Enterprise around Mining

Facilitating SME Upgrading in Southern Africa through Partnerships

Feasibility Study Summary

2

Abstract

The Federal Institute for Geosciences and Natural Resources (BGR) commissioned a feasibility study to examine the potential for upgrading of Small and Medium Enterprises (SMEs) in the mining sector in Southern Africa, by creating business to business linkages with international SMEs.

The study, conducted over a three month period in 2015, focuses on the drivers of SME engagement as identified by lead firms such as mining companies and large equipment manufacturers. The study provides the economic context for operating in the region as well as specific product areas that were identified by lead firms as problematic. This document provides a summary of the major research findings.

Research contributions were made by Prof. Mike Morris, Prof. Raphael Kaplinisky, Dr Judith Fessehaie and David Perkins from PRISM at University of Cape Town (South Africa). Dr. Masuma Farooki and Mark Fellows from SNL Metals and Mining (UK), Johannes Danz and Asa Borssen from BGR (Germany).

3

1. Introduction

The mining cluster in southern Africa is often seen as the centre for economic growth and industrial development in the region. To deliver this growth, mining companies’ activities need to be linked with the wider industry, engage Small and Medium Enterprises (SMEs) and contribute to employment and technological growth within the economies the mining companies operate in.

As will be shown below, estimations indicate a sizable market for the procurement of locally produced goods and services. The utilisation of these opportunities by domestic firms however remains fairly limited with ongoing reliance on imports in the region. In fact, the situation has not changed in recent years, despite the issue of local value addition climbing high on the political agenda, and mining companies beginning to implement supplier development programs as part of their CSR agenda. It is against this background this project was initiated.

After an earlier scoping study (commissioned in 2014) identified a major gap in market knowledge, particularly among suppliers and potential investors into the African market, the purpose of this study was to identify means to address this gap and other major issues in the development of a regional supplier industry including trust, informed investment decision-making and risk.

With this mandate the study mapped the procurement practices for mining companies, access to local and international suppliers, issues with delivery of required inputs and the larger regulatory context within which these firms operate.

This executive summary reviews the key findings of the research, highlighting critical issues identified by strategic stakeholders and summarizes the recognized gaps. It concludes that business to business partnerships are a promising instrument to seize the significant potential of mining as a catalyst for structural economic development. Being business-driven, these partnerships introduce an element of sustainability that current supplier development programs do not account for.

The following section outlines the methodology employed and definition of terminology. The third section provides an overview of the main contextual findings that define the environment in which local linkages are to be developed. Chapter four looks into opportunities for the development of an SME supplier industry in Southern Africa and chapter five offers a conclusion on the scope for upgrading SMEs through international partnerships.

2. Methodology

The current study was initiated in June 2015, with interviews and surveys conducted over a three month period. Madagascar, Mozambique, South Africa and Zambia were identified as the countries of focus. The four countries represent different levels of maturity within the mining industry; South Africa having a long established mining culture, Zambia has been growing into a mature mining sector, Mozambique has seen intensive investment in its mining sector over the past 15 years and Madagascar is comparatively new, with major mining operations coming on line in the last five years.

Initially, a small survey was conducted among European mining suppliers in order to generate an overall picture of the firms’ level of knowledge of business opportunities and the business environment in southern Africa. Additionally, firms were asked to highlight the major obstacles in accessing such opportunities in the future. 42 firms were identified during the first phase of European surveys, of which 17 agreed to be interviewed. These firms were based in Germany, Poland, Sweden and the UK. In the second phase, informed by surveys in southern Africa, a more focused sample of 38 SMEs were targeted, of which 7 firms agreed to be interviewed.

4

The major focus of the study was mining companies as these firms represent the key consumers of mining inputs from the SME sector. Original Equipment Manufacturers (OEMs) represent a second group of consumers and increasingly so as the industry is driving a trend to outsource non-mining related activities, particularly in the fields of maintenance and warehousing. The two together constitute ‘lead firms’: that is, they determine the nature and level of procurement of goods from SMEs in the region and internationally. Overall, 11 mining companies were interviewed in South Africa accounting for 56% of the platinum operations, 22% of the coal, 67% of gold and 37% of the iron ore operations in the country. Two of the three active mining operations in Mozambique, the largest operating mine in Madagascar and five of the largest mining companies in Zambia were interviewed.

To enrich and cross-check the findings of these interviews, further informal interviews and discussions with mining companies and suppliers were undertaken at two major conferences. The first was the Mining on Top Africa Conference in London, held 24-26 June. The conference hosted just over a 100 delegates, including ministers from African mineral economies, CEO’s of leading mining companies, construction firms and limited supplier firms. The second event was the BAUMA Africa conference held in Johannesburg 15-18 September. This international trade fair focuses on construction machinery, building material machines, mining machines and construction vehicles and had 616 exhibitors from 42 countries. This conference was used to focus on mining equipment and other input suppliers (from small to large scale firms) to gauge the reasons behind the high level of imports into the southern African and the lack of development of local added value by these firms.

Additionally associations, such as the national Chamber of Mines, mining company supplier development programs and national development agencies were also surveyed to contextualise the strength and weaknesses of current SME upgrading and linkage development in the region.

3. Contextual Findings

a. Global mining environment and size of mining operations

The mining environment globally and in southern Africa is at a cyclical low. After the commodity boom period in the previous decade, both investment and prices have tended to plateau. Expansion plans have been put on hold, and exploration budgets have been the lowest in the past ten years. Therefore potential business opportunities within the early stages of the mining cycle, particularly exploration, are limited. This furthermore affects the nature of mining operations that are likely to be commissioned/constructed in the coming decade. As investors and mining companies move towards capital conservation, there is a shift away from ‘mega’ projects or ‘world-class’ assets. Newer mines therefore tend to be mid-sized projects.

b. Political and regulatory pressures

In the southern African mining sector, as with other extractive dependent regions, the pressure for local content is increasing. Local content policies, often badly defined, are being introduced in regulations and contracts.

The implementation and monitoring of such policies tends to differ across countries. In Madagascar, Mozambique and Zambia there are local content regulations being prepared or have been recently drafted. While this study has not attempted an evaluation of these regulations, reporting by mining companies and suppliers indicate these are weakly enforced at best.

5

South Africa, relative to the other three, is facing much higher regulatory pressure on procurement of mining companies and other first tier suppliers. The Mining Charter (2010-2014)1 is currently under renegotiation, and there are pressures to further push for procurement from Broad-Based Black Economic Empowered (B-BBEE) SMEs, although the mining houses are starting to push back with greater vociferousness as they are financially squeezed in the current market conditions. In the current charter, mining companies have been required to procure a minimum of 40% of capital goods, 70% of services and 50% of consumer goods from BEE companies by 2014. In addition, multinational suppliers of capital goods annually contribute a minimum of 0.5% of annual income generated from local mining companies towards socio-economic development of local communities into a social development fund, set up in 2010.

Impact on suppliers: The South Africa local content regulation has produced a twofold impact on the SMEs in the country. First it has put pressure on established white-owned mine suppliers to share ownership with black shareholders in accordance to DTI regulation (see BOX). Responses to this have varied and range from formerly white-owned companies seeking partnerships with emerging black suppliers to attempts of moving production out of the country. The latter being especially relevant for suppliers with a strong focus on exports into the region. Long term effects of the local content regulation is difficult to predict. It needs to be noted, however, that South Africa has in fact lost production capacity in its supplying industry in recent years.

Second is the emergence of B-BBEE compliant firms. These SMEs have taken two forms; first those attempting to assemble/manufacture within South Africa, with limited managerial and manufacturing capacity which urgently requires upgrading. Second, as traders, firms import products to supply local mining companies. This has had the unintended consequence of replacing previously domestic production with imports.

BOX: DTI Local Content Regulation in South Africa

Black Ownership requirements

With the exception of micro enterprises up to an annual turnover of R5 Million and below, all companies in South Africa are subject to B-BBEE regulation. The regulation primarily aims at increasing black ownership, which is then translated into a scorecard. For example, for being a Level One compliance, the firm must be 100% black owned, while for Level Two compliance it must have 51% black ownership2.

Non-compliance

Although there are no direct financial penalties, only B-BBEE compliant companies are able to avail certain business opportunities. This is particularly relevant with regards to business being undertaken with government bodies. Indirectly, non-compliance also has an effect on private business relations as procurement from a non-compliant source negatively effects the rating of the buying company.

c. Trust deficit in the general business environment

One of the common themes across respondents, whether in southern Africa or in Europe, was the lack of trust between firms. The trust deficit refers to issues ranging from concerns of delay in receiving payments to more serious matters of IP protection and accounting fraud. The concerns stem primarily from the ‘lack to recourse’ when transactions become problematic.

1 http://www.sadpmr.co.za/upload/Mining_Charter.pdf 2 Details of compliance standards can be found here https://www.thedti.gov.za/economic_empowerment/bee_codes.jsp

6

Trust has also been reported as an issue for international SMEs that wish to enter the southern African market. Smaller firms do not have the resources to conduct due diligence on potential partners and clients and have indicated that current systems, such as trade delegations and trade fairs are inadequate platforms to establish trust. Fundamentally, there is a lack of knowledge of the business environment in southern Africa which has an adverse effect on establishing trustful business relations.

d. Infrastructure and transport costs

The cost of transport and the associated poor infrastructure within this region are factors pushing the demand for suppliers within a given geographical vicinity of the mine site. Mining operations in the region tend to carry large inventories, particularly for critical inputs, to ensure break-down or replacement does not impact mine operations. In recent years, pressures on mining companies to cut costs have led many companies to pass on inventory responsibilities to their suppliers. Suppliers are therefore required to provide inputs at short notice. With high transport costs and poor infrastructure, the option of locating far away from the client is both a costly and time consuming proposition.

Information on the product/services demands from different mining clusters, and the potential size of such opportunities, would be valuable for SMEs in making decisions with regards to locating their operations. Additionally for mining companies, providing such information would encourage a capable/efficient supplier cluster to develop near their operations. Apart from the Kitwe and District Chamber of Commerce and Industry in Zambia’s copper belt region, no indication of such information being made available collectively for a cluster was given.

4. Mining Procurement and Opportunities for SMEs

a. The Mining Company Procurement Profile

Two tiers of mining companies were reviewed for this study; the Large/Majors tier and the Medium/Mid-tier. Majors are defined as those with sales revenues above the US$ 500 million in the previous year. Majors tend to have multiple mine sites, for multiple minerals, located in more than one country/continent. Majors will have country offices, regional hubs and company headquarters (usually located outside of southern Africa).

Mid-tiers have sales revenues between US$ 50 -500 million in the previous year. They will operate one to two mines, usually located in one country. The country office will be the major decision making authority and authorisation divisions between mine managers and country officers will not be clearly delineated.

Pressure to cut costs have increased on all mining companies, regardless of size, as mining price and investment cycles have turned downwards over the last five years. Efforts to reduce expenditure have been met with different strategies; from increasing bargaining power with suppliers, to outsourcing non-core functions, and developing local suppliers.

As a result of cost management pressure, as well as ensuring financial reporting compliance, the Majors have developed standardised and often rigid systems for engaging with suppliers, including SMEs. Each company reviewed has a supplier registration portal on its webpage. All suppliers must be registered through the portal to be included in the company’s supplier database. No business can be granted to a firm that is not registered in the company’s database. Covering these portals, let alone winning an actual tender, is too challenging for most SMEs, particularly for local newcomers that do not have the necessary experience, financial stamina or reputation among mining companies. With the exception of few

7

established companies, this effectively excludes local firms from securing a piece of the operational expenditure (OPEX) invested each year in southern Africa.

Mid-tiers operate more decentralized procurement authorization structures. The level of decentralization varies; one company indicated 95% of their procurement purchased occurred at the mine site level, while other respondents operate a tiered system that centralizes procurement of the most high value and complex good and services while keeping procurement of the more regular items at the mine site level. Given such firms will have one or two mine operations; greater decentralisation allows more opportunities for cost efficiency. This level of authorisation allows more space for SMEs to enter the value chain.

Mining companies have increased pressure on their large suppliers (such as equipment manufacturers) to develop their own local supplier development programs and increase local content in their processes. Limited interviews with such equipment suppliers have indicated that while the potential for local SME engagement exists, supplier development has remain limited at this time.

Within local supplier development programs a distinction can be drawn between supplier management and enterprise development. Supplier development is limited to providing training and developing capacity to deliver to the lead firm’s standards. Additional requirements fall under the enterprise development category, relating to developing managerial and marketing capacities, managing cash flows, process developments, certifications etc. The latter are essential for developing manufacturing capacity, with the mining sector as a catalyst in assisting enterprise development. They are usually not part of the supplier development programs implemented by the major mining companies in southern Africa.

b. Identified Business Opportunities

Mining companies, in general, will release information on their overall spending for a given year. This usually takes the form of operating expenditure (costs for running a mining operation) and capital expenditure (costs for the expansion of mining operations). However mining companies are hesitant in sharing detailed breakdown of their spending by different products, as these are considered confidential commercial information.

For this reason, the access to detailed market information for SME suppliers in the southern African mining context is fairly limited, allowing issues such as trust and reputation to continuously impede both the development of a local supplier industry and also investments of international companies into an unfamiliar market.

Through the surveys and interviews in this study some of this information was unlocked. The results provide a first insight into the potential for proper regional economic development along the mining sector that, importantly, is not just based on low value products or services.

The case studies presented below are examples of identified business opportunities. They are based on the procurement requirements acknowledged in the surveying of mining companies in southern Africa. In parallel, it draws from the review conducted of SMEs in Europe that may have the capabilities to meet the procurement demands and potential matching opportunities are mentioned below. The examples are selected from a vaster number of opportunities, and highlight areas where linkages to Europe based suppliers are particularly interesting. Standards, and related issues with certification, are also represented due to its relevance for business opportunities in the mining sector.

8

b.1 Goods

Equipment and spare parts

Problematic procurement for equipment was largely reported for capital and heavy goods, which are outside the scope of this project. However, all respondents mentioned OEMs as a particular avenue of SME inclusion in the supply chain. OEMs procurement practices and scope of business opportunities for SMEs need to be further investigated, as they were not the primary target of this research. Spare parts for OEM equipment were also mentioned as a possible business segment. A variety of products and product segments for spare parts were mentioned as difficult to procure – see Table 1 for an overview.

Consumables

South Africa tends to produce the consumables required for its mining sector and is a major supplier to the other three countries of such products. However, the monopolistic character of some of these suppliers has been identified as being problematic. A particularly interesting example is SASOL, the largest supplier for cyanide in the region. SASOL tends to maintain import parity pricing and has managed to defend its position in the region, responding rather aggressively to attempts that seek to install further production capacity in its area of influence. A similar story can be told for high grade steel products with Arcelor Mittal accounting for the largest market share in the region. Respondents indicated they would prefer having a number of suppliers to choose from, to gain price advantage that competition brings. Apart from cyanide, ferro-silicate and lime were identified as other consumables that have been problematic.

Europe based suppliers: The cyanide for mining market is dominated by a few very large chemical companies who offer cyanide for mining services as one of many chemical products and services; these include organizations such as SGS and Orica. Of the mining specific SME suppliers identified within Europe, CyPlus GmbH in Germany appeared one of the largest. It should be noted that it was especially difficult to identify companies that provided cyanide for mining services, mostly likely due to the negative connotations surrounding the product.

Table 1. Overview of Goods preferred to be procured locally but where local supply is lacking

Equipment and Machinery Rod mills, Ventilation equipment, Hoists, Refrigerator units for underground mining, Crushers, Liners, Conveyor belts, Processing equipment (sorting, separating, washing)

Spare Parts Plastics, Tyres (recycling), spares for equipment and machinery as noted above

Consumables Grinding media, Personal protection equipment, Drill bits, Electric cables, Isolating paint, Wire mesh, HDPE piping, Ferro silicate, Cyanide, Chemicals

b.2 Services

Mining hazardous waste management/disposal solutions

The management of hazardous material waste were reported as lacking. In countries such as Madagascar, where large scale mining has emerged in recent years, local supplier capacity was particularly weak. In South Africa, a mature mining country, the need for such services has begun to emerge in recent years, as mining in general is increasingly focusing on being a sustainable industry. Particular emphasis was given

9

to the issue of mine closure and rehabilitation. With resource prices remaining on a low level, but also due to the age and depth of its mines, South Africa faces considerable challenges in this field. A local industry to care for these issues has not yet established.

While there are ideas and initiatives on local level these have not been materialized. A respondent mentioned a blue-sky thinking competition, where young engineers were invited to present ideas on dealing with acidic waste water, found in deep shaft mines. While positive results were noted for ideas, the capacity to transform these ideas into products was lacking.

Europe based suppliers: A considerable amount of SMEs were identified in Europe, particularly within Germany, which offered waste management and specifically waste water management services for mining. These included Beak Consultants GmbH and Brenk Systemplanung GmbH, which are both environmental consultancies in Germany that offer a range of waste disposal services.

Mining tires recycling tire services

Recycling of products from mine sites, such as tires and machine oil was also indicated as a potential business area that is not being catered to within the region. Some respondents noted that used tyres were currently stockpiled as there were no opportunities for disposal or recycling. Given the current pressure on mining companies, some have indicated an interest in recycling to save costs.

Europe based suppliers: Most tire recycling services that were identified were based, or had their headquarters, in either Canada or Australia, such as Kal Tires or Osho Ventures. The majority of these firms also had operations in Southern Africa to service predominately South African mines. Within Europe, Eldan Recycling A/S is a SME based in Denmark that was identified during the research, and which does operate mining tire recycling and re-treading services in southern Africa.

b.3 Standards

Health and safety requirements

Health and safety standards generally apply to three verticals in mining operations; first the products and equipment used on mine site, second with to transportation of materials in and out of mine site and third the standards followed by personnel working on mine sites.

Equipment: Excluding the larger capital machinery and items (such as crushing plants or 60 tonne trucks), there are a number of smaller items that are required at the mine site. These would include auxiliary equipment such as ventilation equipment, pumps, piping, light vehicles and spare part for mining equipment. The standard specifications for such equipment, apart from performance standards, includes specifications that allow them to be operated safely at mine sites. For example, for light vehicles such as pickup trucks purchased from the general market need to be fitted with roll over protective structures. Guards for exposed rotating cutting machinery, for nip-points on pulleys and drives, interlocked guards for rotating shafts and rollers etc. are other examples for standards required for operating machinery on mines sites.

SMEs providing such inputs are reported to be unable to meet safety and health criterion. While this has not completely precluded local/regional firms supplying such inputs to mine sites, mining company respondents indicated that the presented products usually do not meet the standards required. The company has to spend its own resources in helping SMEs meet their compliance standards for such equipment.

Transport: Mining companies consume a number of hazardous and chemical materials, such as cyanide for gold production, reagents, and explosives. The transport and storage of such material is required to

10

meet stringent health and safety regulations. One of the reasons provided for not using SMEs as opposed to the large firms (such as SASOL) for explosives and cyanide was the reported inability of the SMEs to secure and maintain health and safety standards for storage and transport for such material.

Personnel: The mining company is responsible for all personnel on the mine site, whether they are employees of the company, contractors or visitors. An injury or death on a mine site is taken very seriously by both the mining company and the country regulator. Apart from the loss of life, such incidents can shut down mine operations for a number of days, while investigations are conducted. Therefore a mining company takes compliance to health and safety standards as a critical factor.

For local SME employees, if their services require their personnel to be working on the mine site, they must be able to meet the company’s health and safety standards. While mining companies are willing to provide such training for contractors/SMEs, it is an additional cost to the company. When considering when to in-house services or out-source to SMEs, the cost of training for such contracts has to be taken into consideration. SME suppliers that are aware and can provide documentation to support their safety and health compliance would be more likely to secure contracts.

Issue: for local SMEs to be more competitive in this area, their technical capability to produce safety and health compliant products needs to be upgraded. Training, awareness and procedural practices need to be added to the skills of SMEs to become more competitive in the provision of chemicals and other consumables to mining sites. General training and internalisation of health and safety standards, and more importantly the documentation of such internal procedures to be presented to clients, is required by domestic SMEs.

The accreditations for safety and health regulation differ between mining companies (and reportedly sometimes between different mines sites of the same company). Thus SMEs are required to gain a range of certifications, which can act as discouragement for extending client base.

A survey of business directories suggests that for South Africa, there are very limited SMEs that can meet the requirements set for manufacturing health and safety equipment and transport of hazardous material and chemicals. These activities tend to be in the domain of the larger firms or international providers. Many SMEs across Europe were identified that offer health and safety goods and services for the mining sector that could be considered to partner with local SMEs in southern Africa to upgrade the latter’s skill/technology set.

Opportunity: The need for safety and health compliance in products, procedures and personnel, is reported to be an area of problematic procurement for mining companies. SMEs are also reported to consider this as a cost that is not fully recovered. For SMEs to become competitive in this area, they require upgrading in skills and technology. Information on what level of compliance would be beneficial for SMEs to secure business, what differing requirements of mining companies are (and whether there are common standards possible here), availability of external business linkages to provide regulatory compliant products, could provide an opportunity for increasing domestic value added in this area.

Europe based suppliers: Many SMEs across Europe were identified that offer health and safety goods and services for the mining sector. As with other service areas in the mining industry, most of the health and safety mining suppliers that were identified, including GAI Tronics, a UK based SME, have attempted to secure themselves against the mining downturn by diversifying beyond predominately selling products and moving into also offering training and consultancy services.

11

c. The regional demand profile

As previously stated, the access to detailed market information for SME suppliers in the Southern African mining context is fairly limited. In order to gain a better understanding of the possibilities for these companies and to enrich the above introduced business opportunities, it was necessary to shed some light on the size and composition of the regional market. A regional demand profile was created to allow for estimates of the size of a variety of product categories, putting the anecdotal evidence of the previous chapter in context. The result is a valuable instrument for companies to choose the right location for their engagement. It further enables researchers and policy makers to better understand how the structural differences in the mining sectors among the countries under review affect the potential for an economic development beyond mining.

A regional profile

Using in-house expertise and a review of the World Bank Study on local procurement in the West African mining sector3, a list of mining inputs (both product segments and services) was constructed. The overall annual market size for mining related goods and services for each country has been estimated by "top-down" and "bottom-up" methods. The primary bottom-up method is by aggregating mine site cash cost data, where available within the SNL Metals and Mining database.4 Secondarily, to account for those mines not captured by the SNL mine-by-mine cost, a top-down estimate was produced for each country commodity segment, based on a commodity revenue estimate and assumed profitability (margin).

The market size estimates relate to operating costs. Capital expenditure for expansion is not accounted for, as they vary widely from year-to-year, depending on the commodity cycle.

Expenditure category split (in percentage terms) was estimated for 36 cost categories. Six categories of mines were differentiated; underground and open pit mines, at three scales of operation (small, medium and large). For details, an example with a limited set of categories and numbers for South Africa is available in the ANNEX. The size of each product category has been calculated for all four countries under review using 2014 numbers from the SNL database.

Given the detailed cost split attempted in this exercise, nominal accuracy of market size estimates is approximately +/-20%.

Given the size and number of operating mines in the region, Table 2 shows the estimated expenditure by mine site, broken down by country, scale and mining process. As expected, South Africa is the largest market (86%), followed by Zambia (11%), Madagascar (2%) and Mozambique (1%).

For the region, just about half of the mine site costs come in the large underground segment (dominated by platinum production in South Africa), followed by large open pit mines (19%) and then medium underground mines (15%).

By country, the largest mine cost spend for Zambia comes from its large underground mines. For Madagascar, medium open pit mines have the highest mine site costs, while for Mozambique this is largely underground mines.

Table 2. Estimated Mine Site Cost for Operating Mines (US$ million)

3http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/02/10/000477144_20150210115422/Rendered/PDF/AUS63240WP0P130I0Guide0Eng0Feb02015.pdf 4 The SNL Metals & Mining data covers more than 60 countries, 300,000+ drill results, nearly 40,000 properties and nearly 3,000 active companies. SNL carries out detailed forward-looking analysis of the mined commodity markets, mined volumes and industry capital expenditure.

12

S-UG M-UG L-UG S-OP M-OP L-OP Total South Africa 785 3,926 14,135 524 1,571 5,235 26,175 Zambia 160 481 1,890 64 128 481 3,204 Mozambique 11 76 133 8 38 114 379 Madagascar 27 27 - 54 432 - 540 Total 984 4,510 16,158 649 2,169 5,829 30,298

Source: SNL.com

These estimations indicate a sizable market for local companies to move into and contextualize the business opportunities outlined previously. While the margin of error increases with the level of detail provided, general conclusions can be drawn for the demand of a certain product category, which in turn can segue into a more detailed assessment of the business opportunities for a specific product within the category through further field research.

5. Scope for B2B upgrading of SMEs through international partnerships

The supplier industry in southern Africa has struggled to find entry points into the regional mining sector and continues to do so despite the regulatory pressures on the mining industry to increase local content. The weakness of the domestic supplier industry originates in the particularities of mining procurement, and the enclave characteristics of the extractive industry, but is also grounded in the general structure of the regional industry. Even though some SMEs possess the technical skills necessary to compete in the mining industry, the vast majority lacks crucial elements for a sustainable engagement in the sector. Financial stamina, the ability to digest large contracts, reputation and sheer size are the most prominent examples.

Triggered by local content regulation, or out of own economic interest, every major mining company in the region has in recent years engaged in supplier development. Despite the substantial funding for these programs, success stories are scarce. The programs report high rates of attrition for SMEs and inability to grow independently when support is withdrawn.

Usually, supplier development programs are situated in the close vicinity of a mine as part of the mining company’s attempt to give back to the local communities. This however creates a dependency of the supported SMEs since these will be trained to fit the needs of the particular mine and thus cannot diversify their client base.

In order to enable a domestic supplier industry that creates jobs and adds value to the local economy the above stated issues need to be addressed. And despite the cyclical low of the mining industry as a whole the conditions for doing so are promising. As outlined in the regional demand profile, the southern African mining sector continues to be a major consumer and regular purchaser of a vast variety of goods and services. This is interesting for international investors looking for new opportunities worldwide – such as the business opportunities identified in this study.

Business linkages between local and international SMEs appear to be an adequate instrument to realize many of the above mentioned opportunities. Through such partnerships, local SMEs experience an upgrade, for example through securing finance for company growth, technical support or the production of licensed goods that fulfil the certification requirements of mining companies.

From the international investors’ point of view, a partnership with a local SME is one of few opportunities to enter the southern African market, especially considering the increasing regulatory pressure that is

13

often aimed at the ownership of companies. Local presence is further driven by the increased requirements of mining companies towards suppliers with regards to the availability of technical staff and spare parts. Especially smaller equipment suppliers from abroad that do not possess the capacities to build a local care and maintenance network of their own need to establish partnerships with local companies if they want to keep selling equipment in the southern African market.

In contrast to the supplier development programs of the large mining companies in the region, a partnership between two companies is business-driven from the very start and designed to suit the needs of both partners. To stay competitive and ensure a growing business, these partnerships are unlikely to enter into a dependent relationship with a single mine site but will diversify their business, which naturally introduces an element of sustainability.

While there is a substantial basis for business activities in southern Africa, the engagement of internationals remains limited. Interviews indicated a high risk perception and little knowledge of the market among European equipment suppliers. Even companies that have taken the strategic decision to invest in the region struggle with orientation in all matters of their undertaking. Information is a key element to support partnerships between southern African and international companies. Through information the element of risk on the side of the investor is reduced; enabling an informed decision making and a more robust planning for joint endeavours.

Market transparency in the southern African mining sector seems unlikely to improve in light of ongoing regulatory and economic pressures, as well as the general complexity of the sector However, a neutral intervention may contribute to realizing the potential of such partnerships and thus lay the foundation for an economic development beyond mining.

14

ANNEX

Expenditure

Category S-UG M-UG L-UG S-OP M-OP L-OP Total

Geological and

exploration services 20,6 97,2 300,2 10,0 28,7 89,5 546,3

Geological equipment

and supplies 2,1 11,4 37,5 1,5 5,1 15,8 73,4

Analysis and testing 12,4 68,6 238,4 9,0 30,4 100,4 459,2

Supply chain services 1,4 8,4 34,0 1,0 3,7 15,0 63,5

Environmental services 13,7 76,3 294,4 10,0 33,8 123,9 552,0

Feasibility, design and

engineering 3,4 19,1 73,6 2,5 8,4 31,0 138,0

Construction, and

related materials and

services 5,1 24,3 79,8 3,0 8,6 26,9 147,7

Contract mining 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Equipment & Plant

maintenance & repair 34,3 162,0 531,7 24,9 71,7 223,9 1048,6

Equipment rental 2,7 13,0 42,5 2,0 5,7 17,9 83,9

Drill ing equipment and

services 3,4 19,1 73,6 2,5 8,4 31,0 138,0

Plant and equipment -

mining / general 6,9 38,1 147,2 5,0 16,9 62,0 276,0

South Africa $M