By Shirley Webber, Head of Natural Resources and Energy, CIB
It could take up to six months for many mining companies to return to normality because of the national shutdown imposed by governments in South Africa and other countries in Africa. While the lockdown has been eased to varying degrees, it will take several months before mines restore full production.
This is because of limitations on the number of miners that can work underground or open cast operations. Some companies must organise for the return of foreign workers who had gone to their homes after operations were stopped due to COVID-19.
The shutdown has also impacted on the liquidity requirements of mining companies and those dependent on a single commodity have been particularly hit hardest. We therefore expect that their short-term liquidity requirements would have increased and will most likely remain under pressure in the next three months.
As the shutdown restrictions are gradually eased, we expect a gradual uptick in production until full output is achieved. But at this rate, we expect mining companies to return to full production over a six-month period.
However, it must be noted that during the shutdown, some mining operations, such as smelting and furnaces, were not completely stopped because operationally it is not possible to stop them without causing significant damage to them.
On commodity prices, we have not seen a significant dip; if anything, commodity prices have been holding up. Naturally, we expect some dips in prices due to the usual demand and supply factors. However, the price of minerals such as gold remain robust and while copper and palladium prices have softened slightly, we still expect a recovery in the short term.
But this does not mean we will not experience volatility in commodity prices over the next three to six months. What is not certain however is the level of volatility as the global economy slowly begins to return to normality post the national shutdowns imposed to control the spread of the Coronavirus.
The irony of the current shutdown is that South African mines have not been able to benefit from the depreciation of the Rand, which would have been beneficial for exports given the current US$/Rand exchange rate. It is therefore a rather unfortunate development that the mines are not in full production given where the local currency is now.
At Absa, we have been having operational discussions with our mining clients on issues such as liquidity support, capex and cost containment. These discussions are necessary so that we can fully understand what the mining companies are facing so that the bank can assist them properly. Such discussions are also important to ensure that we address any questions which may be raised by the credit committee when it considers applications for liquidity support.
We are therefore definitely willing and able to assist mining clients during these difficult and uncertain times facing the country.