It’s been a challenging year for South Africa’s mining industry. Commodity prices, with the exception of gold, have been under pressure causing a significant drop in both revenue and profits. Mining industry headlines have also been dominated by retrenchments, falling stock prices, restructuring for efficiency and efforts to become more fit for purpose. “These companies have had to look beyond just mining to survive the downturn,” says Andries Rossouw, PwC Africa Energy, Utilities and Resources Leader. “This past year, we observed that what was front of mind for many companies was safeguarding their balance sheets to survive the down cycle and to position them for opportunistic prospects.”
In our newly launched PwC SA Mine Report 2024, we take a closer look at the challenges faced by mining companies this past year, the spike in deals seen across the sector, and the survival mode adopted through these turbulent times.
Market performance, a surge in M&A activity and industry trends
In today’s landscape, there is a global pursuit of a just energy transition. This, coupled with the need for efficiencies, diversification and strategic alignment, has resulted in the sector experiencing a hive of merger and acquisition (M&A) activity in the past year. “The quest for copper and other strategic minerals, broader consolidation and operational synergies, and diversification and strategic realignment to create shareholder value have been the main themes emerging from M&A transactions,” Rossouw says.
“The increase in deal values aligns with global trends, and this is being driven by the quest for critical minerals,” says Vuyiswa Khutlang, PwC South Africa Mining Assurance Partner. “Globally, the deal-critical minerals of focus were gold and copper, the prices of which performed exceptionally in the current year. For South African companies, it was no different. Copper and other strategic minerals have become increasingly sought-after as the world transitions to a low-carbon economy and the demand for clean energy solutions surges. Gold, on the other hand, continues to demonstrate its store of value in times of risk.”
Building resilience through the balance sheet
South Africa’s mining industry has not been spared the volatility of recent times, with many businesses facing challenges. The general commodity price downturn has once again emphasised the importance of having a strong balance sheet. As businesses look to steer through today’s challenging operating conditions while sustaining investment and growth, the balance sheet can either be a drag or a key source of agility and strength.
“Unlike the previous downcycle, conservative capital allocation and rapid reaction on lower prices meant that balance sheets are still in relatively good shape despite a slight weakening in the past year,” Khutlang says. “A strong balance sheet provides options in sourcing capital, which is critical for a cyclical industry. There are numerous capital sourcing options, but one of the trends we have noted is that mining companies are increasingly using green and sustainability loans to support operations which align with their own and global sustainability goals.”
In our report, we looked at the balance sheets of large listed South African mining businesses to reveal what tactics they have used, or can use, to build resilience. What was evident is that resilient balance sheets had a fit-for-purpose capital structure that aligns with the business’ strategic needs and direction. When companies are not proactive in managing their balance sheets, deteriorating or unhealthy balance sheets are often not diagnosed early enough. “These situations often resulted in short-term actions being undertaken to rectify the situation, including taking on more funding and selling assets at discounted value,” Khutlang explains.
“Mining is key to the economy as these companies play a crucial role in the communities they operate in, not only as employers or as the engines for the economies around them, but through other services, such as the clean water that they provide to their communities,” Rossouw says. “It is therefore crucial to start thinking and planning for sustainable ecosystems once operations close. It is also imperative that, where possible, mining companies use available technologies to improve their safety, productivity and efficiency to extend the life of their mines.”
