South Africa's mining sector finds itself in a  beleaguered position.  While  still retaining its status as one of the most important treasure troves of of strategic minerals and metals in the world the mines are under increasing strain financially, politically and operationally according to George Nicholls, Chief Executive Officer (CEO) of Pasco Group.  Nicholls was speaking recently at a briefing given to foreign investor in Cape Town, South Africa.

Describing the current risk environment for mining operators as a perfect storm Nicholls identified a number of key issues that the sector will need to come to terms with in order to ensure sustainability.  Top of the list is the impact of sharply lower commodity prices associated with the global economic downturn.  This has placed the more marginal mines in serious jeopardy while job cuts throughout the sector could see around 100,000 out of work by the end of 2009.

The second risk identified by Nicholls is the apparent resolve by the trade unions  to demonstrate their strength relative to both employers as well as the new government led by President Jacob Zuma.

“Mid-year is traditionally strike season in South Africa,” Nicholls added, “but what is of particular concern this time around is there appears to be little appetite on the part of the major   trade unions to temper their demands in line with the current economic reality. Ultimately placing mining companies in an even more precarious position.”

The growing problem of illegal mining is the third risk facing the industry. Estimates place the number of illegal miners operating on gold mines in the Gauteng province alone at over 3,000.  The activity carries a sombre price with the reported deaths of more than 60 illegal miners in the Free State Province earlier this year.

“What we have seen over the past few years is a definite shift in illegal mining from the relatively small scale unauthorised artisan type mining to  sophisticated  syndicate driven operations  which entail illegal access to legitimate facilities coupled with the use of  explosives and heavy machinery,” Nicholls said.

Illegal mining pose significant safety and operational risks for mining companies and contributes significantly to increased cost of production, security and output.

“We expect the problem to become worse as those effected by the job cuts across the mines swell the ranks of illegal miners,” Nicholls predicted.

Problems is the growing concern among local and foreign investors over calls for the government to nationalise the mining sector with the most vocal of these being ANC Youth League President Julius Malema.

“Although the ANC moved  swiftly to  refute the suggestion, it has made a vigilant market decidedly jittery,” said Nicholls, adding that in 2002 the leak of an apparent draft mining charter calling for  50% of mine ownership to be transferred to black ownership caused a rout in the market and resulted in the loss of roughly US$ 5 billion in market capitalisation in the space of a few days.

“We see very little risk of nationalisation of the sector, but it has served as an unwelcome addition to the perception of South African mines as a high risk investment at this point in time,” Nicholls added.

However, it may not be all doom and gloom for the sector as signs of a green-shoot revival in the global economy has seen commodity prices begin to test upwards trends while South Africa's mining sector has historically proven to be remarkably resilient to severe challenges and constraints.

“Often we have   found that it is under such conditions that the sector has excelled in innovation, sometimes producing new technologies or processes that have revolutionised the industry.   It may turn out that these troubled times prove to be the catalyst to change the way mining companies consider and mange risk,” concluded Nicholls.

About George Nicholls & Pasco.
George Nicholls is a security professional and chief executive of Pasco.

Article featured in the Mining Mirror a print publication by Brooke Pattrick Publications.