Mining sector breathes a little more easily

Image: iStock

Mining has the highest fixed costs of any sector in the economy, accounting for slightly more than half its total costs.

Thursday saw the Department of Mineral Resources and Energy announce a partial relaxation of the lockdown, allowing shuttered mines to ramp up to 50% of normal production. This will be increased gradually based on assessments of health risks to miners. 

Fuel refiners have been given the go-ahead to operate at full capacity.

Mines affected by the Covid-19 lockdown are making urgent plans to restart production in line with the health stipulations set out by government.

Coal mines supplying Eskom are considered essential to the economy and have already been exempted from the lockdown. Coal exporters were also allowed to continue production during lockdown provided they obtained the necessary export permits. 

The latest relaxation applies to all other mines and will allow key foreign currency earners – such as gold and platinum producers – to restart operations.

The Minerals Council lobbied hard for a phased lifting of the lockdown, arguing that the initial 21-day period that has just ended would result in 10 000 jobs lost.

“A longer lockdown period, with lower production and no mechanisms in place to support the industry, could put 10% of the workforce or 45 000 direct jobs at risk,” it said in an economic impact assessment issued this week, adding that this excludes jobs in supplier industries.

Mining has the highest fixed costs of any sector in the economy, accounting for slightly more than half its total costs.

While variable costs can theoretically be paused during a lockdown, fixed costs cannot.

Another problem faced by mines are their highly leveraged balance sheets. The average debt leverage ratio for the sector is 1.7 times equity. This combination of high fixed costs and high leverage ratios imperils the future of several mining operations, particularly if the lockdown is extended.

The relaxation of lockdown rules for mines will not be lost on other sectors, which are already knocking on government’s door asking for similar relief.

Several surveys conducted in recent days show an overwhelming demand for a quick return to “normal” business conditions, with growing concerns that the cure for the Covid-19 virus in the form of an extended lockdown may be more deadly than the virus itself. A survey by Dear South Africa, canvassing more than 45 000 responses, shows massive frustration with the lockdown and its damage to the economy.

Dawie Roodt, economist with The Efficient Group, estimates a possible 300 000 deaths from poverty caused by loss of jobs and income. This is based on Greece’s experience after the 2008 financial crisis when the economy shrank by about a quarter. There is a correlation between a shrinking economy and rising death rates from a variety of causes.

Estimates of the damage caused by the lockdown grow more alarming by the week, with some expecting an 8-10% contraction for 2020.

Though mining is a relatively small contributor to total GDP, it is a large employer and earner of export earnings. Minerals Council figures show it contributed 8.1% to GDP in 2019 and R348 billion or one-third of the country’s export earnings. 

There are 454 900 people employed in the sector, each supporting at least two other jobs in allied industries. 

Mines will be allowed to recommence operations subject to a rigorous screening and testing programmer as employees return to work.

Quarantine facilities must be provided to employees who test positive for Covid-19, and mines must make arrangements to transport their SA employees from their homes to their places of work.

Miners from neighbouring countries will be allowed to return once the lockdown regulations in these countries are relaxed. 

Collieries that supply Eskom will be allowed to continue operating at full capacity, as will refineries that supply fuel to the country. This includes smelters, plants and furnaces. 

Says Minerals Council CEO Roger Baxter: “We commit the industry to the prioritisation of health and safety of employees as this phase-in gathers steam, with all the preventative and mitigating controls to fight Covid-19 in place.

“It is Minerals Council’s view that government has adopted a pragmatic and practical approach to fighting the pandemic and enabling the economy to survive the crisis. We commit to working hard with government and organised labour in this national effort.” 

The Council says it has developed a standard operating procedure that provides guidelines for the management of healthcare workers and employees returning to work during and at the end of the lockdown period. 

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