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THE REGULATORY ENVIRONMENT AND ITS EFFECT ON COAL MINE
DEVELOPMENT
Roger Baxter
Chief Executive
4 February 2016
PAGE
This is the Mining Industry
“Long Cold winters and Short beautiful summers”
Chamber presentation to IHS Energy conference 2
PAGE
More than half of NDP priorities can be tackled by mining
Economy and employment
Economy infrastructure – The foundation of social and economic development
Environmental sustainability – An equitable transition to a low-carbon economy
An integrated and inclusive rural economy
Positioning South Africa in the world
Transforming human settlement
Improving education, training and innovation
Promoting health
Chamber presentation to IHS Energy conference 3
PAGE
Mining matters for the growth, development and transformation of South Africa
Related Services:• Financial services
• Banking• Stock market (JSE)
• Auditing and consulting services
• Business services
Supplier Industries:• Manufacturing
• Chemicals• Consumables (e.g.
diesel, timber)• Rail
• Port
• Electricity
Capital goods:• Equipment
• Machinery
Direct Services:• Geological
• Engineering• Health and safety
• Education skills
- Autocats
- Chemicals/liquids/ferilisers
- Steel/alloys
- Jewellery
Exploration
Infrastructure development
Mine development and operating
Treatment (Washing –
e.g. coal, sizing e.g.
iron ore, smelting e.g. precious metals)
Refining(Pure Gold, PGM,
Ferro Alloys)
MINING
Manufacturing
End consumer markets
- Electricity
- Liquid fuels
- Methane gas for FCsEnergy
Chamber presentation to IHS Energy conference 4
PAGE
PGM; 26
Iron ore; 20
Coal; 18
Diamonds; 3
Manganese; 6
Chrome; 2
Other ; 8
Gold; 17
Sector contributions to mining minerals exports in SA (2014)
Mining matters to South Africa
In 2014, the South African mining industry contributed:
• 7.6% to GDP
• Around 15% to FDI
• 20% of private investment
• 1,4 million jobs
• 25% of exports
Source: Chamber of Mines estimates; StatsSA
Chamber presentation to IHS Energy conference 5
PAGE
SA Coal mining sector – burning issues
� Falling Coal export prices (-60% since 2012)
� Some areas of policy uncertainty – especially on strategic minerals and export restrictions (which the industry thought were resolved)
� Some policy and regulatory challenges (and various government departments wanting to add extra costs on to coal mining – e.g. Environmental legislation)
� Unexpected upward revision in coal royalties (change to the base calculation), resulting in large unplanned increased in royalty for industry
� Some infrastructure constraints (but not all players take up export entitlements)
� Water management and ability to feed back into water supply
� Falling productivity
� Rapidly escalating costs
Chamber presentation to IHS Energy conference 6
PAGE
South Africa’s share of the global total has fallen from 14% in 2004 to 8% in 2014
Source: SA Chamber of mines, SAIMM, Industry research
Total SA coal production and global export thermal coal market share
4%
6%
8%
10%
12%
14%
16%
0
50
100
150
200
250
300
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E
Coa
l pro
duct
ion
Mill
ion
tonn
es
Export Eskom Other local Export global market share
Chamber presentation to IHS Energy conference 7
PAGE
Competitiveness in mining is driven by
multiple factors
Competitiveness drivers Performance outcomes
� Value add
� Production volumes
� Investment
• Labour cost
• Other costs
Produc-tion
Costs
Sustainability outcomes
▪ Occupational health and safety
▪ Environmental impact
Trans-formation
Safety, health, & environ-ment
▪ Transformation level
▪ Societal contributions
SOURCE: McKinsey & Company
Market context
Regulatory environment
Inherent potential
Product demandEnabling factors
Factor market efficiency
Industry structure
Natural resource endowmentHuman capital/ skills
Geographical factors
Accessibility of markets
Domestic demand
International demand
Regulatory and legal requirements
Institutional capacity
Infrastructure
Ease of doing business▪ Social licence ▪ Security of tenure▪ Rule of law▪ Macroeconomic
stability
Chamber presentation to IHS Energy conference
PAGE
Mining has a set of characteristics that include:
� It is a high risk industry, with long lead times from exploration through to mine
development and ultimately through to closure.
� It is very capital intensive and a large portion of the capital is spent in the
development of the mine.
� It is exposed to cyclical commodity markets.
� It is generally a “price-taker” and cannot pass on cost increases to the final consumer.
� It is geographically captured.
� It requires access to cost competitive and efficient infrastructure.
In order to encourage investment into mining, policies need to recognise the characteristics of mining and help reduce the risks of investment in long
term projects.
Chamber presentation to IHS Energy conference 9
PAGE
Mining Asset Lifecycle
Explore Evaluate(proofing)
Develop Mine Closure
Cash flow over life cycle+
-
Price cycle
Given long life cycle, mining needs predictable, stable and competitive policy and regulatory environment
Chamber presentation to IHS Energy conference 10
PAGE
Creating a successful coal mining sector
More effective problem solving partnership between government, business and organised labour
Regulatory and legislative environment that is stable, predictable and competitive
Stable and constructive labour relations environment and better social license to operate
Access to available, efficient and cost effective infrastructure (electricity, rail)
Solutions to improve productivity (next generation mining) and reduce cost pressures
Chamber presentation to IHS Energy conference 11
PAGE
South Africa ranked 64/122 most attractive mining investment jurisdictions in the 2014 Fraser Institute Survey (we should be in top 20)
52,85353,255,155,255,357,657,858,158,458,558,959,160,260,360,461,161,561,662,362,662,96465,366,166,266,366,667,367,667,868,569,67070,571,571,572,472,874,574,874,974,975,175,575,575,77676,477,278,178,379,780,180,781,481,58282,983,383,683,8
0 20 40 60 80 100
NicaraguaRussia
IndiaFrance
ColombiaIvory Coast
TanzaniaMadagascar
GuyanaFiji
BrazilNew South Wales
Burkina FasoPortugal
CaliforniaGhana
MyanmarJujuy
New ZealandNorway
Nova ScotiaGreenland
MoroccoTasmania
New MexicoZambia
MichiganCatamarca
MontanaMexico
ColoradoNorthern Territory
PeruNunavut
British ColumbiaQueensland
BotswanaNamibia
San JuanOntarioAlberta
New BrunswickIdaho
South AustraliaArizona
SaltaMinnesota
Northwest TerritoriesUtahChile
SwedenIrelandAlaskaYukon
Newfoundland & LabradorWyoming
QuebecWestern Australia
ManitobaNevada
SaskatchewanFinland
14,120,521,8
2627,328,629,730,230,4313232,233,4343535,635,736,536,536,636,937,237,437,639,139,84041,14242,442,642,643,443,443,443,744,344,344,444,645,445,945,946,146,246,747,44848,448,548,548,749,4505151,151,25252,652,8
0 20 40 60 80 100
MalaysiaHungary
KenyaHonduras
Solomon IslandsEgypt
GuatemalaBulgariaNigeriaSudan
RomaniaGreece
South SudanCentral African Republic
EthiopiaLesotho
MendozaNiger
Sierra LeoneDominican Republic
SerbiaPhilippinesZimbabweVenezuelaKyrgyzstan
ChinaSpain
BoliviaLa RiojaAngola
UgandaSurinameRio Negro
French GuianaThailand
MauritaniaMongoliaVietnamPoland
UruguayMali
EcuadorCambodia
MozambiqueTurkeyEritrea
IndonesiaWashington
ChubutPapua New Guinea
Guinea (Conakry)Neuquen
KazakhstanLaos
Santa CruzLiberia
VictoriaPanama
South AfricaDemocratic Republic of Congo (DRC)
Fraser Institute Survey 2014
Chamber presentation to IHS Energy conference 12
PAGE
Underlying reasons for South Africa not faring well in the Fraser Institute mining rankings (great potential)
Fraser Institute Survey 2014
-100 -80 -60 -40 -20 0 20 40 60 80 100
Uncertainty concerning disputed land claims
Political stability
Labour regulations/labour militancy/work disruptions
Uncertainty on administration & interpretation of regs
Socioeconomic agreements
Taxation regime
Efficacy of the mineral legal system
Regulatory Duplication and Inconsistency
Security situation
Mineral potential assuming existing regulations
Tade barriers (tariff & non-tariff + forex restrictions)
Quality of infrastructure
Environmental regulations
Uncertainty over which areas will be protected as parks
Availability of Labor and Skills
Quality of the geological database
Policy potential assuming industry best practice
Frazer Institute Survey 2014 factors encouraging investment in exploration versus deterrents to investment for South Africa
Deterrent Score
Encouragementscore
Chamber presentation to IHS Energy conference 13
PAGE
Capital investment outlook looks weak (lower prices, rising costs, plus uncertainty on some aspects of policy)
Source: SBG Securities, Company reports, Chamber of mines estimates, based on top 3-5 largest producers per sector; estimated 2014/2015
-
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
90 000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Gold PGM Coal Iron Ore Manganese
Capital expenditure by SA mining companies by commodity* (R million) Capital spend on SA growth projects ^
R million (>5yrs) Split
Gold 9 507 14%
PGM 7 676 11%
Coal 28 580 41%
Diamonds 24 300 35%
Total 70 063 100%
Top projects in each sectorCommodity
Diamonds
Thermal coal Gold (Maintenance)
PGM (Maintenance)
Cost (Rm)
20000
7700
3235
3301
Chamber presentation to IHS Energy conference 14
PAGE
� The MPRDA amendment bill: the industry requires regulatory certainty (issued include s11
approvals, s26 export restrictions, strategic minerals, pricing, regulation of dumps, etc.).
� Transformation Regime (B-BBEE Act & Mining Charter):
� need for certainty on interpretation (continuing consequences of previous BEE deals).
� Eskom 51% versus Mining Charter 26%.
� Taxation of the mining sector:
� Resource rent taxes, changes to royalty base, environmental taxes, carbon tax.
� Section 54 stoppages: in some cases inconsistent implementation of regulations.
� Labour instability and cost: union rivalry increases risk of protracted and violent strikes:
� The need to introduce secret strike balloting and flexibility to s18 agreements.
� The social wage issues.
� Environmental requirements:
� Previously fragmented system with duplication.
� Challenges regarding funding requirements for environmental trust funds.
Summary of regulatory framework areas creating challenges
Chamber presentation to IHS Energy conference 15
PAGE
1. Water Resources Management
• Security of Water Supply, competition of water with other users
• Water Quality Management i.e AMD from abandoned mines.
2. Interface of Coal Mining with Protected Areas
• COM members commits not to mine in legally protected areas
• There is no framework guiding policy to govern the interface/Coexistence of mining and biodiversity conservation in the cases wherein the protection and declaration of water sensitive areas came after the mining activities.
3. Regulatory Matters
• The mining industry commit to implement the One Environmental System however, certain challenges hinders effective implementation of the OES.
• Fragmentation - in that the OES only deal with synchronisation of timeframes (300days)
• Unrealistic regulations i.e NEMA Financial Provision Regulation (Double provisioning)
• Regulation of Mine Residue Deposits and Stockpiles as hazardous Waste in terms of Waste Legislation.
Environmental issues affecting the coal mining industry
Chamber presentation to IHS Energy conference 16
PAGE
Creating a regulatory and legislative environment that is stable, predictable and competitive (Policy and Regulatory Certainty)
MPRDA amendment bill
• Government is aware of the critical importance of finalizing the Bill.
• Various challenges in first draft addressed through significant engagement between business, government and parliament.
Transformation
• Dti provided a year’s period to allow for alignment between Charter and DTI codes.
• Dual process on interpretation (bilateral discussion and court process).
• Government needs to create coherence of policy between Eskom requirements and the Charter.
Certainty on Taxation
• DTC interim report supports existing royalty system which obviates need for RRT.
• DTC proposes phasing out capital ring fencing.
• However, DTC also recommends equalization of mining tax with manufacturing (i.e. reducing immediate capital expensing).
Carbon tax
• The Chamber calls for a 5 year delay to implementation due to crisis facing the sector and fact that RSA is below “Peak-Plateau-Decline line” committed to in Copenhagen in 2009.
Chamber presentation to IHS Energy conference 17
PAGE
Progress on the policy challenges
Section 54 safety stoppages
• Agreement by DMR to speed up the development of the Enforcement Policy pertaining to Section 54’s.
Deputy President’s NEDLAC task team – minimum wage and strike action committee
• NEDLAC process underway, results expected by mid-2016.
• Looking at measures to prevent/resolve L/T strikes and create greater labour
stability.
Environmental licensing
• New “One Environmental system” in place. Real progress made with
commitment by government that environmental licenses will be issued within 300 days.
• Challenge of environmental trust funds being addressed (hopefully DEA will take on board proposed changes).
Chamber presentation to IHS Energy conference 18
PAGE
Vision for the South African coal miningindustry
Workforce,
transformed, productive,
fair wages and non-
discriminatory, safe and
healthy workplaces
Management not only
focus on profits, but
provide decent jobs, play
positive role in mining
communities and
sensitive to environment
Government and trade unions:
proud of and fully supportive of
the mining industry and
acknowledge industry as
important for the country
Key exporter Key earner of foreign
exchange Key taxpayer
Creator of decent jobs Developer of skills
Key contributor to economy
Investors regard industry
as a good investment
destinationCONSTRUCTIVE PARTNERSHIPS
BUILT ON TRUST
Chamber presentation to IHS Energy conference 19
PAGE
THE REGULATORY ENVIRONMENT AND ITS EFFECT ON COAL MINE
DEVELOPMENT
Roger Baxter
Chief Executive
4 February 2016