The prices of JSE-listed mining shares have surged in 2019, leaving most other sectors in the dust. In the year to date, the bourse’s mining index has risen by about 25%, compared to about 10% for the all-share index. The gold index has added a hefty 50%. Shares in Impala Platinum, which sank for years, have more than doubled their value in the year to date after nose-diving for years.

This share price performance reflects a dramatic return to profitability in a sector that has been battered for years by depressed prices, soaring costs, labour unrest, and policy U-turns that have left investors dazed and confused. One example: Anglo American Platinum (Amplats) in 2018 paid a dividend for the first time in seven years as full-year earnings more than doubled. They doubled again in the 2019 financial year and it expects a more than doubling in half-year earnings when it unveils interim results on Monday 22 July.

Stellar results are also expected in the gold sector, while Kumba Iron Ore has flagged that it expects its interim earnings, due 24 July, to be at least 160% higher.

There are a number of factors behind this rebound. Platinum companies, notably Amplats, have made profitable transitions to mechanisation and undergone restructuring. Labour is the sector’s biggest cost and there are fewer miners working underground because unprofitable operations have been shafted. The number of workers in the platinum mining sector has declined from around 200,000 in 2008 to under 170,000 last year, according to the Minerals Council. In gold over the same period, the number of people directly employed in the industry fell from about 160,000 to just over 100,000.

And commodity prices have perked up. Gold has been on a tear, jumping on Friday 19 July to more than $1,425 an ounce for the first time in over six years on the prospects of US rate cuts and simmering global tensions. Palladium prices have also been spiking higher, while Kumba said its stronger interim financial performance was “underpinned by higher average iron ore export prices and a weaker average rand/US dollar exchange rate.”

But does this translation of higher profit and cash-flow expectations into booming share prices signify a renewal of confidence in the South African mining industry?

Not really, according to industry watchers. Lara Smith, managing director at mining consultancy Core Consultants, told Business Maverick that rising share prices were “not a sign of confidence”.

“Precious metals in general are coming up and feeding into stock prices. But South Africa still has all the legacy issues and bad policies. In fact, I have eight producing South African mines given to me as a list for sale. Investors just want out. And earlier this year I was given a list of 20 mines, mostly in South Africa. Before I could do anything they were all sold, and for a song.”

Indeed, the share price surge reflects profit expectations regarding existing operations.

“The market appears to be valuing existing established mines, or in some cases fully permitted brownfield development projects, on what is perhaps a better outlook for the related commodity prices. All of that is independent of the state of the exploration and new project pipeline. I believe investors are making the distinction. Soaring share prices are not an endorsement,” said Paul Miller, fund manager with CCP 12J Fund.

This point was underscored by data from S&P Global Market Intelligence, which shows that $403-million was allocated to exploration budgets in South Africa in 2007. Last year, that figure was a quarter of the 2007 number at just under $97-million. And exploration is what ultimately leads to new projects and expanded capital expenditure.

There is also a stark contrast between share prices and production. South African mining production contracted in May for the seventh consecutive month, falling 1.5% y-o-y compared to a revised contraction of 1.2% y-o-y in April.

So portfolio investors are piling into South African mining equities, but operational capital, which is directed to long-term stuff such as exploration and the building of new mines or the expansion of existing ones – and in mining, the time-scales are generally in the decades – is not being sunk into new projects. And JSE-listed companies that are investing in expansion generally are not doing so in South Africa, or at least not much.

Harmony Gold’s capex focus has been on its joint venture, copper/gold Wafi-Golpu project in Papua New Guinea, AngloGold wants to sell its South African assets, and Gold Fields’ expansion plans lie elsewhere as it struggles to bring its last domestic operation, South Deep, to profit. Sibanye’s next big move into a new commodity class will probably be into battery metals, which are hardly abundant here. And platinum producers, with a couple of exceptions, are generally holding off on building new shafts. De Beers is building a new mine in Limpopo but South Africa’s glory days as a diamond producer are over.

Rising share prices do indicate that at current prices, much of South Africa’s mining industry is making money and that investors in many cases can expect a dividend. That is obviously no bad thing, and may even translate into higher wages matched in some cases with rising productivity, as well as more money for social upliftment initiatives. But other data clearly shows that the sun is still setting fast over the industry.

Without a sustained increase in the allocation of capital to exploration and new projects, expect dusk to descend on the industry before any new dawn appears on the horizon. BM