• COUNTRY IN FOCUS
• There will be no vaccine available within the next three
months;
• Covid-19 will not be eliminated within the next three months;
• Spreading of the disease will happen in waves with not all
areas will be affected equally; and
• Widespread testing for the virus will allow interpretation of
patterns.
First shutdown (March/ April 2020)
Understandably, with limited data on Covid-19, most
governments opted for a total shutdown to control the spread
of the disease. Such a lockdown incorrectly assumes that all
areas are equally affected at the same point in time. This onesolution-fits-all
gives policy-makers time to develop a better
approach to manage the situation.
The shutdown caused a paralysed economy with no
production, no earnings and no growth. In the scramble
for some remote productivity, companies have introduced
virtual workflows with flexible service models. While it works
for ‘services’, production requires physical presence – unless
it is automated to the point that it can be done remotely.
Although the April shutdown will squeeze margins, most
large firms have plans in place to keep afloat for a few weeks.
According to PWC SA Mine 2 , the industry had R32-billion
free cash flow in 2019 and assuming all expenditure on
consumables, transport, royalties and exploration stop with
immediate effect, this
cash will last just over
one month for the total
industry. All companies
are different, but it is
almost certain that some
(smaller) companies will
experience hardship in
the first month of zero
production.
For the larger companies,
executives and
shareholders will start
sacrificing income, while
workers at smaller firms
will start losing their
jobs. In addition, some
companies understandingly must declare ‘force majeure’, with
the official lockdown (an unforeseeable circumstance at the
start of 2020) preventing them from fulfilling their supply and
other contracts. To conclude, cracks are appearing within the
first month of lockdown.
Likely scenario after two months of shutdown
Continued paralysis in production is the most feared scenario
presently. Larger firms with accumulated earnings or access
to capital will cope for a bit longer than medium-scale mining
companies, who will go under in the second month of no
production. With an average EBIDTA margin of 25% and
aggregated cash making up 16% of assets in 2019, some
more South African mining companies will go broke after two
months of no production (‘losing’ 17% of the year. This will
be a time of significant restructuring of portfolios and mass
lay-offs. After two months of shutdown, the mining industry
will show signs of ‘failing’. To conclude, after two months of
no production most small and medium-scale South African
mining companies will go broke, with their workers and their
communities. If lockdown continues beyond this, it will start
affecting the sustainability of larger firms.
Three months of shutdown
Assuming that only necessary operating expenses continue,
the total aggregated cash of R70-billion for the industry will
be depleted after three months. In a paralysed economy, only
those companies with access to more capital will be alive.
This is the doomsday scenario that we all fear, which will
trigger the fall of the South African mining industry, as we
know it. This is not where it stops, because once the industry’s
domino falls, other dominoes will also fall, including the state.
For the state to ‘prop-up’ the economy, it needs income and
many governments in Africa simply do not have the cash to
prop their economies. While society can probably do without
consumer goods for three months, governments cannot afford
to lose their reliable and above-average income stream from
the mining industry.
The chart below illustrates the contribution of South Africa’s
mining sector to the national income – in relation to its tax
contribution. It shows that the mining sector pays more than
its fair share in taxes – in fact, it pays on average twice the rate
of its contribution to the economy and therefore ‘subsidises’
other industries through a higher effective tax rate. A mining
shutdown therefore has more impact on government than
other economic sectors.
Figure 1: Raw data obtained from STATSSA Publications P0044 & P0441
What can be done?
Shutdown in its current form must end and be replaced by
a system that allows companies to generate earnings, while
conducting robust risk management. The mining industry is
familiar with managing multiple risks, and government policy
makers can learn from mining in developing a pragmatic
approach to manage the spread of diseases. This experience
with risk management and the fact that mining occurs mostly
in remote locations, means that the industry is more prepared
for managing the spread of infectious diseases than most other
economic sectors.
The objective is simple: keep the mines going and stop the
government from failing. For this to work, testing must continue
but the objective must change from testing that justifies staying
at home to testing that allows people to work. Sharing of
information and equal access to communication will be critical
for trust in such a time. •
2 Source PWC SA Mine 2019: In transition. September 2019, 11th edition. Available from pwc.co.za/mining.
32 • African Mining •May 2020
www. africanmining.co.za