Alarm bells over one of South Africa’s most important sectors

Mining companies have seen a substantial drop in profits over the last year, which poses a serious problem for South Africa’s tax collection.

This is according to the latest PwC South Africa’s 2023 SA Mine report, which looks at various factors negatively impacting the mining sector, including productivity and infrastructure constraints, decreases in the prices of certain minerals, and increases in input costs.

“The amalgamation of these factors has resulted in a decrease in profits and operating cash flows experienced by South African mining companies,” Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader, said.

“However, strong balance sheets have enabled miners to increase investment into operations and pay dividends.”

Rossouw added that the weakening of the rand did provide some relief to the lower dollar-mineral prices, but this was eroded by more costly imports and the prices for key inputs, including chemicals, materials
and equipment.

South African economy has been highly dependent on the mining sector, with data from the South African Revenue Service showing that 58% of South Africa’s exports (R575 billion) were mined material exports in the first half of 2023.

Rossouw noted that the sale of mined material is essential for the local economy, as inflows boost the nation’s foreign reserve currencies.

“The socio-economic environment in which mining companies operate in South Africa is often characterised by high levels of unemployment, low skills and poverty,” he added.

“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.”

However, mining companies have faced several headwinds over the last year, including electricity constraints, logistical nightmares for bulk commodity exports, above-inflationary cost pressures, changes in commodity prices, widespread illegal mining and a shortage of critical skills.

With these challenges in mind, there are concerns over how long South Africa can continue to rely on key commodities, such as gold, coal, iron ore and platinum group metals, as stocks decline.

A lack of exploration and a lag between investment decisions could also hurt the long-term sustainability of the industry.

However, there may be hope for the sector, as the push for global decarbonisation pushes demand up for South Africa’s critical minerals.

“Southern Africa has some of the critical metals needed, and it is important for the region to look at opportunities and take advantage of them,” Vuyiswa Khutlang, PwC South Africa Energy, Utilities and Resources Partner, said.

“To take advantage of these opportunities will require significant cooperation between public and private stakeholders.”

Looking positively, mining companies are increasing their investment for future operations, PwC’s report notes.

“Investment in the future of operations has increased, while continuing to return value to shareholders through dividends, even though profits have decreased,” Khutlang said

“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.”

However, with the significant drop in platinum group metal and coal prices from record highs, there could be a limitations on investment.

Tax importance

A successful mining industry also benefits the South African economy, with declining profits hurting the nation’s corporate tax collections.

Following a peak of R31 billion in Q2 2022, tax from the mining sector has dropped massively to R12 billion in Q2 2023, Stats SA said.

With this, company tax dropped from R77 billion near the end of 2021 to R49 billion in Q2 2023, with a massive shift in collections from the mining sector partially responsible for this.

The statistic body said that the mining industry benefitted from the commodity boom following the end of the Covid-19 pandemic, with the glossy outlook impacting Treasury’s expectations in the 2023 budget, which now looks to be far off the mark.

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