Mining has potential to uplift, but needs state support - Business Day

Mine development has long lead times, so certainty and a conducive policy environment are important determinants of hurdle rates for return on investment.

In an adverse environment, hurdle rates have to be constantly reviewed and repriced upwards as the risk premium associated with the operating environment increases. In an unstable environment, the probability of potential investment not taking place significantly increases, rendering projects unviable.

Some companies stressed that investment was generally dependent on a wider variety of determinants than the political and policy stability of the operating environment. For example, the commodity price cycle and forecast price assumptions are important in making investment decisions. The survey was an attempt to isolate the effect on investment of the policy environment from the operating environment.

To understand the potential positive effect of policy certainty, the chamber quantified the amount of current capital expenditure already in the system. This was possible by using company reports as well as the 2017 Nedbank report on Capital Expenditure Project Listings.

The estimated currently planned capital spending in the mining sector (stretching over the next four years) amounts to more than R145bn. The potential capital expenditure in a more certain and conducive environment (covering at least another three years) could amount to an additional outlay of more than R122bn.

This means capital expenditure on mining projects could be 84% higher than R145bn. The positive effect on employment creation, according to the survey results, would be nearly 48,000 people.

Much of the planned investment is "stay in business" investment. Investment in new mines halved from 2012 to 2016 and that was before the 2017 publication of the reviewed Mining Charter of the Department of Mineral Resources, which this survey shows will worsen this trend.