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Global commodity prices and its effect on South Africa’s mining sector

What are the trends in the global commodity markets? How does decisions made locally influence the rate of foreign investors into South Africa? What does the latest decision mean for miners and deal makers? Jaqcues Erasmus, KPMG’s Global Head of Mining provides insight in this interview:

With the recent uptake in commodity prices, many are saying that the market feels perkier than it has in many years – Is this real, is it sustainable, will it last?

From a KPMG perspective, we have seen some positive moves in commodity prices, if you look into this from a local perspective, the rand has had a see-saw run and has strengthened quite significantly in the last few weeks. By virtue of Friday’s announcements, the market has reacted negatively and the rand has weakened significantly against the US Dollar. This is positive for the local rand edged commodity producers as their revenues would significantly increase with the weakening rand, giving them more free cash flows to invest into their stay in business capital and also look at potential further investments.

Jacques’ perspective – From a South African market perspective, my fear is that if there is still political instability, I don’t think there is a significant chance of attracting huge foreign investment – so these companies might possibly look elsewhere to invest their money in projects outside of SA.

Yes, we believe that it is real, and yes, it is sustainable – companies have gone through a process where they have reshaped their operational plans in order to deal with lower commodity prices. From that perspective, the producers are in good shape. Any additional cash flows will benefit in either rand being up in operations quicker than they expect, or alternatively having funding available to get good opportunities in the market. I think that there is still a consolidation play within SA, I believe that there are three commodities that are still open to consolidation: the gold sector, platinum sector and thirdly, in the coal market.

Are we seeing a real upward trend?

Yes, from a global point of view, the US economy is showing positive signs, similarly the Asian markets have stabilised and consolidated now – although the growth numbers are not as significantly as previously protected. I think that we’ll continue to stimulate growth and if the US market remains stable, my thinking is that the economic growth in the US will drive, or at least maintain, commodity prices at its current level being gold, platinum, copper, nickel and the like.

What does this mean for miners and deal makers?

With the high commodity prices, the window of opportunity to really buy good assets at a discounted price is closing. I think from a miner’s perspective, they would look to consolidate their own operations and the deal makers would have to very carefully consider assets which have either a very good resource base or a synergistic to current operations – and those are the type of transactions I see going forward.

Is there enough confidence in the industry to encourage investment?

This is a story of two parts, globally – yes, the markets are open for investments. However, locally, I think with our impending impasse in the government, I believe there is still uncertainty, which could slow growth for investment in the coming month.

What long-term investments will be made on the back of rising prices?

There will be organic growth where there is capital to further develop some Greenfield and Brownfields projects. Similarly, I think there will be the dealmakers where there is synergistic opportunities to consolidate a certain sector, which could still continue.

Which are the best performing commodities?

A range of commodities have had an uptake – Chrome has had a significant uptake, for coal prices have been steady. The gold price has kept itself at levels that all the commodity traders or analysts have anticipated that they would. Platinum could still have an uptake. In addition, Nickel and copper have shown some good increases in the past 6 months.

Is this a good time to invest?

Buying good quality assets at discounted price – the window of opportunity has closed. I think if you still have a very good asset, there are still opportunities to purchase.

What are we going to do differently this time around?

With the uptake in commodity prices, producers are very conscious to make sure that their production costs, which would follow similar and would have a margin squeeze, should the commodity price come back. I believe that a focus on costs is going to continue, and that’s going to be imbedded in most mining company processes.

Jaqcues will be speaking at the Joburg Breakfast Indaba themed COMMODITIES 2017 – on the way up???

For more information:

JEJacques Erasmus
Global Head of Mining
KPMG in South Africa
E: Jacques.Erasmus@kpmg.co.za
T: +27 827 190305

 

 

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About Jacques Erasmus

Partner - Head of Mining for Africa. Jacques commenced his career with KPMG in 1998 and entered the partnership in September 2005. He relocated to Canada and joined the KPMG Calgary office as a partner in December 2011 after obtaining his Canadian CA qualification. Jacques returned to KPMG South Africa during August 2012. Jacques has recently been appointed the Head of Mining for Africa. Jacques is the key subject matter expert for the gold and platinum industry in South Africa and Africa. Major clients include international gold, platinum and coal companies and various exploration juniors specializing in all commodities.

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