South Africa Still Uncertain as Mines Prepare to Reopen

- May 26th, 2020

The impact of COVID-19 on the country’s gold, copper, diamond and platinum-group metals companies is beginning to become apparent.

In late March, mining ground to a halt for the first time in South Africa’s 168 year history as the country tried to limit the spread of the coronavirus.

As the nation prepares to reopen on June 1 after a two month lockdown, the impact on the nation’s gold, copper, diamond and platinum-group metals (PGMs) miners is beginning to become apparent.

The reopening comes after weeks of work to combat the virus. President Cyril Ramaphosa initially mandated a three week lockdown — March 27 to April 16 — that closed all non-essential businesses in Africa’s largest country. He implored all 56 million residents to stay at home.

 

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The reopening was subsequently pushed back as the amount of infected people continued to climb. To date, South Africa has had 24,264 confirmed cases of COVID-19, 524 reported deaths and 12,741 instances of patient recovery.

During a May 27 general meeting of the Minerals Council South Africa, CEO Roger Baxter noted that mining production in the country could fall by 8 to 10 percent due the mine closures and economic disruption of COVID-19.

In a televised address, Ramaphosa told South Africans that the lockdown was enacted to stop the spread of COVID-19, noting that until a vaccine is developed, the virus will continue its path in the country.

“This means that we must get used to living with this coronavirus for some time to come,” he said.

But he then noted in the May 24 speech that after consultation with his cabinet, a decision had been made to move the country from alert level four to a lower level three.

“(This) marks a significant shift in our approach to the pandemic. This will result in the opening up of the economy and the removal of a number of restrictions on the movement of people while significantly expanding and intensifying our public health interventions,” said the South African head of state.

“Even as we move to a level three, it is important that we should be aware that there are a few parts of our country where the disease is concentrated and where infections continue to rise,” he added.

One area that has seen a spike in cases is the Northcentral community around the Mponeng gold mine.

The mine, which is owned by AngloGold Ashanti (NYSE:AU,ASX:AGG,JSE:ANG), will remain closed while the company performs contact tracing after 196 employees at the site tested positive for COVID-19.

Mponeng is the world’s deepest mine; from the ground it extends more than 4 kilometers into the Earth.

Prior to the country-wide lockdown, AngloGold had entered into a deal with Harmony Gold (NYSE:HMY,JSE:HAR) to sell its South African assets.

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The sale would position Harmony as “South Africa’s primary gold producer,” according to the company.

The deal, which would include a cash payment of US$200 million, is subject to regulatory approvals and is unlikely to be finalized before the end of July — notwithstanding the current COVID-19 cases reported in the community.

As the June 1 start day for South Africa approaches, it is becoming clear that it won’t be an immediate return to business as usual.

Mining operations are complex businesses that may take months to reach pre-COVID-19 output levels, which will ultimately further weigh on the economics of the country.

Read on to read our coverage of South Africa’s initial reaction to the mining lockdown, as well as insight from the chief economist at Minerals Council South Africa.

South Africa and COVID19: The lockdown begins

While tallies remain low in the country, South Africa’s preemptive shutdown is being hailed a smart move for a nation already struggling with the highest HIV numbers in the world.

According to the World Bank, mining communities have been epicenters of communicable disease in the past, most notably tuberculosis and HIV.

“The companies are trying to comply with the president’s request to try and stop the spread of the virus,” said Henk Langenhoven, chief economist at Minerals Council South Africa.

“There’s been very, very few cases in mining because the companies started in January with the hygiene part and adjusting the way the labor force would move in and out of mines,” he added. “And that paid off, there’s no doubt about it.”

As the world’s largest platinum producer went offline, questions were raised about the economic impact a 21 day mining curtailment could have on the country. Eight percent of South Africa’s annual GDP is derived from the mining sector, which employs approximately 450,000.

South Africa not only produces the most platinum annually, but also houses 80 percent of global reserves. It is the second top producer of palladium, as well as a leader in gold and diamond output.

 

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South Africa and COVID-19: Sustaining economic demand

In 2019, GDP for the largest nation in Southern Africa exceeded US$358 billion. As mentioned, mining contributed 8 percent of that amount, which adds up to roughly US$28.6 billion — that means a three week lockdown could cost as much as US$1.78 billion.

Most the mining projects in the country have entered care and maintenance status, and companies have opted to keep paying employees, which Langenhoven said is important to prevent a simultaneous demand shock — similar to the supply shock the lockdown created.

This is especially critical because, unlike the US and Canada, South Africa lacks the fiscal resources for massive stimulus packages.

As the chief economist noted, there are other factors aside from consumer demand that could create an unwanted shock.

Another would be companies not being able to service loans and trying and support them, he said. “The third issue is a worry that fixed investment spending might be curtailed if it goes on too long, which would also be a demand shock.”

Ensuring that demand remains secure will be imperative when the economy is up and running again.

While it’s hard to gauge the lasting toll that the three week closure could have on the sector, Langenhoven pointed out that workdays lost, as well the amount of days it takes to reach production again, all need to be accounted for.

“It depends on how deep the mines are. It depends on whether the fridges were kept running,” said Langenhoven. “Gold mines are 3, 4 kilometers underground. And if you don’t keep it cool, then it takes time for the climatic conditions to return.”

For PGMs smelters that process ore, complete shutdowns were out of the question due to the amount of damage the smelting units, particularly the furnaces, could endure as a result of thermal shock. The smelters have instead had their capacity reduced and are processing stockpiled ore on site.

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South Africa and COVID-19: Financial woes

Within 48 hours of the lockdown going into effect, international credit agency Moody’s downgraded South Africa’s sovereign credit rating to junk and gave the country a negative outlook score.

“The key driver behind the rating downgrade to Ba1 is the continuing deterioration in fiscal strength and structurally very weak growth, which Moody’s does not expect current policy settings to address effectively,” reads the firm’s March 27 report.

“The negative outlook reflects the risk that economic growth will prove even weaker and the debt burden will rise even faster and further than currently expected, weakening debt affordability and potentially, access to funding,” it continues.

The financial services company cited structurally weak growth for the downgrade, and pointed to constrained available capacity to stimulate the economy. It also expressed caution about longstanding structural labor market rigidities.

Langenhoven sees those factors taking much longer to correct than a restart of the mining industry.

“It’s going to take time, we are not in good health,” he said. “It’s a combination of policies, macro policies, mostly fiscal policies, and the fact that we borrowed so much.”

“We know that the if we fall out of the international index, because we have junk status, then institutions have to withdraw their money. We’re not certain what that impact will be.”

Though the economic situation may be precarious, Langenhoven did note that the appetite for buying government bonds has grown in recent weeks.

South Africa and COVID-19: Growing pains

As the lockdown in South Africa stretches into its second week, concern is mounting that it may be extended, creating an even larger impact on the country’s economy.

 

Investing During the Pandemic

   
The latest on what experts see coming for resources and commodities amidst the Coronavirus pandemic.
 

“The minister of health has spoken about possible actions after the 21 days, but he’s not said that the lockdown will continue,” said Langenhoven, who was speaking on April 2. “They said there might be some restrictions continuing or actions being taken after the 21 days; I would imagine that all depends on the rate of increases and the rate of infection.”

A South African Reserve Bank report released on Monday (April 6) notes that the country’s economy was already experiencing growth challenges before the pandemic, and these issues have only been made worse by the continuing spread of the virus and subsequent lockdown.

“South Africa was already in recession prior to the COVID-19 shock, and the situation has become more challenging since,” it reads.

The central bank update also states that a previous economic growth forecast rate of -0.2 percent was “probably too optimistic,” and it has since revised the outlook.

“More recent work suggests 2020 growth will be in a range of -2 percent to -4 percent, with downside risks should the lockdown be extended, or if the global economy weakens more than currently projected,” the report explains.

But there is a glimmer of hope in the reserve bank’s long-term projections.

“Further out, there is limited scope for a rebound, but growth is now unlikely to exceed 1 percent in 2021. The upside risk to this forecast, however, is that a deeper contraction this year would permit a stronger rebound in 2021,” the South African Reserve Bank notes.

There is also growing concern about the impact lockdowns related to COVID-19 could have on the economy of Southern Africa as neighboring countries begin implementing their own mandatory shutdowns.

This is an updated version of an article first published by the Investing News Network in April 2020. 

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

 

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