Where do mines' productivity levels intersect with directors' fiduciary duty?

Published: 01 July 2017 | Directorship

The parlous - and worsening - trends in South Africa's mining productivity are nothing new in industry observers, but the R46 billion loss suffered by the sector in 2016 should get directors wondering whether a line has been crossed. IoDSA member Roger Dixon, who has spent a lifetime in mining and is currently a corporate consultant with SRK Consulting and an independent mining consultant, argues that the situation has already gone too far.

A recent Financial Times article decries the'dismal' levels of productivity among companies in Britain, describing it as the country's biggest policy chaIlenge. In trying - unsuccessfully-to pinpoint the precise factors underlying this problem, the paper suggests that bad management is both 'rife and persistent'. It also names exceptionally weak investment as a possible culprit, representing another corporate governance failure.

A world away, in the South African mining sector, we seem to be facing similar challenges- although the causes may not be as difficuIt to find.

Over the past five years, according to the PricewaterhouseCoopers (PwC) SA Mine report in 2016, the sector's annual net profit has steadily dropped  -from R65 billion in 2012, to R25 billion, then R5 billion and then R2 billion, before crashing through the floor to  the R46 miIlion loss.

This was not entirely unexpected. Our mines are certainly facing headwinds of almost bewildering variety:

  •  Global economic conditions and commodity prices remain depressed, despite some signs of hope;
  •  Deeper orebodies and more complex geological conditions raise costs and risks;
  •  LocaI poIiticaI instabiIity plays havoc with the rand exchange rate, which might temporarily improve dollar-based commodity sales but raises important input costs;
  •  Deep mines need long investment horizons of 10 years or more -which are not popular among investors in the current climate;
  •  Regulatory uncertainty has dragged on for years, as investors wait to hear what the Mining Charter will demand, and what risks these requirements will carry;
  •  Water scarcity and increased pressure on mines to  be self-sufficient;
  •  Power supply security, which remains a key obstacle that couId hinder mining growth, while having already taken its toll on mines through outages and restrictions; and
  •  Most recently, a ratings downgrade that makes finding finance more difficult­ and more expensive when you find it.

And underlying all these concerns is the escalating cost of production due to the increasing costs of labour, electricity and consumables. Central in these ingredients is the cost of labour- now an average of 40% of a mine's cost structure - and how well it can return value to the business that employs it.  The problem is that this return is decidedly slim. The Chamber of Mines reports that output per worker in platinum mines, for instance, declined 49% between 1999 and 2014- raising real labour costs per kilogram by 309%.

Part of the answer to these sorts of challenges has always been the tripartite collaboration between employers, employees and the state. A recent- some wouId say rather Iate - intervention that has raised hopes is the Mining Phakisa, whose stated intentions included the planning and implementing  of holistic mine modernisation'. Sadly, in a process where labour's engagement is a key pillar, the platinum sector's  biggest trade union- the Association of Mineworkers and Construction Union - does not participate. The National Union of Mineworkers, for its part, tends to view the issue of  mechanisation with extreme suspicion.

So where does industry turn for some relief, for a route out of the downward spiral? If costs rise continually, higher productivity is a pre-requisite for sustainability. This productivity will need massive investment in technology (itself still requiring years of expensive research and development) and operational restructuring of just about every aspect of the workplace.

Under our current economic and political conditions, attracting the necessary levels of investment seems well-nigh impossible - there simply is not  the appetite among investors who, frankly, are finding more attractive sectors and locations without much difficulty. The question for directors of mining companies, therefore, is a sobering one: In the exercise of their fiduciary duties, is how they 'direct' their management teams regarding a key business driver, like productivity, when the regression has become so seemingly entrenched.

Low productivity, I would argue, is now the centraI threat to the survivaI of South Africa's mines. As complex as its causes admittedly are - and as thorny as its solutions will be - there does need to be a line drawn in the sand, preferably with all stakeholders in agreement on where that line should be. Does the buclkstop with the board of directors?

Low productivity, I would argue, is now the central threat to the survival of South Africa's mines. As complex as its causes admittedly are - and as thorny as its solutions will be - there does need to be a line drawn in the sand, preferably with all stakeholders in agreement on where that line should be.




SRK Africa