Junior Mining In South Africa - Business Media MAGS

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Junior Mining In South Africa

Making the right moves, by Nelendhre Moodley.

The junior mining sector is vital to the overall health of the South African mining industry, especially in keeping it alive and growing. To unpack some of the latest developments under way in the junior mining sector, SA Mining recently caught up with Grant Mitchell: head of the Junior and Emerging Miners’ Desk at the Minerals Council South Africa.

How important is junior mining in South Africa?

Junior miners comprise of explorers, developers and smaller producers.

Exploration companies are essential to the long-term survival of the South African mining sector. Without finding new deposits a mining economy cannot survive in the longer term. Unfortunately this part of the mining value chain has been neglected in South Africa. Currently South Africa’s exploration budget decreased from $404-million in 2007 to considerably less than $100m in 2018 and South Africa’s share of global exploration budgets has decreased to about 1% in 2018.

The state needs to support a high-risk activity such as exploration, which largely relies on venture capital markets, by providing incentives for investment.

The second group under the junior mining category in South Africa are developers who take a known deposit and build the mine with a view to moving on into production. Interestingly, the research done at the Minerals Council on the junior mining sector shows that most junior mining companies in South Africa who are explorers and developers wish to become established as miners in the long term. This is unlike the junior mining sector in Australia and Canada for example, where exploration companies specialise in exploration alone and if they find a deposit, they sell it on to a mining company which then develops the mine.

The third category of junior miners in South Africa consists of smaller and mid-tier producers who typically buy a small operation with the intention of mining. The Minerals Council defines these producers as having an annual turnover of below R500m per annum. They are found in most mineral commodities – coal, gold, platinum, manganese, chrome and diamonds as examples. The biggest concentration is in coal with many being wholly owned and managed BEE companies.

How has 2020 treated junior miners and how have they managed the pandemic?

2020 has been a difficult year for the junior mining sector. The lockdown earlier on in the year presented junior mining companies with many challenges. A Mentimeter snap online survey conducted under level 3 lockdown with a sample of junior Minerals Council member companies showed that initially testing and screening was a challenge; however this improved as the lockdown continued as more test kits became available. Most of the companies surveyed felt the regulations around COVID-19 were manageable and achievable, however once mining production resumed many had to scale back production due to lack of demand in the markets as well as the inability to raise funding to maintain full production capacity.

Exploration and development projects were particularly hard hit, with most of these projects either suspended or at least reduced in scale.

In terms of producing companies, most of them had to materially defer construction and development projects under level 3, with many companies having to suspend contractors by evoking force majeure.

In terms of mining right applications, most companies that were surveyed indicated that they had experienced delays due to COVID-19. However, TERS/UIF support was forthcoming for employees, with many companies indicating that they had received funding over this period.

Finally, most companies surveyed indicated that they had to recapitalise and/or apply for bank loans and or were forced to reduce staff.

Despite the challenges, all of the 34 junior mining members of the Minerals Council have survived and are slowly getting back on their feet. One or two companies however have had to go into business rescue.

This clearly illustrates that the junior mining sector is here to stay – they are a hardy bunch of people able to survive tough economic times.

What are some of the emerging trends in the junior mining sector?

A key issue is the demand for minerals post COVID-19 which will impact junior explorers and producing companies. In particular, small-scale diamond producers were extremely hard hit with demand falling away considerably.

Commodities such as platinum group metals, iron ore and gold have been doing well so junior companies involved in these commodities have been able to ride the pandemic better than most other mineral commodities. Copper and nickel, however, have experienced depressed demand with manganese, coal and chrome showing a flattening out of sales.

The Minerals Council junior member companies are involved in all these commodities with the highest concentration in coal.

Have government or industry made any moves to help junior miners during these trying times?

There is currently an ongoing dialogue with government on how to revive the exploration sector in particular. As part of the president’s revival of the economy post COVID-19 strategy, a number of work streams have been set up, including a work stream on reviving exploration. Chaired by the Council for Geoscience and including the Department of Mineral Resources and Energy (DMRE) and the Minerals Council, a strategy is being developed to capture between 3% and 5% of global exploration dollars within the next five years.

Issues that require attention include the replacement of the current mining and exploration tracking system to a more efficient online tracking system as well as speeding up the mining application process.

It is also critically important in the agreement that was reached with the DMRE that exploration activity, due to its high-risk profile, remain free of BEE obligations in the Mining Charter. This in itself will be an incentive for potential investors.

Another initiative that is being led by the Junior Miners Leadership Forum in the Minerals Council is the introduction of the flow-through share tax incentive system for exploration projects.

Canada has the most successful junior and exploration sector, which has been largely led by the flow-through share system introduced in 1958. The model is basically a tax incentive that provides for the exploration expenditure of the operating company – this tax is foregone in favour of the investor. Put simply, the investor concludes a subscription agreement with an operating company for the issue of and the subscription for a share called a flow-through share. This share provides the investor with all the rights of an ordinary shareholder but also a right to deduct exploration expenditure incurred by the operating company which will reduce its normal tax liability.

The operating company incurs exploration expenditure which qualifies for a deduction from its taxable income and chooses to renounce a portion or the full amount of such expenditure to the holders of the flow-through shares in the year in which such expenditure has been incurred. The operating company loses its right to deduct such expenditure to the extent that the expenditure has been renounced.

The holders of the flow-through shares then become entitled to deduct their portion of the expenditure renounced by the operating company from their taxable income. This deduction is in aggregate limited to the expenditure incurred by the investor in acquiring the flow-through shares.

This type of incentive system has not just sustained Canada’s mining  sector, but the country’s entire minerals value chain – exploration, mining and beneficiation – which have all benefited. From 2000 to 2018 on average Canada attracted $2-billion a year in exploration expenditure. South Africa, on the other hand, has only attracted $194-million annually. Australia almost matched Canada at $1.8-billion exploration expenditure annually.

A model based on flow-through shares has been developed by the Minerals Council and presented to both the DMRE and National Treasury.

There is an ongoing conversation in this regard.

How do you see 2021 playing out for emerging miners?

It is difficult to predict but junior mining companies have demonstrated that they are a hardy group and despite the challenging times have kept going. A lot will depend on the demand for minerals which in turn will depend on the health of the world economy, China being a key player in this regard. Domestically, issues such as a second wave of COVID-19 leading to further lockdowns would affect the junior sector. However all things being equal, we are cautiously optimistic that the junior sector should be in better health in 2021 than in 2020.

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