Change or lose out, Xstrata's Davis warns SA

[miningmx.com] -- XSTRATA, one of the world's major resources companies, has suspended a R5bn investment in ferrochrome in South Africa because of power problems there, said CEO Mick Davis, pointing out a string of bottlenecks that caused the country to miss the last commodity price boom.

One of the key deterrents to investment in South Africa has been the energy crisis, which culminated in the mines being shut for a week in January 2008 when there just wasn't enough power to go round. There is an accelerated build programme that will start delivering power in 2013, but there are major price hikes in the offing to pay for it and a lack of certainty about the time line.

"A shortage of energy generation capacity has already stalled further investment in mining and beneficiation capacity, losing with it the potential for thousands of jobs and the associated revenue and foreign exchange this production would earn for the country," he said. Xstrata has suspended a R5bn ferrochrome expansion.

Davis, in a frank speech to the Wits Business School, said changes that could be wrought on the mining sector stemming from talks between the government, labour and mining companies were a positive development.

The first phase in those changes came from a two-day summit last week between the three parties to identify issues curtailing the sector's growth and transformation.

"It is, however, critical that we quickly transform our intentions into detailed, actionable plans to deliver the improvements necessary to position the industry for future growth and Xstrata is committed to playing our part in this process, along with our many other stakeholders," Davis said.

The process, which mines minister Susan Shabangu wants completed by end-June, entails changes to the Mining Charter and, early next year, changes to the Mineral and Petroleum Resources Development Act and other legislation to iron out items preventing growth and transformation.

One of the changes would be to alter regulations to allow energy intensive companies like Xstrata, which is the world's largest ferrochrome producer, to generate enough electricity for its own needs and taking pressure off power utility Eskom.

Eskom is installing new capacity at $3,000 per kilowatt, while the private sector could do it for around half the price and quicker, using modular plants, Davis said.

A relatively quick fix for the skills shortage was to divert top graduates to teaching in schools for a couple of years before they started their professional careers.

To illustrate how badly South Africa, one of the global commodity treasure chests, missed the last commodity boom, Davis showed a graph of resource-rich countries posting strong contributions to gross domestic products, while in South Africa, between 2001 and 2008 the sector posted a negative one percent performance.

Citing a McKinsey study, Davis said if South Africa's mining sector had grown value creation by five percent over those seven years, matching the global average, it would have added a total of $8bn to GDP and created 45,000 jobs in the mining sector.

"Restricted and unstable energy and transport infrastructure, shortages of skilled labour - in particular engineers, geologists and artisans - and the constrained capacity within regulatory bodies to satisfy significant volumes of licensing or permitting applications have prevented our country from reaping the full benefit of the first phase of the commodities boom."

He warned of underinvestment in water treatment and reticulation creating a scenario where tensions between industry and communities could flare up.

"But it doesn’t have to be this way," he said, adding the government working together with the industry can bring growth, job creation, competitiveness and "the ability to capture value from the ongoing ‘Super Cycle’."

Another two much-needed changes were the scrapping of foreign exhange controls, a move a number of administrations have not had the 'courage' to completely abandon, and allowing offshore companies to be included on indices on the JSE, he said.

A fund manager later told Miningmx companies with primary listings offshore joining the JSE were not included in indices, meaning their liquidity was curtailed and their attraction to South African funds was minimal because of investment guidelines.

The JSE is aware of the problem, but it needs intensive lobbying of National Treasury to ensure it is addressed, the manager said.

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