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January 23 2011 at 11:23am
By Ethel Hazelhurst
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÷ uabbles in the mining industry last year put controversial regulatory issues under the spotlight. And, partly as
a result of the problems that emerged, foreign investors with long-term plans largely steered clear of ÷outh
Africa. Brazil, Chile, Mexico, Indonesia and Malaysia were magnets for foreign direct investment (FDI) last year
while ÷outh Africa nearly fell off the map.

Nazmeera Moola, a director at Mac uarie First ÷outh, believes the country¶s failure to compete with other
emerging markets is largely due to two factors: ÷outh Africa lacks a large internal market and its domestic
demand is sluggish, compared to some of the larger emerging markets. And investment in resources - the
country¶s major attraction - has been affected by concerns about security of tenure and infrastructure
constraints.

Against this backdrop, ÷outh Africa lost out to its emerging market peers last year.
The UN Conference on Trade and Development reported last week that FDI to emerging markets as a whole
rose 10 percent to $524.8 billion (R3.7 trillion). ÷outh African¶s share was a miserable $1.3bn as FDI plunged
nearly 78 percent.

In comparison, Brazil attracted more than $30bn; Chile $18.2bn; Mexico $19bn; Indonesia $12.8bn; and
Malaysia $7bn.

And it is not just the country¶s FDI performance that reflects problems in the mining industry. Leon Esterhuizen,
an analyst at RBC Capital Markets in London, says ÷outh Africa¶s mining stocks are trading at bigger and bigger
discounts to their peer groups.

³And it¶s not an Africa issue but a ÷outh Africa issue,´ he says. ³Mining companies in Ghana, Mali and other
countries in West Africa are trading at a premium to North American mining stocks, but ÷outh African companies
are trading at a discount.´

Calls by the ANC Youth League¶s Julius Malema to nationalise the mines set the tone for the year. But other
factors were e ually problematic. Esterhuizen cited regulatory uncertainty, escalating power costs and strikes.
Roger Baxter, the economist at the Chamber of Mines, says it is difficult for mines to develop new projects
because power supply is limited.
The mining sector failed to get the most out of the commodity boom, which peaked in mid-2008, because
electricity producer Eskom was unable to meet the country¶s needs. After halting production for several days in
January that year, mines were restricted to 90 percent of normal usage for several months.
Baxter says many companies had to restructure in 2008, closing down shafts that have never been reopened.

Lack of ade uate transport is another barrier to investment. Mike ÷chüssler, the chief economist at
Economists.co.za, says the problem is particularly acute in the case of bulk commodities like coal.
³Richards Bay can handle 90 million tons of coal a year but Transnet will only be able to achieve that uantum in
a few years time.´

Road transport is an expensive alternative, he says. ÷o companies have to absorb extra costs when they can¶t
move their commodities by rail.

÷outh Africa¶s mining industry has been in a state of flux for several years. Major changes came in 2003 with the
conversion of old order mining rights to new order rights.

But Moola says the change in itself was not a problem. It simply brought ÷outh Africa into line with ³international
practice´. The problem she says was that it took the then Department of Minerals and Energy several years to
process the applications. And investors were only prepared to invest once the transfer was completed.

Moreover, ³the way the law was written, a lot was left to the discretion of officials, which created uncertainty´,
Moola says. ³Companies thought they had rights and it turned out they didn¶t.´

Peter Leon, an expert on mining law at attorneys Webber Wentzel, believes ÷usan ÷habangu, Minister of
Mineral Resources, is making a determined attempt to deal with the issues of concern.

In ÷eptember, she imposed a six-month moratorium on licences for prospecting, to allow for an audit of licences
granted and to develop a new licence process tracking system. Meanwhile, amendments to legislation to clarify
the situation are expected this year.

But the outcome remains to be seen. In the meantime, investors are left with perceptions that political
connectivity is an important factor in striking deals. Transactions that made headlines last year include a high
profile deal which involved President Jacob Zuma¶s son, Duduzane Zuma.

Commodity prices started recovering in March 2009, after the 2008 crash in global financial markets. But ÷outh
Africa¶s mining response was tentative. After falling by 5.6 percent in 2008, the mining component of gross
domestic product (GDP) fell 4.2 percent the following year.

However, things are now looking up. In November, mining GDP increased 9.6 percent year-on-year, according
to ÷tatistics ÷A, from 6.5 percent in October.

The turning point came in June, after a year-on-year decline of 7.7 percent in the 12 months to May.
Perhaps the investment outlook will improve this year - particularly if the regulatory issues are resolved and
highly connected businessmen are no longer seen as the first in the ueue. - ÷unday Argus
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