8 February 2016

South Africa: Right Time for Mining Companies to Bounce Back

The crisis facing African mining companies, who have fallen behind global peers due to declining productivity and return on invested capital, can be turned around, a McKinsey report released on Monday reveals.

While African companies supply 83% of the world's platinum, 73% of the world's cobalt, and over half of the world's manganese, chromium and diamonds, they have underperformed in terms of value creation, explains the report titled Creating Global Mining Winners in Africa.

The good news is that African mining companies "have access to a range of levers to triple or quadruple their chances of becoming world-class performers".

By taking specific actions in productivity, strategic merger and acquisitions, and allocation of capital, "African mining companies can boost their odds of moving up the power curve by a multiple of three or four", according to the report.

Companies should complement these moves by facilitating access to infrastructure, collaborating on regulatory frameworks, investing in local labour and community development and cultivating a local supplier base, the report proposes.

Doing so would improve companies' odds of moving from the mid quintile to the top quintile on the power curve by up to 31%, according to Lorenz Jüngling, leader of McKinsey's Global Energy and Materials Practice in Africa.

The report was released to coincide with the start of the Mining Indaba in Cape Town on Monday, which brings together over 7 000 mining professionals, investors, executives and government officials in African mining from more than 100 countries.

The meeting this year takes place amid a bleak outlook for commodities, with China's slowing demand for raw materials, a reduction in oil prices and global financial uncertainty.

Michael Kloss, McKinsey director and co-author of the report, said even though there was a global downturn in commodity prices, investors should still spend money in this critical sector.

"A downturn is a good time to buy, and at least half of all African companies have the headroom to fund this growth based on their debt to equity ratio to do it.

"Our analysis shows there are also plenty of targets: 77% of mining companies account for just 30% of the industry's market capitalisation in Africa," said Kloss.

Jonathan Moore, managing director of Investing in African Mining Indaba, said on Monday that the current market forced the African mining industry to take a hard look at how it does business and the aspects that are most critical to its future success.

"Looking ahead, governments and companies are focused on developing strategies to invest in African mining beyond the current mining cycle," he said. "In a capital restrained market, it is notable that we have one of the most influential representations from the investment community that we have seen to date.

"It is imperative to explore the possibilities of big, bold strategic moves that offer the best odds of moving companies from good to great," the report explained.

"The industry will have to go beyond the traditional means of collaboration. As such, mining companies should do everything to create a better business environment - they should support regulators to create the right conditions, collaborate with labour to create a mutually beneficial environment for capability building and labour, work with governments to create a more favourable business climate and with communities to build an environment that creates shared value and productivity enhancements.

"The time for action is now, and by taking action now, we believe that the odds for the future of African mining companies will be on track as one of the most attractive regions for mining globally."

Source: Fin24

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