Opportunities and challenges facing the South African Mining Industry

Presentation to the SACEA AGM

By Roger Baxter, Senior Executive, Chamber of Mines of South Africa, 17 February 2011

PRESENTATION OUTLINE
Mining and minerals, integral to modern society The global mining industry Back to the BOOM RSA Coal Mining Sector The South African Mining Industry The future

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Metals and minerals in a Smart Phone

Copper (16 grams) Silver (0.35 grams) Gold (0.034 grams) Palladium (0.015 grams) Platinum (0.00034 grams) Ceramic magnetic switches containing rare earths Indium Titanium dioxide Indium tin oxide
source USGS http://pubs.usgs.gov/fs/2006/3097/ source NRC critical minerals report

Metals and Minerals in a car

960kg iron &steel 109kg Aluminum 22.7kg Carbon 19 kg Copper, 34kg for a hybrid 19kg Silicon 11 kg Lead 10kg Zinc 7.7kg manganese 6.8kg Chromium 4.1kg Nickel 0.4 kg Platinum

+Antimony, barium, beryllium, cobalt, gallium, gold, magnesium, molybdenum, neodymium, indium, palladium, Sulphur, rhodium, silver, strontium, tin, titanium, tungsten, vanadium, zirconium.

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Even a Wind Turbine uses a significant amount of metals and minerals

335 tons of steel 4.7 tons of copper 13 tons of fiberglass 3 tons of aluminum 1,200 tons of reinforced concrete

Solar panels need many metals and minerals

Arsenic (gallium-arsenide semiconductor chips) Bauxite (aluminum) Boron minerals (semiconductor chips) Cadmium (thin film solar cells) Coal (by-product coke is used to make steel) Copper (wiring; thin film solar cells) Gallium (solar cells) Iron ore (steel) Molybdenum (photovoltaic cells)

Lead (batteries) Phosphate rock Selenium (solar cells) Silica (solar cells) Tellurium (solar cells) Titanium dioxide (solar panels)

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Even a compact fluorescent light bulb is minerals intensive?

Barite Bauxite (alumina for phosphor; aluminum for end caps & filaments) Copper (end caps; filaments) Lead (soda-lime glass; ballast; adapter unit) Limestone or dolomite (finely crushed stone to make sodalime glass) Mercury (vapor in glass tubing) Nickel (end caps; filaments) Phosphate rock (phosphor)

Rare earths Silica (glass) Soda ash (soda-lime glass) Manganese (phosphor) Tin (end caps; filaments; glass coatings) Tungsten (electrodes; filaments) Zinc (end caps; filaments)

A bright smile, even comes from mining.

Silica Limestone Aluminum Phosphate Fluoride Titanium Mica Petroleum

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PRESENTATION OUTLINE
Mining and minerals, integral to modern society The global mining industry Back to the BOOM RSA Coal Mining Sector The South African Mining Industry The future

South Africa has the worlds fifth largest mining sector

The global top ten mining countries as measured by Mining GDP (US$ billions)
0 20 40 60 80 100 120 140 160 180 182 129 64 26 21 21 20 19 18 3 200

Rank
1 2 3 4 5 6 7 8 9 10

China USA Australia Brazil South Africa Canada Russia India Chile Colombia

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Worlds Top 10 Mining Companies by market capitalisation

The world's largers mining companies by market capitalisation (January 2011)
200 US$ billions 150 100 50 0

The big 5 of minerals are coal, copper, iron ore, gold and aluminium
Comparison of Revenue by commodity (composition of revenues of top 40 mining companies - PWC)
25

20

15
%

2007

10

2008 2009

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PRESENTATION OUTLINE
Mining and minerals, integral to modern society The global mining industry Back to the BOOM RSA Coal Mining Sector The South African Mining Industry The future

Back to the Boom

Global economy is recovering from first global recession in 61 years. Recovery is unevenly distributed, with advanced economies sluggish and developing countries growing strongly. The risks of a double dip are fading fast. Mining companies are in better position having repaired balance sheets and sustained core projects. The materials intensive nature of growth in emerging economies will escalate in next decade caused by continued urbanisation and industrialisation.

Can South Africa cash in on the boom?

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Back to the Boom

PWC ANNUAL MINING REPORT TITLES 2007 Riding the wave 2008 as good as it gets 2009 When the going gets tough

2010 Back to the Boom

World economy is recovering

IMF outlook for world economic growth for key regions, (source IMF WEO April 2010 and July 2010)
12 10 8 % annual growth rate 6 4 2 European Union 0 -2 -4 -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2011 Developing Asia World Advanced economies Euro area

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World economy is recovering

Global steel production has recovered to pre-crisis levels (source: IISI)
140 000

Tons of steel production per month

120 000

100 000

Total - Oceania Total Asia (less China) Total - Middle East Total - Africa Total - South America Total - North America Total - C.I.S. (6) Total - Other Europe Total - European Union (27) China

80 000

60 000

40 000

20 000

2007

2008

2009

2010

World economy is recovering, but the recovery is unevenly distributed

Global steel production has recovered to pre-crisis levels (source: IISI)
Tons of steel production per month
160 140

120

100

China Non-China production

80

60

40

20

2007

2008

2009

2010

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World economy is recovering

Global automotive production by key region/country, (source: CSM and JDPowers)
80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 2007 2008 2009 2010E 2011E 2012E Other Japan Latin America China Europe NAFTA

Risks remain.
Unemployment rates in the industrialised countries (source: OECD)
12.00 % unemployment rate 10.00 8.00 6.00 4.00 2.00 2006 2007 2008 2009 2010 Germany Japan USA Euro area OECD

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Risks remain.
Government structural fiscal deficits as % of GDP
2

GOOD

Structural balance as % of GDP

-2

Germany Japan

-4 United Kingdom -6 United States

-8

-10 2001 300 250 200 % of GDP 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

BAD

Risks remain.
Gross government debt as % of GDP BAD

Germany Japan United Kingdom United States

GOOD

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Back to the Boom.

World's urbanised population 1950 to 2050, source UN 2009 revision
7 000 000 Oceania 6 000 000 Thousands of people Northern America 5 000 000 4 000 000 3 000 000 2 000 000 1 000 000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Latin America and the Caribbean Europe India China Asia (less China and India) Africa

The Global Commodities Boom

Further facts on China: 700 000 Engineers graduate annually in China 650 million cell phones in circulation in China Currently has 160 cities with >1million people (vs 9 in USA) 257 new cities expected to be built by 2025 500 new coal fired power plants to be built in next decade 97 new airports to be built in next 12 years 50% of the worlds cement production in 2008 from China 50% of worlds steel produced by China in June 2009 34% of worlds aluminium production in 2008 33% of globes titanium sponge & pigment production

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Back to the Boom.

China's urban population to reach 1 billion by 2025 (source McKinsey)
1000 900 800 Millions of people 700 600 500 400 300 200 100 0 2005 2025 149 143 153 34 86 160 233 316 Megacity (>10m) Big (5m-10m) Midsized (1.5m-5m) Small (0.5m-1.5m) Big town (<0.5 m) 120 104

Back to the Boom.

China's share of global commodity demand (source: BHP Billiton)
70 60 50 40 30 20 10 0 39 26 24 16 17 8 17 14 7 9 1 3 2002 2009 63 56 49 42 34 39 36 35

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And India is gaining its own growth and developmental momentum

Indian Urban Population (million)
590
+250

340 290 220

1991

2001

2008

2030

Total Indian Population (million) Indian Population Urbanised (%) Average Global Urbanisation (%)

856 26% 43%

1040 28% 47%

1155 30% 50%

1470 40% 59%

Back to the Boom.

Composition of Global GDP, PPP basis, (IMF WEO April 2010)
100 90 % share of Global GDP 80 70 60 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Advanced economies Developing Asia Developing countries (excluding Asia)

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Back to the Boom.

World investment trends, GFCF as % of GDP- (IMF WEO April 2010)
35 Investment as % of GDP 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Emerging and developing economies Advanced economies World

Back to the Boom: China is building 2 X Eskom p.a.

Electricity generation per region
8000 7000 6000

terawatt hours

5000 4000 3000 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total North America Total S. & Cent. America Total Europe & Eurasia Total Middle East Total Africa Total Asia Pacific

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Mining companies have restructured balance sheets and are ready to grow.
PWC Survey of top 40 mining companies "Mine: Back to the Boom" key indicators, 2009
50 45 40 35 . % or ratio 30 25 20 15 10 5 0 Gearing ratio Return on capital employed Net profit Return on Equity Effective tax rate EBITDA margin
2003 2004 2005 2006 2007 2008 2009

Mining companies have sustained investment in core LT projects related to commodity boom.
Capital investment by top 40 mining companies by commodity (source: PWC)
12

Capex US$ billions

10 8 6 4 2 0

2008 2009

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PRESENTATION OUTLINE
Mining and minerals, integral to modern society The global mining industry Back to the BOOM RSA Coal Mining Sector The South African Mining Industry The future

Coal, key issues:

254.7 MT local production, R69 billion in sales in 2010. Only 65.7mt exported in 2010 vs >70mt target. Rail constraints big challenge. RSA needs extra 100MT of coal production by 2020, +/- 75 MT for electricity generation and 25 MT for exports. All coal fields require substantial new investment just to sustain production +/- R100 billion in investment required. Unhelpful public debate on coal quality only 2 collieries had problems and these have been resolved through new contracts. Perception that coal mining companies are exporting Eskom quality coals to India is again sensationalist. Perhaps biggest challenge is to engage effectively in the debates about Climate Change and carbon taxes.

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South Africa has the 6th largest reserves of hard coal

Global Hard coal reserves, 2009 (source: BP)
Indonesia, 0.4 India, 13.1 Other, 6.7 United States, 26.5

China, 15.1

Colombia, 1.6 Kazakhstan, 6. 8 Poland, 1.5

Australia, 8.9 South Africa, 7.4

Russian Federation, 11. 9

South Africa is the 6th largest hardcoal producer

Global hardcoal production 2008 and 2009 (source: IEA)
Millions of tons 0 China USA India Australia Indonesia South Africa Other Russia Kazakhstan Poland Colombia 2008 2009 500 1000 1500 2000 2500 3000

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South Africa still has enough reserves to support production

Hardcoal: years of production left at current production rates and known reserves (source IEA)
0 Kazakhstan Russia South Africa USA Australia India Colombia Poland TOTAL/average China Indonesia
7 21 69 77 88 122 119 110 103 214

50

100

150

200

250

300
293

350

South Africa remains the 5th largest exporter

World hard coal exports, 2007 to 2009 (IEA)
0 Australia Indonesia Russia Colombia South Africa USA Kazakhstan Canada Vietnam China ROW 2007 2008 2009 50 100 150 200 250 300

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There is a shift of SA coal exports from EU to Asia

SA Thermal Coal Exports by Destination (Source: SACR 2009)
Million tons

80000 70000 60000 50000 40000 30000 20000 10000 0

2005 2006 2007 2008 2009

Far East/Asia

Europe

Middle East

Americas

Africa & Islands

Climate change is a big issue for the global coal industry

RSA government has released a Green Paper on SA response to GCC and Treasury a paper on Carbon Taxes. At global level SA accounts for 1.1% of global GHG emissions. In RSA coal generates 94% of electricity, 30% of liquid fuels and accounts for 70% of GHG emissions. COM strong emphasis on practical realities of energy supply, the need for energy security, the risks of being first mover and ensuring global agreement is achieved. RSA must also meet its own growth objectives. Coal has a significant future role in primary energy supply, but focus must be on clean technologies and carbon capture and storage.

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Top 5 CO2 emitters account for 56% of global total

Top 20 CO2 Country emitters, 2008 (source IEA)
0 China USA Russia India Japan Germany Canada UK Iran Korea Italy Mexico Australia Saudi Arabia Indonesia France Brazil South Africa Spain Ukraine 1 000 2 000 3 000 4 000 5 000 Million tons CO2 6 000 7 000

Top 5 countries account for 56% of total global CO2 emissions

South Africa produces 1.1% of total global CO2 emissions, 18th largest emitter

Strong correlation between GDP/capita and CO2/capita

Emissions per capita versus GDP per capita (PPP basis), source: IEA/IMF
50 000 45 000 40 000 35 000
GDP per capita

USA UK Germany Japan Korea Canada

30 000 25 000 20 000 15 000 Brazil 10 000 5 000 0 0 India 2 4 6 8 Iran China

Russia South Africa

10

12

14

16

18

20

CO2 emissions per capita

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Coal remains important to global energy supply, and will remain important in the future.
Electricity generation by fuel: 2008 (IEA)
Other 3% Hydro 16%

Primary energy supply by source: 2008 (IEA)

Combustible renewables & waste Hydro 10% 2% Nuclear 6% Other (wind, solar, geothermal) 1%

Coal 27%

Coal 41% Nuclear 14% Gas 21%

Gas 21%

Crude oil 5%

Crude oil 33%

South Africas electricity demand will grow as energy intensive sectors grow over the next decade
Activities/services 2% Iron and steel 3% Real estate 3% Pharmaceuticals 4% Electricity 9% Meat 2% Water 3% Coal 2% Agriculture 2% General government 2% Insurance 2% Non-ferrous metals 14% Gold 10%

Soap 4%

Communications 5%

Accommodation 5% Petroleum 5% Trade 7%

Transport services 8%

Other mining 6%

Source: Frost & Sullivan, StatsSA

Almost 50% of total electricity usage comes from sectors that are either targeted by IPAP and the New Growth Path, or are most likely to contribute to growth in employment. Currently these sectors also facilitate the majority of our export revenue and are crucial to the maintenance of the tertiary sectors contribution to the economy.

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The Treasury proposed CO2 tax, if a R100/ton CO2 is added up to 2020 & then R200/ton CO2 for 2020 to 2040, will add 18c/kWh to the electricity price
South Africa's IRP2010 revised balanced scenario (RBS) versus impact of R100/ton CO2 tax (which adds 18c/kWh)
1.40 1.20 1.00 Rand per kWh 0.80 0.60 0.40 0.20 0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

The new Revised Balanced Scenario price curve incorporating the effect of carbon taxation as suggested by Treasury adds 18c/kWh to the original RBS price curve

RBS
Source: Frost and Sullivan

RBS with Treasury CO2

Practical realities facing South Africa

Country is semi-arid, so limited hydro potential. Country faces food security risks if biofuel is pushed. Nuclear is very expensive from a capital cost point of view. Solar plant are useful but small (max concentrating solar plant is about 250 MW). Wind power is small in the grand scheme of things: To replace on 3000MW coal fired plant would require 15000MW equivalent of wind to be installed (20% energy availability factor) Would require 7500 X 2MW wind turbines to be installed. That is 1 wind turbine installed every 240 meters between Durban and Cape Town!!

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PRESENTATION OUTLINE
Mining and minerals, integral to modern society The global mining industry Back to the BOOM RSA Coal Mining Sector The South African Mining Industry The future

Mining - The Essential Core Of SA Economy

Creates 1 million jobs (500 000 direct & 500 000 indirect). Accounts for about 18% of GDP (8% direct, 10% indirect & induced). Critical earner of foreign exchange >50%. Accounts for 18% of investment (9% direct). Attracts significant foreign savings (>30% of value of JSE). 18.5% of corporate tax receipts (2007 R22 billion, 2008 R33 billion, 2009 R11 billion) 50% of volume of Transnets rail and ports 93% of electricity generation via coal power plants 15% of electricity demand About 37% of countrys of liquid fuels via coal (R30 billion worth)

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Recent Citibank research note rates South Africa as the richest in situ mineral resource holder in the world:

Source: Citibank

SA has significant geological prospects..

South African reserves for key minerals, 2008
Global rank
1 1 1 1 1 2 2 2 2 2 4 4 5 5 6 8 8 8 9
0 10 20 30 40 50 60 70 80 % of global 90 100 .

PGM's Manganese Chromium Gold Alumino-Silicates Vermiculite Vanadium Zirconium Minerals Titanium minerals Fluorspar Antimony Phosphate rock Nickel Uranium Lead Coal Zinc Silicon Iron ore

Source: USGS/COM/DMR

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A large share of the industrys expenditures are captured locally

Income and Expenditure of SA mining industry (2009: source StatsSA), Total Expenditures R399 billion, total income R332 billion
Capital expenditure, 51.5 Other purchases and operating costs, 192.9

Dividends, 25.5

Taxation, 10.1 Depreciation and impairments, 35.3

Interest Paid, 12.2

Labour costs, 71.2 Source: StatsSA

I.E. THE BENEFITS OF SOUTH AFRICAN MINING ARE MOSTLY CAPTURED LOCALLY!!

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A high road is very possible for South Africas mining industry..

Two scenarios were developed for the forward looking scenarios

High road

Production growth

Current constraints are relieved

Constrained by current bottlenecks Low road A D

Costs grow at historic rates

Cost increases are reduced to half of historic rates

Source: McKinsey

Cost Management

For period 2010 to 2020, conservative modeling indicates that a 3.9% growth rate for the non-gold mining sector is realistically possible, with another >100 000 jobs possible..

Source: COM/MIGDETT

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However, during the past commodity boom South African mining performed poorly versus its peers..
The global top ten mining countries as measured by growth in mining value added (2001-2008 real US$ terms)
-5 0 5 10 15 20 19 12 10 8 7 7 7 7 6 4 -1

Rank
1 2 3 4 5 6 7 8 9 10

China Chile Russia Indonesia India Colombia Australia Brazil Peru Venezuela South Africa
Source: Global insight

13

South Africa was unable to take advantage during the commodity boom mostly due to domestic issues
Mining production declined in period 2006 to 2008, despite significant increase in investment in that period. Binding infrastructure constraints (electricity, rail,) Red tape constraints (e.g. water licenses) Policy uncertainty (changing the rules of the game) Mine closures for safety related issues (some valid, some not) s54s Human capital constraints Stagnant productivity and rapidly escalating costs Volatility in rand-dollar exchange rate Then the global crisis hit

local

International

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The lack of growth is due to a combination of drivers eroding the sectors competitiveness
Competitiveness drivers
Market context Factor market efficiency Industry structure Inherent potential Natural resource endowment Human capital/ skills Geographical factors Enabling factors Infrastructure Ease of doing business Social licence Security of tenure Rule of law Macroeconomic stability Regulatory environment Regulatory and legal requirements Institutional capacity Product demand Accessibility of markets Domestic demand International demand
Competitiveness threat Mixed picture Competitive advantage

The key threats to competitiveness of SA mining are Infrastructure (electricity, rail) Social licence to operate1 Human capital/ skills Institutional capacity

1 Dealt primarily in sustainability and transformation workstreams SOURCE: McKinsey & Company

Mining Industry Growth, Development And Employment Task-team (MIGDETT)

Tripartite, leadership driven. Setup in December 2008. Long term issues (repositioning the industry for growth):
Must get infrastructure right for the next boom Address longer term regulatory constraints Develop sufficient human capital to enable the sector to grow in future Move to SA Inc approach

WORK IN PROGRESS

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Agreement by tripartite leadership to develop Strategy For Sustainable Growth And Meaningful Transformation Of The South African Mining Sector
To be developed by tripartite under auspices of MIGDETT
Competitiveness task team Transformation task team

Mining Charter review part of the process Strategy document debated at Mining Summit in late March Final declaration signed 30 June 2010 Revised Mining Charter released in September

Proposals to help SA Mining Industry Back on to Growth Trajectory

Substantive tripartite declaration on 13 topics signed on 30 June:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Promoting growth and transformation Infrastructure Innovation, productivity and cost competitiveness Sustainable development in mining Beneficiation Regulatory framework Human resource development Employment equity Mine community development Housing and living conditions Procurement Ownership and funding Monitoring and funding

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PRESENTATION OUTLINE
Mining and minerals, integral to modern society The global mining industry

Back to the BOOM The South African Mining Industry The future

Substantial work is being done to get the rubber to hit the tarmac
The regulatory task team is discussing amendments to MPRDA. There is a review in DMR of problems on licenses. The infrastructure task team is working on a matrix of infrastructure constraints per commodity. Industry is cooperating with government on wide range of areas to promote competitiveness and growth. The future is in our hands..

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Mining is now back on top 5 priority sector list of government (MIGDETT has played large role)
All government Ministers need to indicate in their plans and performance agreements how they are going to assist the priority sectors. Government is increasingly recognising the important role that mining does play and can play. Government has recognised that the exchange rate is too strong. Mining has the opportunity to turn around its recent slow growth performance. The future is in our hands.

MINING AND MINERALS MATTER FOR THE GROWTH, DEVELOPMENT AND TRANSFORMATION OF SOUTH AFRICA

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