South Africa Faces Tax Dilemma as Mining Industry Costs Soar
South Africa’s government faces a dilemma: how to help mining companies weather surging costs and depressed commodity prices as the ruling African National Congress seeks to wring more revenue from the industry.
Upheaval has plagued platinum and gold producers since August last year, when thousands of workers staged a series of illegal strikes, winning pay increases of as much as 22 percent. Adding to mining costs, Eskom Holdings Ltd., which supplies about 95 percent of South Africa’s power, is seeking 16 percent average annual tariff increases until 2018 to fund expansion.
While Mining Minister Susan Shabangu says the government is committed to working with the industry, the ruling ANC wants the country to derive greater benefit from its minerals. At a conference in December, the party said a “resource-rent” tax, or higher royalties, were under consideration.
“I’m quite worried,” Nick Holland, the chief executive officer of Gold Fields Ltd. (GFI), Africa’s No. 2 gold producer, said in an interview yesterday at the Investing in African Mining Indaba, a gathering of more than 7,500 industry executives. “We can ill afford to accept any taxes beyond what we have. It’s just going to increase the speed of the decline of the mining industry.”
Mining output slumped 11 percent on a seasonally adjusted basis in the three months through November from the prior three months, government data show. Nine loss-making platinum-mine shafts were shut in the second half of 2012, according to the Department of Mineral Resources, while Anglo American Platinum Ltd. (AMS), the largest producer, last month announced plans to idle four shafts, which may result in as many as 14,000 job losses.
The government needs “to more get involved in discussions with mining on what we do, how we’re doing it, without jumping to conclusions,” Harmony Gold Mining Co. CEO Graham Briggs said in an interview yesterday. “If you meet and you understand and you’re not on opposing sides of the table, you can be quite successful.”
Platinum has fallen 26 percent since reaching a record high of $2,301.50 in March 2008 as a global economic slowdown crimped demand from carmakers, the biggest consumer of the metal. Platinum has gained 11 percent this year while gold has advanced 0.1 percent, insufficient to compensate for rising input costs.
“We have seen several years in which levels of demand for platinum have fallen significantly short of the industry’s expectations,” Cynthia Carroll, the departing CEO of Anglo American Plc (AGL), which controls Anglo American Platinum, told the conference. “At the same time, costs have continued to rise relentlessly. This is an industry in crisis. And the near-term future shows no sign of respite.”
South Africa has the world’s largest known reserves of platinum and chrome, and is the continent’s biggest gold producer. The mining industry directly employs about 500,000 people, makes up about 9 percent of gross domestic product and accounts for two-thirds of exports.
At its national conference in December, the ANC rejected proposals to nationalize mines in favor of a tax review. “There will be tax; what form it will take is a matter for the administration,” Enoch Godongwana, head of the party’s economic transformation committee, said at the time.
Since March 2010, mining companies have paid royalties tax based on sales in addition to income tax, with the rate varying depending on the type of mineral.
“We have got a very efficient tax regime here,” Peter Major, head of mining at Cape Town-based Cadiz Corporate Solutions, said in an interview yesterday. “I just don’t understand why the government would want to change that. The problem here is they are just not getting enough from taxes because the companies aren’t making enough money.”
While the ANC draws up broad policy frameworks, the National Treasury will ultimately determine what taxes the mining industry should pay, Shabangu said.
“It can’t be a given” that taxes will go up, she said in an interview yesterday. “We will come up with a tax dispensation that will work for the country. If we are unable to apply our minds and make sure that our tax regime becomes a successful and thriving regime, in allowing and attracting investment in South Africa, then the same ANC will say we have acted in an irresponsible way.”
Last month, South African Finance Minister Pravin Gordhan said there would be no imminent changes to mining taxes.
“We will keep the matter under review and when we think it’s appropriate we’ll see how the regime needs to change,” he said in an interview on Bloomberg TV at the World Economic Forum in Davos, Switzerland.
Even so, the government has limited options to raise revenue as declining mining output stalls growth and it faces mounting pressure to cut a 25 percent unemployment rate. The country also has to address income disparities that rank among the highest in the world.
“We need to talk about the implications of doing anything around taxation because we’ve got enough,” Anglo American’s Carroll said in an interview. “The mining inflation in this country is very, very high and you can’t keep piling it on with everything else going up.”
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