South African mineral exploration - flatlining since 2010
The South African Reserve Bank's own numbers show "mineral exploration and evaluation" investment fell off a cliff in 2010 and has never recovered.
By: Paul Miller: Director - AmaranthCX
Although the Department of Mineral Resources and Energy (DMRE) publishes no data on mineral exploration, buried deep in the South African Reserve Bank's (SARB's) website is extensive financial data. If you dig down deep enough you will find a time series of data on "Gross fixed capital formation: Mineral exploration and evaluation". It is not at all surprising that the DMRE does not include this data in any of its publications as it is hardly flattering of the department which is, after all, responsible for promoting investment into the South African mining industry. This data was a new discovery for me and appears to be the only available official statistics on mineral exploration in South Africa.
Investment into minerals exploration is a vital leading indicator of the long-term economic health of a mining industry. All mines are declining assets and a mining country that does not attract enough investment into exploration, and thus constantly replenish its mine investment pipeline, cannot be considered to host a healthy or sustainable industry.
(Source: SARB - KBP6199J and KBP6199Y from the Quarterly Bulletin time series)
What the inflation adjusted orange line in the chart above shows is a decline in exploration investment in South Africa from 1990 to 2002 - 2004 when the Mineral Resources & Petroleum Development Act (MPRDA) was passed and then promulgated and the first Mining Charter was gazetted.
South Africa then received a double exploration dividend between 2004 and 2009:
The MPRDA transitional arrangements from private mineral rights to nationalised mineral rights forced the previous holders of private mineral rights to decide what mineral properties they wanted to apply to convert or sell, or relinquish. To do this they needed data on the deposits they held, which required accelerated exploration programmes, especially for platinum group metals in the Bushveld complex.
The other half of this dividend was that the transition coincided with the commodity super cycle, with surging commodity prices and booming mining equity markets.
This period from about 2004 to 2009 also saw multiple foreign junior mining companies set up shop in South Africa looking for opportunities to invest. Exchange controls were relaxed to allow inward dual listings on local public markets and that, coupled with local mining and exploration start-ups, saw a net increase in listed mining companies on the local exchange. This all ended abruptly with the global financial crisis and exploration investment has never recovered.
Without taking inflation into account, mineral exploration and evaluation investment declined from a high of R2.945 billion in 2009 to R525 million in 2010 and then remained largely flat, being just R579 million in 2019 - a decrease of roughly 80% from the highs. However taking inflation into account, less money is being invested in 2019 than in 2010, which was the first year after exploration investment fell off the cliff.
The number of listed mining companies declined from 125 in 1995 to 47 in 2004, rising to 69 by 2008 then declined steadily to just 41 at the beginning of 2021. This is quite probably the lowest number of listed mining companies since shortly after the JSE was founded 134-years ago in 1887. With one minor difference being that at least 5 of the remaining companies listed in South Africa in 2021 actually have no mines in South Africa.
(Soure: JSE Limited, AmaranthCX research)
The National Treasury's policy response to incentivise investment in exploration - Section 12J of the Income Tax Act - attempted to be all things to all sectors, but had rules so byzantine that there was no take up for the first five years of the incentive. The National Treasury then started a repeated, uncertainty inducing cycle of relaxing and then tightening the rules that did eventually lead to some take up for other sectors like tourism (hotels), student accommodation and asset rental - but still nothing for mineral exploration. The Section 12J incentive - a clear failure at incentivising mineral exploration investment - ends its 12-year life in 2021.
The DMRE's response was to persist with the obviously disastrous SAMRAD (South African Mineral Resources Administration System) implementation, followed by a second and a third, progressively more onerous, version of the extralegal Mining Charter. It also enmeshed itself in numerous court cases; became notorious for maladministration; alleged corruption, cronyism and self dealing; and during the state capture era used its health and safety inspectorate to bully existing mining companies into toeing the line.
It is often said that South Africa squandered the commodity boom prior to the great financial crisis, but it is now very clear that South Africa has also squandered the following decade.
The DMRE has said that it is working with the Minerals Council SA and Council of Geoscience (CGS) to develop a new exploration strategy for the release this month. As a explorationist colleague recently said (only partially in jest), neither any of the Mineral Council's current members nor the CGS have actually discovered a major new deposit in South Africa in at least the last 30 or even 40 years (with the possible exception of Ivanhoe Mines) - and it is clear that the DMRE knows nothing about what successful exploration takes. So quite why this secretive tripartite group thinks they are able or qualified to develop a credible exploration strategy is well worth questioning.
The organisation that does have the skills and experience to develop a credible exploration strategy is the World Bank - which has successfully advised on the reform of the mining codes of multiple countries around the world - and in particular is largely responsible for the regulatory reforms that led to the boom in mineral exploration across the rest of Africa over the past 25 years. Perhaps our only hope of any improvement is that when South Africa eventually has to go to the World Bank for a financial bailout, that one of the conditions set is an internationally competitive overhaul of South Africa's mining regulatory regime, guided by international experts.