SA mining loses R100bn in profit as prices, rail constraints and load shedding bite

South Africa's mining industry has seen a nearly R100 billion slide in profit this year as lower commodity prices and a tough operating environment, marked by load shedding and railing constraints, took their toll.

As reported by PwC in its annual 2023 SA Mine report on Tuesday, an analysis of 29 domestic mining companies showed a net profit plunge to R108 billion in their latest financial years, down from a record R206 billion.

In the report, titled "SA Mine: Adapt to thrive"', PwC noted the factors hitting the industry include productivity and infrastructure constraints, such as load shedding and poor rail performance, decreases in certain commodity prices, and increased costs.

Transnet Freight Rail's deteriorating performance, especially on the critical export coal line, has been a key challenge.

Load shedding has hit production, although to a limited extent.

Andries Rossouw, PwC's Africa energy, utilities and resources leader, said in a statement on Tuesday that a weaker rand may have provided some relief, but this has been offset against more expensive imports, and higher prices for inputs such as chemicals and equipment.

PwC noted the sector's regression comes after two years of record performance and shareholder returns, and R108 billion still compares favourably to the R32 billion recorded in 2019 or the R11 billion loss in 2018.

As concerns mount that South Africa is facing a fiscal crisis, the mining sector's downturn will be felt by the government, which benefitted from windfall taxes and royalties from the industry in the previous two years. The sector's reported tax expense dropped to R48 billion, a 34% decline.

Still, miners' tax returns have also continued to be a key driver in balancing the national trading account. South African Revenue Service export data shows that the value of mined material exports amounted to R575 billion in the first six months of 2023, equating to around 58% of total exports.

And despite the dramatic drop in profit, SA miners have maintained strong balance sheets with little debt and are even investing in the sector.

"Investment in the future of operations has increased, while continuing to return value to shareholders through dividends, even though profits have decreased," said Rossouw. "Miners have continued to invest in projects in South Africa, with the largest increase identified in capital spending on assets year on year, from 18% in 2022 to 37% in 2023."

Investment pressure

There are, however, early signs that the significant drop-off in prices of platinum group metals and coal from record prices could limit future investments.

SA miners are also faced with illegal mining, jeopardising the safety and viability of some mining operations and a shortage of critical skills within the sector. 

The effect on the sector is cause for concern for not just the 478 000 people that the mining industry formally employs, but also for communities dependent on mining.

"The socio-economic environment in which mining companies operate in South Africa is often characterised by high levels of unemployment, low skills and poverty," said Rossouw. "The consequences of any challenges to mining could result in a dire situation for the nation's economy and security, including the social well-being of society."

Vuyiswa Khutlang, PwC South Africa energy, utilities, and resources partner, said in the statement that a lack of exploration in South Africa and the lag between investment decisions and new production could hamper the industry's long-term sustainability.

As the reserves of certain minerals shrink, she said it will be critical for mining companies and governments to develop strategies to safeguard communities that are dependent on mining operations, as miners often play a significant role in providing social services such as education, clean water and sanitation, and infrastructure.

"The need to transition communities from being dependent on mines, reskilling employees, and rehabilitating mines becomes a critical conversation for all stakeholders," Khutlang said. "This is especially important, as some provinces have as little as six years of mining left based on currently declared reserves."

This article originally appeared on News24.