No industry is as inextricably intertwined with SA’s economy as mining. The discovery of diamonds near Kimberley in the 1860s and then gold on the Witwatersrand in the late 1880s accelerated the industrialisation of the country. SA is what it is today because of mining. In the 1900s, the biggest firms in the country were mining houses, and they had interests in vast numbers of businesses in industries outside of mining. Anglo American was the most dominant of these, with stakes in explosives, construction, steel, brewing (it owned 16% of SAB), life insurance, food, paper, banking, property, automotive and newspaper companies.

The sector remains a sizeable part of the economy. The Minerals Council South Africa (MCSA) says that its direct contribution to GDP was 8.7% in 2021, and it accounts for about 20% of private-sector fixed investment. In three provinces – Limpopo, Mpumalanga and North West – its direct contribution to GDP is between 22% and 25%.

Primary exports of commodities totalled R438.5 billion in 2021, a full 24% of exports. The sector remains a sizeable employer, albeit at lower levels than when the gold sector was booming, for example. The MCSA says that it directly employs 460 000 people. The gold and coal sectors each employ just under 100 000 people, with platinum group metals miners accounting for the bulk at more than 170 000.

While its gold production is well past its peak, SA is the largest platinum producer in the world and among the top 10 coal and iron ore producers globally.

Mining companies retain an outsized impact on the JSE, although the days of these being the majority of the bourse are long gone. The general mining sector on the JSE comprises 13 companies with a combined market value of R5.6 trillion. Three of these – global mega miners BHP, Glencore and Anglo American – account for 95% of this amount.

David Shapiro, chief global equity strategist at Sasfin Wealth, says that investors would select these large, diversified miners ‘because of the spread they offer – they’re not reliant on one particular commodity, in a market that is notoriously fickle. Diversified miners are much larger in size, with a broader array of exposure, and are also geographically diverse, which is important. They have more muscle, with stronger balance sheets, and better – and cheaper – access to funding to manage any downturns in the commodity market’.

He adds that while the prices of underlying commodities such as coal, platinum, iron ore and copper will influence the profits of mining companies, his firm belief is that investors should not invest in these shares on the basis of the commodity cycle alone.

According to the Bank of Canada, ‘commodity prices tend to go through multi-year periods of boom and bust, known as supercycles’. Extended swings in commodity prices have been occurring since the early 1900s. It adds that ‘the upswing phase in supercycles results from a lag between unexpected, persistent and positive shocks to commodity demand in conjunction with slow-moving supply responses. Eventually, as supply finally expands and demand growth moderates, the cycle enters a downswing phase’.

Instead of obsessing about the cycle, says Shapiro, investors should focus on the operational efficiencies of these companies, which will demonstrate how well they can do, even at the bottom of the cycle. The cycle, he adds, is secondary.

BHP is the largest mining company in the world when measured by market cap (R2.96 trillion). The company was formed through the merger of BHP and Billiton in 2001, with the latter demerging from Brian Gilbertson’s Gencor in 1997. Those base metal, ferro-alloy and aluminium assets ultimately became owned by BHP, with some of them later being spun off into a separate entity, South32.

Valued by the market at R248 billion, South32 has operations in Southern Africa, South America and Australia. It owns and operates the two aluminium smelters in Southern Africa – Hillside at Richards Bay and Mozal in Maputo, Mozambique – and also has a manganese project in the Kalahari. It is focused on base metals (such as aluminium, copper and zinc) but also mines silver, lead, nickel and metallurgical coal. Since its separate listing in 2015, its shares are up 129% on the JSE, having reached record highs earlier last year.

Prior to its former parent BHP’s unification, where the historical structure of two separate companies (Plc and Ltd) with separate share registers was collapsed, only the shares of BHP’s UK entity (Plc) were (dual) listed on the JSE. The Australian mining group is focused on five core commodities – iron ore, copper, nickel, potash and metallurgical coal (it has other coal projects, too).

BHP owns two mega iron ore projects, namely Western Australia Iron Ore (comprising five mines and four processing hubs) and 50% of Samarco in Brazil, and two very large copper ones – Olympic Dam in South Australia and Escondida in Chile. It has no operations in SA.

Glencore, with a market cap of R1.48 trillion, was founded in 1974 by Marc Rich and produces and trades in more than 90 commodities. It merged with Anglo-Swiss mining group Xstrata in 2013. It differs from other large diversified miners in that it has this sizeable trading business, with about a quarter of its EBIT coming from this.

In SA, it owns various chrome and vanadium assets (some with Merafe) as well as Astron Energy, the Caltex fuel business (850 service stations and the Milnerton refinery) that it bought from Chevron in 2018.

Anglo American was and remains the largest mining company in SA. It says it is one of the largest investors in the country, operating at 26 sites with a separate management board for the region.

The majority of these operations are at separately listed Anglo American Platinum (12 mines and smelters) and Kumba Iron Ore (Anglo owns majority stakes in both companies). Notably, three of its four leaders in the country are women (Nolitha Fakude is chair of the management board, Natascha Viljoen heads Amplats and Mpumi Zikalala is CEO of Kumba).

Subsidiary De Beers owns two diamond mines in SA – Voorspoed and Venetia – having divested of its historical assets surrounding Kimberley as well as Cullinan, near Pretoria. In neighbouring Botswana, it has four diamond mines through Debswana, a joint venture with the government. It has 90 000 employees worldwide, with half of them in SA.

Anglo says its total tax and economic contribution in SA during its 2021 financial year was $9.1 billion. This is around three times more than in any other country globally. Beyond its former home, it has major mining operations in Australia, Brazil, Chile and Peru.

Under pressure from shareholders, Anglo unbundled its SA energy coal assets in 2021. While not in the mining sector, Thungela Resources has been among the top performers over the past 18 months with shares up 870% since its debut on the market.

Beyond the three mega miners and South32, there are only four companies in this sector with market values greater than R2 billion.

Founded by Patrice Motsepe, African Rainbow Minerals has a market cap of R67 billion. Its roots date back to 1994, but the entity listed on the market today was created 10 years later. It mines and beneficiates iron ore, manganese, PGMs, nickel and coal, and it also holds a strategic investment in Harmony Gold.

Tharisa (market cap of R6 billion), Merafe Resources (R3.4 billion) and Master Drilling (R2.1 billion) differ from the larger stocks in the sector in that they are not diversified.

Tharisa is a PGM producer with a single asset, Tharisa mine, near Rustenburg. It has a near-term production target of 200 000 oz of PGMs. Last year, it produced 179 000 oz, with guidance of a similar amount for this year.

Merafe produces ferrochrome, which is used in stainless steel and speciality steel products. In 2004, it combined its operations with those of Glencore to form the largest ferrochrome producer in the world. It enjoys a 20.5% participation in the profits of this business, which is operated by Glencore. The partners are building a PGM plant near the Kroondal mine.

Master Drilling is one of the largest rock boring and drilling services companies in the world. It has sizeable operations in SA, the DRC, Zambia, Mali, Ghana, Sierra Leone, Brazil, Chile, Colombia, Mexico and Peru. More than two-thirds of its revenue come from Africa and South America, with diversification across commodities.

There are a handful of far smaller companies listed in the sector. Kore Potash (with a market cap of around R616 million) is a UK-based mining firm that’s developing a potash project in the DRC. Potash is used in fertilisers.

Chrometco is a small chrome producer (majority owned by Sail Minerals); Kibo Energy is focused on green-energy projects; Union Atlantic Minerals is an exploration company; and Sable Exploration and Mining has a stake in a greenfields chrome project.

By and large, mining companies have enjoyed super profits in recent years, despite the knock from the COVID-19 pandemic. In its outlook published in August, BHP says ‘extreme volatility notwithstanding, most of our major commodities are trading at prices that are close to, or above, our estimates of long-term equilibrium’.

Its VP of market analysis and economics, Huw McKay, says that ‘the global economic outlook is significantly more complex and multi-faceted now than a year ago… Little is certain in the face of such complexity beyond the fact that the overall rate of economic growth will decelerate – ex-China – as the impact of global monetary tightening is progressively felt over the next six to 18 months’.

Importantly, replacement supply across the mining sector ought to provide medium-term support for prices. There are simply no new large mines being built. This is the bull case for commodities. McKay echoes this, saying that BHP continues ‘to see the need for additional supply, both new and replacement, to be induced across many of the sectors in which we operate’.

Sasfin’s Shapiro is also bullish, saying that China will return to the market post its COVID-19 lockdowns. This – together with fixed investment by major economies, including the need for them to improve their infrastructure, energy security and a big shift to renewable energy, as well as the search for clean metals (nickel, copper, cobalt and lithium) – are all positive drivers over the next decade.

By Hilton Tarrant
Image: Gallo/Getty Images