PUTTING SOUTH AFRICA FIRST

SOUTH AFRICANFA

CTS

ABO

UT

August 2013

MINING

The mining sector remains the “flywheel” of the South African economyThe mining industry has played a key role in South Africa’s economic development for over 140 years, which has transformed South Africa into the most industrialised country in Africa. The industry remains a major contributor to the economy with significant contributions to employment numbers, export earnings, attracting foreign direct investment, creating GDP and contributing to proper transformation in the economy.

Putting South Africa First

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FRAMEWORK AGREEMENT FOR A SUSTAINABLE MINING

INDUSTRY

Government, organised labour and business on Wednesday, 3 July 2013 signed the Framework Agreement for a

Sustainable Mining Industry.

The agreement sets out key steps and processes that will see all parties working together to ensure stability and sustainability of

the mining sector for the future of South Africa’s economy.

The parties recognise that the mining industry is central to South Africa’s economy and job creation and that urgent steps

are needed to strengthen the sector for it to withstand the current difficult global economic conditions.

The parties committed to improve processes and procedures as well as implement new measures that bring about lasting change

while working together to sustain the sector.

MINING CREATES SUBSTANTIAL ECONOMIC ACTIVITY IN MANY OTHER PARTS OF THE ECONOMY In 2012, the mining sector helped generate 16,7% of the country’s economic activity (i.e. 16,7% of the Gross Domestic Product – GDP). • Almost one fifth of South Africa’s

economy is attributable back to the mining sector.

• Directly the industry’s contribution was 8,3%, but this can be more than doubled when the mining supplier industries, plus the downstream industries that use mining outputs, the spending multipliers and the induced effects of mining are included.

Much of the economic activity in the input industries is attributable to the mining sector. The industry uses significant amounts of transport services, consulting and financial services, steel and material inputs, electricity and water inputs and so on.

THE MINING SECTOR HELPS FUEL THE ECONOMYMining is the industry that helps provide about 72% of South Africa’s primary energy needs, and effectively “fuels” the South African economy.• About 125 million tonnes of coal was

used to generate 94% of South Africa’s electricity, which in turn turned the wheels of industry and the economy.

• About 45 million tonnes of coal was converted into liquid fuels, which accounted for about 30% of the country’s liquid fuel production.

• In the absence of domestically mined coal, it is estimated that South Africa would need to import an extra R90 billion of foreign energy, which would have significantly undermined the country’s trade balance and energy security.

FACTS ABOUT SOUTH AFRICAN MINING – AUGUST 2013 | 01

MINING IS A MAJOR ENGINE OF JOB CREATION

In 2012, the mining sector helped to create 1 365 8921 jobs in the South African economy. • This accounts for 14% of the total formal

non-agricultural employment in the country.

• Mining created 524 632 jobs directly and another 841 260 jobs were created in the industries that either supply goods and services to the mining sector, or use mining products for downstream value addition, or which are related to the spending multipliers from mining and mining employees in the economy.

• The social multiplier of mining is very significant for South Africa. Given a dependency ratio of about 10 to 1, this means that about 13 600 000 people were directly dependent for the daily food on their table on the 1 365 892 jobs created by the mining sector.

Why does mining have such large employment effects into the rest of the economy? Because for every direct mining job approximately two jobs are created in other sectors! Mining requires a significant amount of inputs, goods and services. • For example, in 2012 mining bought in

a huge amount of transport and storage services, which in turn created about R50 billion in GDP and 80 300 jobs. In essence, half of Transnet Rail Freight’s bulk rail and port handling businesses are related to transporting and storing mining products.

• Similarly, the mining sector buys in catering and accommodation services (18 881 jobs), finance, insurance and business services (193 877 jobs), electricity inputs (9 747 jobs) and so on.

• In addition, given the R93,6 billion provided in salaries and wages to employees combined with the circulation of money paid to suppliers, the spending multipliers have a further significant feed through effect into sectors such as the wholesale and retail sectors of the economy, where another 157 298 jobs are estimated to have been created as a result of mining activity.

2012, DIRECT MINING EMPLOYMENT, TOTAL 524 632Source: DMR, as at June 2013

2012, INDIRECT EMPLOYMENT ATTRIBUTABLE TO MINING, TOTAL 841 260Source: Quantec and IDC, 2012

Agriculture, forestry and fishing (48 067)

Food (16 486)

Wearing apparel (6 114)

Wood and wood products (6 113)

Printing, publishing and recorded media (5 282)

Petroleum, chemicals, rubber and plastics (16 913)

Iron, steel, metals, machinery and electrics (22 226)

Motor vehicles and transport equipment (5 334)

Electricity, gas and steam (9 747)

Water supply (2 020)

Building construction and engineering (13 145)

Wholesale and retail trade (157 298)

Catering and accommodation services (18 881)

Transport and storage (80 300)

Communication (7 507)

Financial, insurance and business services (193 877)

Medical, dental, other health and veterinary services (22 350)

Other producers and government services (211 268)

Coal (83 240)

Gold (142 201)

PGM and other (299 191)

Source: Quantec and IDC

MOST OF THE INCOME OF THE MINING SECTOR IS SPENT LOCALLY

02 | FACTS ABOUT SOUTH AFRICAN MINING – AUGUST 2013

In 2012, the total income2 of the South African mining industry (after depreciation and impairments) was R497,1 billion. The total expenditure of the industry (after depreciation and impairments) was R488 billion. Of this expenditure:• R289 billion was spent on input

costs (timber, steel, explosives, water, electricity, transport, etc.);

• R93 billion went to salaries and wages;• R59 billion was spent on capital

expenditure (to sustain production and for growth projects);

• R21 billion was paid in direct corporate taxation;

• R14 billion was paid to the banks as interest on loans; and,

• R12 billion went to shareholders in the form of dividends.

It is estimated3 that of the R488 billion expenditure, more than 80% was spent in South Africa. This is why mining has such a big impact on the size of the rest of the South

African economy – the money generated in mining circulates throughout the rest of the economy, having an impact on sectors as diverse as financial services and housing. Some of the expenditures go towards importing equipment (such as drag-lines or dump trucks) which are not made in South Africa. However, these purchases help improve the total fixed capital stock of the mining sector and add to the productive base of the economy.

Dividends make up 2,2% of total expenditures and about half of the dividends go to foreign shareholders. The other half of the dividends flow through to millions of South Africans, who have money invested in mining through pension funds and investments. Mining does significantly contribute to savings in the economy.

The key point here is that a very significant amount of the benefit of the expenditures of South African mining is captured in South Africa and benefits the South African economy and people.

THE LINKAGES OF MINING TO THE ECONOMYSource: Quantec and IDC, 2012 data

Purchases and operating costs (steel, timber, electricity, rail, etc) (R156,2 billion)

Labour costs (R92,7 billion)

Interest paid (R14,6 billion)

Patents and franchise fees (R4,9 billion)

Rental paid (R14,6 billion)

Leasing of plant and machinery (R4,9 billion)

Other expenditure (R112,2 billion)

Taxes paid (R19,5 billion)

Dividends payable (R9,8 billion)

Total capital expenditure (R58,6 billion)

2012, RSA MINING EXPENDITURE (AFTER DEPRECIATION AND IMPAIRMENTS) – R488 BILLIONSource: StatsSA QFS, December 2012

MINING SECTOR IN 2012 GDP: R263 billion or 8,3% of GDP (nominal terms)

Employment: 524 632

GDP: R527 billion or 16,7% of GDP (nominal terms)

Employment: 1 365 892 (14,0% of total employment)

ECONOMY-WIDE IMPACT ACROSS ALL

SECTORS OF SA ECONOMY

INDUCED IMPACT

GDP: R146,4 billion or 4,6% of GDP (nominal terms)

Employment: 479 986

INDIRECT IMPACT

GDP: R47,9 billion or 1,5% of GDP (nominal terms)

Employment: 152 831

FIRST ROUND IMPACT

GDP: R70 billion or 2,2% of GDP (nominal terms)

Employment: 230 921

THE MINING SECTOR PAYS NEARLY DOUBLE ITS GDP SHARE IN CORPORATE TAXThe mining sector is a substantial contributor to the government and society in terms of its tax contribution (direct and indirect). • In 2012, the mining sector paid

R21,4 billion in direct corporate tax2. This accounted for 14,1% of total corporate taxes paid in South Africa and is nearly double the sector’s share of GDP.

• In terms of the recently introduced mineral royalty system the mining sector paid R5,6 billion in royalties to government for the extraction of the minerals.

• In terms of indirect taxes the sector helped contribute R1,1 billion3 in terms of the special levy on electricity and approximately R900 million in terms of the one percent national skills development levy.

• Considering that the mining sector paid R93,6 billion in salaries and wages in 2012, the sector is estimated to have collected about R9,5 billion3 in taxes from employees in terms of personal income tax for government.

If one includes the economic activity in the rest of the economy that is related back to the mining sector, the overall contribution of mining and mining related activities to taxation collected by government is significant.

THE MINING SECTOR EARNS MOST OF SOUTH AFRICA’S FOREIGN EXCHANGEThe export earnings profile of an economy is a crucial determinant of that country’s economic performance and capability to import. This enables the importation of foreign technology, energy products (crude oil) and inputs to various industrial processes. For all of the past century, South Africa has relied on the mining sector to provide the foreign exchange earnings that have allowed South Africa to become the most industrialised country in Africa.• In 2012, primary mining exports of

R269 billion accounted for 38% of South Africa’s total merchandise exports.

• However, R94 billion in minerals was sold locally into downstream fabrication and energy industries. If the exports of ferro-alloys, steel, chemical, plastics, polymers, lubricants, fertilisers, catalytic converters, intermediate mineral products, etc., are added to primary mineral exports then the total contribution of mineral related exports rises to over 50% of merchandise exports.

Equally important, the minerals industry is a fairly small importer of products and services, thus creating an overall significant positive foreign exchange balance compated to other industries.

FACTS ABOUT SOUTH AFRICAN MINING – AUGUST 2013 | 03

MINING IS A SUBSTANTIAL CONTRIBUTOR TO INFRASTRUCTURE INVESTMENT IN SOUTH AFRICAAccording to Treasury6 the government plans to spend about R845 billion on capital projects over the three year period from 2012 to 2014.

Eskom is due to spend R296 billion in this period, mostly on new power stations and improving network and distribution infrastructure. Transnet is expected to spend R101 billion in the MTEF period.

These investments focus on the freight rail network, large capacity upgrades on the iron ore and coal export lines, acquiring modern rolling stock and refurbishing existing infrastructure. The increased capacity will boost general freight and mining exports.

What many people do not realise is that much of the Transnet Rail Freight and Eskom infrastructure upgrades will be paid for by user charge fees paid by the mining companies over the next 10 to 20 years.

Ultimately, all the capital and operating costs will have to be recovered from users. Given that mining accounts for 50% of Transnet Rail Freight’s business, over half the expected capital cost will be recouped from the mining sector over time.

Similarly, with mining and smelting accounting for close to 40% of Eskom’s business, the same cost recovery mechanism will play out in the electricity sector. This means that mining companies will in all likelihood pay for about R50 billion in Transnet Rail Freight’s capital costs and R100 billion for Eskom’s capacity expansions.

The contribution of mining to capital investment by the state owned enterprises is a significant but unrecognised contribution by the mining sector to fixed investment and the growth of the country’s productive fixed capital stock.

04 | FACTS ABOUT SOUTH AFRICAN MINING - AUGUST 2013

MINING CONTRIBUTES SUBSTANTIALLY TO THE PROVINCES The mining sector is a key driver of the economies of many of South Africa’s provinces7:• Using 2010 nominal data, the province

with the largest mining sector was the North West Province, which had a mining GDP of R54,4 billion and where mining accounted for 30,7% of that province’s GDP.

• The second largest mining province is Limpopo, where mining GDP was R52,2 billion and mining accounted for 27,2% of the provincial GDP.

• The third largest mining province was Mpumalanga with a mining GDP of R44,2 billion and a mining share of 23,6% of GDP.

The key issue here is that mining has helped drive the industrialisation and economic prospects of a number of South Africa’s provinces. It has also shaped the growth of certain areas, such as Rustenburg which had a high 2,7% economic growth rate in 2010 mostly as a result of significant growth in the mining sector.

MINING, A KEY INVESTOR IN THE SOUTH AFRICAN ECONOMYGiven mining’s linkages and induced impacts on many other parts of the economy, it is not surprising that mining is a significant investor in the South African economy. • On a direct basis mining accounts for

12% of total investment in the economy (public and private), and accounts for 19% of total private sector investment.

• If the indirect multipliers and induced effects are considered, the total contribution of mining to fixed investment is estimated to be about 25% of the total.

So one quarter of all investment in the economy is somehow related to the mining sector.

MINING IS A KEY MAGNET FOR PROMOTING DOMESTIC SAVINGS AND ATTRACTING FOREIGN CAPITALNot only does mining contribute to significant private and public investment in the economy, it also attracts a significant amount of foreign savings from the rest of the world, for investment in South Africa.

South Africa is seen very much as a mining investment destination and traditionally mining has accounted for a significant portion of capital flows into the country. These foreign capital flows have helped improve the country’s capital inflows, assisting the capital account of the balance of payments. In addition, through pension fund and life assurance contributions, many millions of South Africans have their retirement and other savings invested in the mining sector. This helps encourage savings and the provision for retirement.

The mining sector continued to be a key component of the Johannesburg Securities Exchange (JSE) and accounted for 24,7% (R1,8 trillion) of the All-share index and 24,4% (R1,9 trillion) of the market capitalisation of all equities on the JSE at the end of 2012.

CREATING AND MAINTAINING A SAFE WORKING ENVIRONMENTThe Chamber of Mines remains committed to a vision of zero harm in which every mineworker returns home unharmed every day. We aim to have a world-class safety performance in the South African mining industry by working closely together with our tripartite partners in government and labour. Through the tripartite Mine Health and Safety Council, the Chamber participates actively in the implementation of the Tripartite Action Plan on Health and Safety that leaders agreed in 2008.

While there is still a long way to go, the industry has achieved a notable improvement in its safety statistics over the last decade.

THE CONTRIBUTION OF MINING TO SOCIETY IS SUBSTANTIALThe contribution of mining to society, including community, enterprise and skills development is substantial.When reviewing the top ten mining producers in SA8: • Approximately R2,4 billion was spent on

community development in 2012.• Around R2 billion was spent on

Human Resource Development, and a further R330,5 million was granted in scholarships and bursaries for that year. Of the R330,5 million- approximately 5 168 bursaries were awarded to non-employees.

• Some R4,9 billion was spent on learnership programmes and a further R1,7 billion on ABET training.

• A further R7,4 billion was spent on artisan training and other training initiatives.

• The industry provides a substantial healthcare base and helps provide care to mine employees and their families.

• The industry has made substantial progress in phasing out single sex hostel accommodation and living conditions for employees and their families. In conjunction with many municipalities and mining communities the industry has helped provide access to housing and community services.

1 Source: Quantec and IDC2 Statistics South Africa, Quarterly Financial Statistics,

December 20123 Eskom Results, Integrated Report, 31 March 20134 Economics Advisory Unit, Chamber of Mines5 Mining Qualifications Authority, Analysis of

Workplace Skills Plans, draft report 31 March 2013 6 The 2013 Budget Review7 South Africa Survey 2012, South African Institute of

Race Relations, published November 20128 Top ten mining companies Community & Sustainable

Development Reports, Mining Charter Reports: Anglo American SA, AngloGold Ashanti, African Rainbow Minerals, BHP Billiton, Glencore Xstrata, Gold Fields, Harmony Gold, Impala Platinum, Lonmin Platinum and Sasol Mining.

Working together for a sustainable future

CHAMBER OF MINES OF SOUTH AFRICATelephone: +27 11 498 7100 | Facsimile: +27 11 834 1884

5 Hollard Street, Johannesburg | PO Box 61809, Marshalltown 2107communications@chamberofmines.org.za | www.chamberofmines.org.za

OUR MISSION STATEMENT

To achieve a policy, legislative and governance framework, which is widely supported and which will allow the mining industry to convert as great a part of the country’s abundant mineral

resources into wealth for the benefit of South Africa.

Putting South Africa First

Follow us on: www.facebook.com/mine @Mine_RSA