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Power supply still a concern to South Africa's mining sector

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Market Data - Metales

Power supply still a concern to South Africa's mining sector

London — South Africa's mining sector still has many concerns about power supply even after improvements to the network through short-term maintenance repairs.

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"Eskom has tried to use the reduced economic load due to the [governmental] lockdown as an opportunity to catch up on maintenance and the new CEO Andre de Ruyter has made some significant differences, and I do believe that he has put us in a better position," Sibanye-Stillwater CEO Neal Froneman told S&P Global Platts in an interview.

Sibanye-Stillwater is the world's largest primary producer of platinum, the second-largest primary producer of palladium and a top-tier gold producer.

"However, having said that, I still think there are significant risks, and certainly on our risk register electric power in South Africa remains one of our higher risks. I do not want to create an impression that the issue has been resolved. I think it has been improved but it is still a significant risk."

That was echoed by Nedbank mining analyst Arnold Van Graan who told Platts in an interview that the Eskom problem had not gone away.

"The understanding is that Eskom did use the lockdown to do much needed maintenance work. If that is the case, then I guess it was time well spent," Van Graan said.

"But there is still a problem at Eskom and, from a mining perspective, you cannot have a vibrant mining industry in South Africa if you do not have a properly functioning Eskom. Speak to any mining CEO and that is the first thing they will tell you."

Van Graan said deep level underground mines cannot be run on solar or wind power as "the ore bodies just do not allow for that in terms of the economics. So, you need Eskom to work for the South African mining industry, to be vibrant, and that is something that needs to be addressed as a matter of urgency once we get through COVID-19."

Back in February, Froneman said the insecurity of power supply was the biggest risk currently facing South Africa's mining industry.

Last December, several South African gold and platinum group metals mining companies were affected by power cuts enacted by the Eskom, which supplies over 95% of the country's electricity, and saw the utility implement for the first time stage 6 load-shedding, resulting in a 6 GW reduction from the national grid.

Some progress

Eskom says it faces a number of ongoing issues, including generation plant performance still being unpredictable, debt approaching Rand 450 billion ($26 billion), being unable to service debt from its own EBITDA and, therefore, having to borrow to service debt, tariffs that are not cost reflective, procurement costs above market norms, lack of transparency and change in energy landscape.

The company said despite challenges it has faced over the past four months, such as COVID-19, load shedding and IT failure, it has made progress in terms of operational stability in the form of implementing opportunity short-term maintenance due to reduced demand, launching a reliability maintenance project, and focusing on procurement savings and reducing working capital and capex.

More trouble on horizon

Aside the previously imposed governmental lockdown on the mining sector and continued threat posed by COVID-19, another challenge lies waiting behind the energy problem.

"There are serious economic challenges ahead now. We have had downgrade upon downgrade. You couple that with economic challenges and perhaps even a peak in COVID-19 coming in August in September," Froneman said.

On June 30, according to Stats SA, the department of Statistics South Africa, GDP contracted by 2%, making it three consecutive quarterly declines, with the fourth quarter of 2019 observing a 1.4% drop and the third quarter a decrease of 0.6%.

Stats SA said it noted a fall across half of the industries it assessed, with mining and manufacturing the hardest hit.

"Iron ore, manganese and chromium were the biggest drags on mining growth, offsetting positive gains made by coal, diamonds and platinum group metals," Stats SA said.

Mining activity slowed by 21.5%, the biggest drop in six years, it said.

"The economic challenges are huge and absolutely the first thing is getting some sort of common goals, that works for labor, works for business and works for all in the interest of South Africa," Froneman said. "So that is the biggest challenge."