the regulatory environment and its effect on coal …

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THE REGULATORY ENVIRONMENT AND ITS EFFECT ON COAL MINE

DEVELOPMENT

Roger Baxter

Chief Executive

4 February 2016

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This is the Mining Industry

“Long Cold winters and Short beautiful summers”

Chamber presentation to IHS Energy conference 2

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More than half of NDP priorities can be tackled by mining

Economy and employment

Economy infrastructure – The foundation of social and economic development

Environmental sustainability – An equitable transition to a low-carbon economy

An integrated and inclusive rural economy

Positioning South Africa in the world

Transforming human settlement

Improving education, training and innovation

Promoting health


PAGE

Mining matters for the growth, development and transformation of South Africa

Related Services:• Financial services

• Banking• Stock market (JSE)

• Auditing and consulting services

• Business services

Supplier Industries:• Manufacturing

• Chemicals• Consumables (e.g.

diesel, timber)• Rail

• Port

• Electricity

Capital goods:• Equipment

• Machinery

Direct Services:• Geological

• Engineering• Health and safety

• Education skills

- Autocats

- Chemicals/liquids/ferilisers

- Steel/alloys

- Jewellery

Exploration

Infrastructure development

Mine development and operating

Treatment (Washing –

e.g. coal, sizing e.g.

iron ore, smelting e.g. precious metals)

Refining(Pure Gold, PGM,

Ferro Alloys)

MINING

Manufacturing

End consumer markets

- Electricity

- Liquid fuels

- Methane gas for FCsEnergy


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PGM; 26

Iron ore; 20

Coal; 18

Diamonds; 3

Manganese; 6

Chrome; 2

Other ; 8

Gold; 17

Sector contributions to mining minerals exports in SA (2014)

Mining matters to South Africa

In 2014, the South African mining industry contributed:

• 7.6% to GDP

• Around 15% to FDI

• 20% of private investment

• 1,4 million jobs

• 25% of exports

Source: Chamber of Mines estimates; StatsSA


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SA Coal mining sector – burning issues

� Falling Coal export prices (-60% since 2012)

� Some areas of policy uncertainty – especially on strategic minerals and export restrictions (which the industry thought were resolved)

� Some policy and regulatory challenges (and various government departments wanting to add extra costs on to coal mining – e.g. Environmental legislation)

� Unexpected upward revision in coal royalties (change to the base calculation), resulting in large unplanned increased in royalty for industry

� Some infrastructure constraints (but not all players take up export entitlements)

� Water management and ability to feed back into water supply

� Falling productivity

� Rapidly escalating costs


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South Africa’s share of the global total has fallen from 14% in 2004 to 8% in 2014

Source: SA Chamber of mines, SAIMM, Industry research

Total SA coal production and global export thermal coal market share

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Coa

l pro

duct

ion

Mill

ion

tonn

es

Export Eskom Other local Export global market share


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Competitiveness in mining is driven by

multiple factors

Competitiveness drivers Performance outcomes

� Value add

� Production volumes

� Investment

• Labour cost

• Other costs

Produc-tion

Costs

Sustainability outcomes

▪ Occupational health and safety

▪ Environmental impact

Trans-formation

Safety, health, & environ-ment

▪ Transformation level

▪ Societal contributions

SOURCE: McKinsey & Company

Market context

Regulatory environment

Inherent potential

Product demandEnabling factors

Factor market efficiency

Industry structure

Natural resource endowmentHuman capital/ skills

Geographical factors

Accessibility of markets

Domestic demand

International demand

Regulatory and legal requirements

Institutional capacity

Infrastructure

Ease of doing business▪ Social licence ▪ Security of tenure▪ Rule of law▪ Macroeconomic

stability

Chamber presentation to IHS Energy conference

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Mining has a set of characteristics that include:

� It is a high risk industry, with long lead times from exploration through to mine

development and ultimately through to closure.

� It is very capital intensive and a large portion of the capital is spent in the

development of the mine.

� It is exposed to cyclical commodity markets.

� It is generally a “price-taker” and cannot pass on cost increases to the final consumer.

� It is geographically captured.

� It requires access to cost competitive and efficient infrastructure.

In order to encourage investment into mining, policies need to recognise the characteristics of mining and help reduce the risks of investment in long

term projects.


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Mining Asset Lifecycle

Explore Evaluate(proofing)

Develop Mine Closure

Cash flow over life cycle+

-

Price cycle

Given long life cycle, mining needs predictable, stable and competitive policy and regulatory environment


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Creating a successful coal mining sector

More effective problem solving partnership between government, business and organised labour

Regulatory and legislative environment that is stable, predictable and competitive

Stable and constructive labour relations environment and better social license to operate

Access to available, efficient and cost effective infrastructure (electricity, rail)

Solutions to improve productivity (next generation mining) and reduce cost pressures


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South Africa ranked 64/122 most attractive mining investment jurisdictions in the 2014 Fraser Institute Survey (we should be in top 20)

52,85353,255,155,255,357,657,858,158,458,558,959,160,260,360,461,161,561,662,362,662,96465,366,166,266,366,667,367,667,868,569,67070,571,571,572,472,874,574,874,974,975,175,575,575,77676,477,278,178,379,780,180,781,481,58282,983,383,683,8

0 20 40 60 80 100

NicaraguaRussia

IndiaFrance

ColombiaIvory Coast

TanzaniaMadagascar

GuyanaFiji

BrazilNew South Wales

Burkina FasoPortugal

CaliforniaGhana

MyanmarJujuy

New ZealandNorway

Nova ScotiaGreenland

MoroccoTasmania

New MexicoZambia

MichiganCatamarca

MontanaMexico

ColoradoNorthern Territory

PeruNunavut

British ColumbiaQueensland

BotswanaNamibia

San JuanOntarioAlberta

New BrunswickIdaho

South AustraliaArizona

SaltaMinnesota

Northwest TerritoriesUtahChile

SwedenIrelandAlaskaYukon

Newfoundland & LabradorWyoming

QuebecWestern Australia

ManitobaNevada

SaskatchewanFinland

14,120,521,8

2627,328,629,730,230,4313232,233,4343535,635,736,536,536,636,937,237,437,639,139,84041,14242,442,642,643,443,443,443,744,344,344,444,645,445,945,946,146,246,747,44848,448,548,548,749,4505151,151,25252,652,8

0 20 40 60 80 100

MalaysiaHungary

KenyaHonduras

Solomon IslandsEgypt

GuatemalaBulgariaNigeriaSudan

RomaniaGreece

South SudanCentral African Republic

EthiopiaLesotho

MendozaNiger

Sierra LeoneDominican Republic

SerbiaPhilippinesZimbabweVenezuelaKyrgyzstan

ChinaSpain

BoliviaLa RiojaAngola

UgandaSurinameRio Negro

French GuianaThailand

MauritaniaMongoliaVietnamPoland

UruguayMali

EcuadorCambodia

MozambiqueTurkeyEritrea

IndonesiaWashington

ChubutPapua New Guinea

Guinea (Conakry)Neuquen

KazakhstanLaos

Santa CruzLiberia

VictoriaPanama

South AfricaDemocratic Republic of Congo (DRC)

Fraser Institute Survey 2014


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Underlying reasons for South Africa not faring well in the Fraser Institute mining rankings (great potential)

Fraser Institute Survey 2014

-100 -80 -60 -40 -20 0 20 40 60 80 100

Uncertainty concerning disputed land claims

Political stability

Labour regulations/labour militancy/work disruptions

Uncertainty on administration & interpretation of regs

Socioeconomic agreements

Taxation regime

Efficacy of the mineral legal system

Regulatory Duplication and Inconsistency

Security situation

Mineral potential assuming existing regulations

Tade barriers (tariff & non-tariff + forex restrictions)

Quality of infrastructure

Environmental regulations

Uncertainty over which areas will be protected as parks

Availability of Labor and Skills

Quality of the geological database

Policy potential assuming industry best practice

Frazer Institute Survey 2014 factors encouraging investment in exploration versus deterrents to investment for South Africa

Deterrent Score

Encouragementscore


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Capital investment outlook looks weak (lower prices, rising costs, plus uncertainty on some aspects of policy)

Source: SBG Securities, Company reports, Chamber of mines estimates, based on top 3-5 largest producers per sector; estimated 2014/2015

-

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Gold PGM Coal Iron Ore Manganese

Capital expenditure by SA mining companies by commodity* (R million) Capital spend on SA growth projects ^

R million (>5yrs) Split

Gold 9 507 14%

PGM 7 676 11%

Coal 28 580 41%

Diamonds 24 300 35%

Total 70 063 100%

Top projects in each sectorCommodity

Diamonds

Thermal coal Gold (Maintenance)

PGM (Maintenance)

Cost (Rm)

20000

7700

3235

3301


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� The MPRDA amendment bill: the industry requires regulatory certainty (issued include s11

approvals, s26 export restrictions, strategic minerals, pricing, regulation of dumps, etc.).

� Transformation Regime (B-BBEE Act & Mining Charter):

� need for certainty on interpretation (continuing consequences of previous BEE deals).

� Eskom 51% versus Mining Charter 26%.

� Taxation of the mining sector:

� Resource rent taxes, changes to royalty base, environmental taxes, carbon tax.

� Section 54 stoppages: in some cases inconsistent implementation of regulations.

� Labour instability and cost: union rivalry increases risk of protracted and violent strikes:

� The need to introduce secret strike balloting and flexibility to s18 agreements.

� The social wage issues.

� Environmental requirements:

� Previously fragmented system with duplication.

� Challenges regarding funding requirements for environmental trust funds.

Summary of regulatory framework areas creating challenges


Water Resources Management

• Security of Water Supply, competition of water with other users

• Water Quality Management i.e AMD from abandoned mines.

2. Interface of Coal Mining with Protected Areas

• COM members commits not to mine in legally protected areas

• There is no framework guiding policy to govern the interface/Coexistence of mining and biodiversity conservation in the cases wherein the protection and declaration of water sensitive areas came after the mining activities.

3. Regulatory Matters

• The mining industry commit to implement the One Environmental System however, certain challenges hinders effective implementation of the OES.

• Fragmentation - in that the OES only deal with synchronisation of timeframes (300days)

• Unrealistic regulations i.e NEMA Financial Provision Regulation (Double provisioning)

• Regulation of Mine Residue Deposits and Stockpiles as hazardous Waste in terms of Waste Legislation.

Environmental issues affecting the coal mining industry


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Creating a regulatory and legislative environment that is stable, predictable and competitive (Policy and Regulatory Certainty)

MPRDA amendment bill

• Government is aware of the critical importance of finalizing the Bill.

• Various challenges in first draft addressed through significant engagement between business, government and parliament.

Transformation

• Dti provided a year’s period to allow for alignment between Charter and DTI codes.

• Dual process on interpretation (bilateral discussion and court process).

• Government needs to create coherence of policy between Eskom requirements and the Charter.

Certainty on Taxation

• DTC interim report supports existing royalty system which obviates need for RRT.

• DTC proposes phasing out capital ring fencing.

• However, DTC also recommends equalization of mining tax with manufacturing (i.e. reducing immediate capital expensing).

Carbon tax

• The Chamber calls for a 5 year delay to implementation due to crisis facing the sector and fact that RSA is below “Peak-Plateau-Decline line” committed to in Copenhagen in 2009.


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Progress on the policy challenges

Section 54 safety stoppages

• Agreement by DMR to speed up the development of the Enforcement Policy pertaining to Section 54’s.

Deputy President’s NEDLAC task team – minimum wage and strike action committee

• NEDLAC process underway, results expected by mid-2016.

• Looking at measures to prevent/resolve L/T strikes and create greater labour

stability.

Environmental licensing

• New “One Environmental system” in place. Real progress made with

commitment by government that environmental licenses will be issued within 300 days.

• Challenge of environmental trust funds being addressed (hopefully DEA will take on board proposed changes).


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Vision for the South African coal miningindustry

Workforce,

transformed, productive,

fair wages and non-

discriminatory, safe and

healthy workplaces

Management not only

focus on profits, but

provide decent jobs, play

positive role in mining

communities and

sensitive to environment

Government and trade unions:

proud of and fully supportive of

the mining industry and

acknowledge industry as

important for the country

Key exporter Key earner of foreign

exchange Key taxpayer

Creator of decent jobs Developer of skills

Key contributor to economy

Investors regard industry

as a good investment

destinationCONSTRUCTIVE PARTNERSHIPS

BUILT ON TRUST


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THE REGULATORY ENVIRONMENT AND ITS EFFECT ON COAL MINE

DEVELOPMENT

Roger Baxter

Chief Executive

4 February 2016

the regulatory environment and its effect on coal …

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