Diamonds aren’t forever. Just ask John J. Teeling, executive chairman of Dublin-based exploration company African Diamonds. During a panel discussion on mining and natural resources at the recent Wharton Global Alumni Forum in Cape Town, South Africa, Teeling told the audience that despite its storied past as a leader in gold and diamond production, South Africa “is mined out.”
Teeling, whose company is currently co-developing a large discovery in Botswana with South African diamond giant De Beers, said that of the 12 mining operations he has started since 1983, seven are in Africa — including in Mozambique, Zimbabwe and Sierra Leone — but none are in South Africa. “We go where the opportunities are, geologically,” he said. “If there’s no geology, you cannot have a mine.” South Africa, which began mining diamonds in 1867 and gold in 1887, has seen its resources depleted over time, while rising stars like neighboring Botswana have moved into the mining spotlight. Globally, the competition is rising as well: After being the leader in gold production for more than a century, South Africa lost its seat to China in 2007. “The future large discoveries in Africa are not going to be found in South Africa,” Teeling said.
Other panelists disagreed with Teeling’s assessment of South Africa’s future mining prospects, citing new technology that can extend the life of older mines. Indeed, the consensus was strong that mining will continue to play a major economic role throughout Africa, as emerging markets like China and India fuel a long-term commodity “super cycle” and African nations learn to contend with the so-called “resource curse,” or the inability to extract value from their abundant natural resources.
Like any industry that has endured for more than a century, mining in South Africa has had its share of problems. Teeling alluded to the historic difficulty of obtaining permits — “it took years to get them” — and recent changes regarding the terms of mining titles, which are now under government control. (In the previous regime, titles were under mixed public and private ownership.) And earlier this year, the industry was forced to a standstill by rolling blackouts caused by a national electrical system overburdened by the massive demand from post-Apartheid urban development. (Eskom, the state-owned power supplier, has said it will take at least five to seven years to correct the problem by building new coal and nuclear power plants.)
Despite these hurdles, mining remains the top industry in South Africa. Wharton marketing professor David Reibstein, who moderated the panel, noted that mining is the country’s biggest employer: a half-million people are employed directly by mines and another 400,000 indirectly through associated services like shipping. South African mines produce nearly 90% of the world’s platinum, 80% of manganese, 73% of chrome and — despite its recent slip in position — 43% of the world’s gold. Mining overall contributed 7% to South Africa’s GDP in 2006. When adjusted for associated services and additional industry output, such as electricity production, the total rises to 18.4%.
Getting More from Old Mines
David Noko, managing director of De Beers Consolidated Mines, based in Johannesburg, said he disagrees that South Africa’s best mining days are behind it. An engineer by training, Noko sees technology as the key to extracting the remnants from seemingly tapped-out mines. When he joined De Beers in 2002, he found the company to be “entrenched” in traditions and older systems. “There was an opportunity for change.” He became convinced that technological advances used to discover minerals in unproductive mines could be harnessed to grow revenue “equivalent to opening a new mine.” For De Beers, the approach has been successful. Noko cited the company’s mines in Kimberley, in South Africa’s Northern Cape, which had been previously shut down and are now a major resource for the company’s diamonds.
Teeling agreed that technology does have a place in the future of mining, noting that the world’s second- and third-largest gold mines were discovered in the 1990s through such means. “They say that [mining] exploration starts at zero every 20 years because of new technology,” he said, “but all the technology in the world is not going to make a resource any bigger. Resources are finite, and that’s the biggest challenge we face. New technology can’t change that.” The equipment itself is expensive, Teeling added, and it doesn’t always work in particular conditions. He joked that he had 12 cutting-edge pieces of mining equipment that he could sell to anyone interested. “They’re pretty to look at, but I’m not quite sure what they can do for me.”
Roger Baxter, chief economist at the Chamber of Mines of South Africa, a private-sector industry representative established in 1887, noted that any evaluation of South Africa’s future mining potential depends on the particular mineral in question. South African mines, for example, have produced 50,000 tons of gold within the past 20 years — more than half of all the gold mined in the industry’s history, he said. Meanwhile, diamonds continue to generate nearly $10 billion in revenue on an annual basis, and the country is the world leader in platinum exports and the third-largest exporter of steamed coal.
Gold and platinum remain attractive investments in South Africa, agreed Gareth Huckle, senior vice president and director for Africa at SUN Mining, a division of India’s privately held SUN Group. But he shares Teeling’s view that other factors — such as the government’s custodianship of all mining titles under the recent Mining Charter as well as issues surrounding royalties — make South Africa a less palatable option for investors like SUN. In 2001, the new regulations concerning titles came about as a way to open the industry to disadvantaged South Africans under the Black Economic Empowerment program, with the ultimate goal of transferring 50% of industry equity to black South Africans. The introduction of royalty rates for exported minerals also contributed to the consternation of mining companies operating in the country: In 2003, a bill was introduced that would stipulate a diamond royalty of 8% based on gross revenue. In December 2007, the figure was revised to 3.7%, and platinum royalties were set at 2.7%, which is in keeping with royalties imposed by other mining countries. The bill is expected to go into effect in early 2009. From the industry’s standpoint, the situation has improved, Baxter said.
Still, Huckle noted, the playing field for mining investments is global and highly competitive. For investors, the question boils down to “where do we have the best chance of finding something attractive? Ultimately, it’s a global decision.”
‘A Structural Change’
For South Africa or any other country with substantial resources to mine, the panelists agreed that the ongoing rise in commodity prices and the exploding growth in markets like China and India mean investments are likely to continue and mining will remain strong.
“The super cycle looks good for us,” Teeling said. With the dramatic rise in demand for cars in China alone, for example, the production of minerals such as zinc — used in galvanizing — will likely need to double. And what about diamonds? Until recently, “650 million Chinese women didn’t know to say, ‘If you love me, give me an engagement ring.’ Now they do. And now 650 million men need to come up with the money.”
“China will have to urbanize 500 million people in the next 15 to 20 years,” Baxter added. “Fifty to 70 tier-one to tier-three cities will need to be built.” Such an unprecedented rise in demand for raw materials indicates that the current super cycle is not merely an extended commodity cycle but rather a “structural change based on the nature of growth.”
Asked whether the current economic crisis in the U.S. and other markets will have an impact on the industry, Teeling said it could lead to a downturn, but only in the short term. “In the long term, [the outlook] is good.” Baxter noted that whether oil is priced at $70 or $200 per barrel “will certainly have a material impact on the commodity cycle,” because 30% of costs in mining involve fuel and materials. Noko added that while diamond demand is down in the U.S., global demand will be sustained long-term, but increasing costs for fuel and other materials needed for mining will limit production. “There have been times when I’ve [thought] my diamonds are better in the ground than out in the market, because I’m not getting the price I want.”
For Noko and De Beers, the option of leaving diamonds in the ground is just that — an option. Other countries are not so lucky, sitting on vast resources and lacking the infrastructure, legal framework or technical skill to make the most of what they have.
Known as the “resource curse,” this situation leaves vulnerable countries open to exploitation by companies and external governments who come in to mine but leave little value behind. South Africa, with its title regulations and proposed royalty systems, is an example of the polar opposite situation. Its government has also worked to ensure that “beneficiation” processes — efforts that add value to mined materials, such as smelting, cutting and polishing — are in place for the minerals that are mined there.
At the other end of the spectrum is the Democratic Republic of the Congo (DRC), which “ranks with Russia as the most prospective geography on the planet” in terms of having a broad array of untapped mineral resources, according to Huckle. Unlike Russia, though, where the complications for extraction are primarily political, in the DRC the risks involve a high degree of political instability and other dangerous conditions. “We call it ‘elephant country,'” Teeling added. “There’s no infrastructure, and it’s very expensive to explore. Its potential will remain unrealized for now.”
Whether minerals mean “poison or growth” depends specifically on government leadership, Baxter noted, citing Botswana as a success story based on financial and regulatory transparency. Once destitute, Botswana is today a middle income country thanks to its mining industry, and it has been dubbed “The African Miracle” for having sustained a per capita growth rate in the range of 6% to 9% following its independence in 1966. Teeling agreed that Botswana is a good example of success, but he attributes it to the fact that Botswana — unlike the DRC and many other African nations — “is one tribe with one language. I’m not sure much of Africa is ready for democracy only 50 years post-colonization.”
Teeling also questioned whether companies like his should play any role in the transformation of governments. “You can’t tell a country what their leadership should be. Who do you side with? People should change governments, not mining companies.”
Regardless of individual company philosophy, there is no doubt that global competition is changing the rules — and the stakes — in Africa’s mining industry. Huckle noted the increasing presence of Chinese mining companies in Africa and their tendency to conduct business differently than companies from democratic countries. “When the Chinese make an investment, they bring in a large amount of their own resources to exploit that asset effectively.” He added that, unlike Western companies, the goal is not a return on investment, but to fill a strategic gap. “They are willing to pay more … to fuel that growth engine.”
Considerably more, in fact: Teeling noted that China has offered the DRC $17 billion for the first right of refusal on particular mining sources. “How can companies compete with that? … We’re the dinosaurs,” Teeling said. “You should have Chinese, Indians and Russians speaking here.”