Beneficiation and Job Creation in the South African Diamond Industry A Mining Industry Perspective o

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Making the most of our mineral resources through
the value chain (downstream and side-stream
beneficiation)
Presentation by Dick Kruger, Chamber of Mines, to
the Chamber Sustainable Development Conference
18 October 2007
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PRESENTATION OUTLINE
General principles of beneficiation
Side-stream beneficiation
How is South Africa doing in terms of
manufacturing beneficiation?
Conclusion
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THERE IS BROAD SUPPORT FROM BUSINESS ON THE
OBJECTIVE OF ADDING VALUE (BENEFICIATION) TO
SOUTH AFRICAS MINERALS

• The mining sector and business in general is of
  the view that adding value to South Africas
  minerals is a meritorious objective.
• Of course the key questions include
• How to define beneficiation?
• Who are the lead agents to drive beneficiation?
• How to encourage/facilitate beneficiation?
• Do the costs exceed the benefits (i.e. negative
  EVA)?

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BENEFICIATION IS AN OFTEN MISUNDERSTOOD CONCEPT -

• The term beneficiation elicits mixed reactions,
  but much is based on the view that South Africa
  is exporting all its minerals in raw form and
  that employment and extra revenues are forfeited
  to the advanced and developing countries that do
  all the processing.
• Much of the attention is on why the South African
  mining sector allows this to happen? This happens
  without sufficient investigation of what type of
  beneficiation is being talked about and who the
  key actors should be?
• Yet significant beneficiation does take place in
  South Africa where the commercial opportunities
  exist and depending on how beneficiation is
  defined.

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A WORKABLE DEFINITION FOR DOWNSTREAM MINERALS
BENEFICIATION
The term beneficiation, used broadly to
describe the successive processes of adding value
to raw materials from their extraction through to
the sale of finished products to consumers,
covers a wide range of very different activities.
These include large-scale and capital-intensive
operations like smelting and technologically
sophisticated refining as well as
labour-intensive activities such as craft
jewellery. Minerals Policy White Paper, Oct
1998
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THE FOUR STAGE DOWNSTREAM BENEFICIATION PROCESS
Mining
Manufacturing
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DEFINING DOWNSTREAM BENEFICIATION
MINING BENEFICIATION Mining has competency/skill
in the mining and in certain parts of the
concentrating/smelting areas.
MANUFACTURING BENEFICIATION From refining to the
fabrication of a final consumer
product. Manufacturing companies have core skills
and competency in this arena (understanding
customer needs, product development, design,
skills, markets, distribution chains, technology).
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PRESENTATION OUTLINE
General principles of beneficiation
Side-stream beneficiation
How is South Africa doing in terms of
manufacturing beneficiation?
Conclusion
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SIDE-STREAM BENEFICIATION

• Much of the focus has been on defining downstream
  beneficiation (adding further value to the
  primary minerals generated by mining).
• However, little attention has been given to the
  significant side-stream beneficiation sectors
  that exist because of mining. This is because
  mining creates the critical-mass necessary for
  the establishment of other industries, such as
  stock markets, financial services, contracting
  services, heavy engineering, power, transport,
  manufacturing, etc.
• The multiplier effects of mining are so large as
  to generate an estimated doubling of the direct
  contribution of the sector to the economy.
• In countries such as Canada and Australia the
  side-stream beneficiation industries have been
  given due recognition and have been supported by
  their governments.
• Side-stream beneficiation requires more
  recognition in South Africa.

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THE CONTRIBUTION OF MINING IS SIGNIFICANT, WITH
SIDE-STREAM BENEFICIATION PLAYING AN IMPORTANT
ROLE

• 7 directly of GDP and 18.4 directly and
  indirectly
• 32 of merchandise exports and gt50 if secondary
  beneficiated mineral exports are added
• 6.5 of fixed investment and 16 if the indirect
  effects are added
• 31 of the market value of the JSE (R1.6
  trillion)
• 33 of all BEE deals done in SA over past 11
  years
• 6 of formal employment, but 12 if indirect
  effect is added
• 12 of direct corporate tax receipts
• 50 of volume of Transnets rail and ports
• 93 of electricity generation via coal power
  plants
• 16 of electricity demand.
• About 37 of the production of liquid fuels via
  coal, which saves about R30 billion annually in
  foreign exchange

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CONTRIBUTION OF MINING TO GDP 2006
Source SARB
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CONTRIBUTION OF MINING TO FIXED INVESTMENT 2006
Source SARB
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CONTRIBUTION OF MINING TO FORMAL NON-AGRICULTURAL
SECTOR EMPLOYMENT, SEPTEMBER 2006
Source StatsSA
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EXPORT EARNINGS PER UNIT OF GDP, MINING VERSUS
THE REST OF THE ECONOMY
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THE SIGNIFICANT MINING INDUSTRY VALUE CHAIN
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MINERALS METALS IN SOUTH AFRICA A SIGNIFICANT
VALUE ADDED CLUSTER
Science Technology

• Mining is one of the most extensive and best
  developed South African industrial clusters
• Extensive sciences technology network/research
• Broad expertise in geoscience
• Large exploration expertise
• Large number suppliers of equipment and services
• World class educational and skills development
  systems and institutions
• Sophisticated financial institutions (JSE, banks,
  legal)
• Large scale smelting and refining.

Exploration Geoscience
Professional schools
Mining
Equity financing
Suppliers
Governance Policy
Smelters Refineries
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SOUTH AFRICAN MINING INDUSTRY PROCUREMENT CHAIN,
2006

• R195 billion in total sales (excluding interest,
  dividend income).
• R90 billion procurement (stores, materials,
  electricity, financial and legal services, etc.)
• R40 billion in wages
• R25 billion in capital expenditure
• R16.2 billion in direct company tax (excluding
  indirect taxes)
• R15.6 billion in dividends back to the providers
  of capital
• R5.5 billion on interest
• R5 billion to specialised subcontractors
• R5 billion to municipalities for services
• R1 billion on insurance premiums
• R1 billion on advertising
• R800 million to R1 billion estimated to be spent
  on RD and product development.

Source StatsSA P0044
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PRESENTATION OUTLINE
General principles of beneficiation
Side-stream beneficiation
How is South Africa doing in terms of
manufacturing beneficiation?
Conclusion
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THE SEPARATION OF MANUFACTURING BENEFICIATION
FROM MINING BENEFICIATION IS VERY IMPORTANT

• This is a crucially important issue because much
  of the focus in the beneficiation debate has been
  on why the mining sector has not done enough to
  drive the manufacturing/fabrication beneficiation
  area - despite acceptance by the DME and
  government that the beneficiation being focused
  on is at the manufacturing level.
• Given the globally accepted and driven Anglo
  Saxon model of specialisation, it is very unusual
  to see a mining company operating at all levels
  of the value chain.

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DOES THE AVAILABILITY OF MINERALS CONSTITUTE AN
ADVANTAGE FOR THE MANUFACTURING BENEFICIATION
SECTORS?

• For precious metals and diamonds the products are
  generally available in any of the worlds markets
  at internationally determined prices.
• The vast majority of manufacturing beneficiation
  (jewellery fabrication and diamond cutting) takes
  place in countries that have little or no mine
  production of precious metals and diamonds.
• So the answer is that the availability of mined
  precious metals and diamonds at world determined
  prices is not an advantage.
• For bulk mined commodities prices are generally
  determined at the international level, but most
  manufacturing processing takes place near the
  market for the product (such as steel) .
• The challenges for bulk commodity beneficiation
  is the pricing of intermediate products (steel)
  which challenges final fabrication (e.g. steel
  wire, gas bottles, etc), rather than actual mined
  commodity prices (iron ore).

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MANUFACTURING BENEFICIATION IS DRIVEN BY
COMPETITIVE ADVANTAGE ISSUES NOT BY THE
AVAILABILITY OF RAW MATERIALS
COMPARATIVE ADVANTAGE issues such as natural
resources are no longer considered to be a key
driver of manufacturing beneficiation investment.
COMPETITIVE ADVANTAGE issues such as cost
competitive production, skills and craftsmanship,
etc., are now the key drivers of manufacturing
beneficiation investment.
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COMPARATIVE ADVANTAGE VERSUS COMPETITIVE ADVANTAGE
Primary industries
Competitive Manufacturing
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WHAT ARE THE KEY DRIVERS OF THE MANUFACTURING
BENEFICIATION INDUSTRY (E.G. JEWELLERY
FABRICATION)?

• Significant entrepreneurial base looking at
  opportunities to service local and export markets
• Competitive production, high productivity, low
  costs vs competitors.
• Craftsmanship and specific skills.
• Access to markets (domestic and foreign). Most
  successful jewellery producers have started with
  a large domestic market.
• Good market intelligence (what customers want,
  the latest designs?)
• Low costs of doing business (smart tape not red
  tape).
• Low materials funding costs (i.e. low interest
  rates).
• Duty free, VAT free and low tax rate areas for
  manufacturing.
• Quality assurance (Hallmarking) for final
  markets.
• Research development innovation incentives
  and capabilities.
• Appropriate and competitively priced
  infrastructure.

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SOUTH AFRICAS MANUFACTURING SECTOR IS IN TROUBLE

• Manufacturing as a of GDP at 16.4 has
  continued to decline over the past three decades,
  versus 22 in the 1980s and 19 in the 1990s.
• With the exception of some niche products and the
  motor industry (because of the MIDP), most
  components of the manufacturing sector have
  battled to become competitive in the face of a
  strong currency and slow progress on improving
  total factor productivity.
• Manufacturing as a of GDP at 16.4 is now just
  above the comparative number for the USA and
  compares unfavourably versus a number of
  countries (China 36, South Korea 33, Malaysia
  32, Ireland 30, etc.).
• Low growth rates in MVA in South Africa (only
  2.2 in 2000-2005) versus high MVA growth in
  competitors (China 10.4, South Korea 7.2, India
  6.6, etc.) means that the gap between South
  Africa and the competitors will continue widening!

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THE PRODUCTIVITY GAP BETWEEN SA AND COMPETITORS
IN MANUFACTURING IS WIDENING
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GIVEN THE COST DIFFERENTIAL BETWEEN SOUTH AFRICA
AND INDIA
Cutting polishing costs
/ct
FRIDGE estimates
Medium price differential
73 /ct
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99
Medium estimated price differential between SA
and India 65 /ct
/ct
De Beers estimates
Medium price differential
40
74
57 /ct
No data
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THE TECHNOLOGY SECTORS HAVE NOT KEPT PACE WITH
INTERNATIONAL DEVELOPMENTS

• Due to continued public ownership of key areas
  such as telecommunications, the lack of
  competition and continued high costs of usage
  plus poor service delivery has undermined
  internet access - and undermined the development
  of competitive advantage in this area. Policy
  uncertainty in telecoms has added to the
  confusion.
• Better RD incentives (150 tax write-off) has
  helped, but local RD expenditures off a low base.

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THE GAP IS WIDENING!
The declining share of manufacturing is perhaps
the best evidence that the business economics
environment for manufacturing is poor versus
the competitors. Unfortunately the gap is
widening!
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PRESENTATION OUTLINE
General principles of beneficiation
Side-stream beneficiation
How is South Africa doing in terms of
manufacturing beneficiation?
Conclusions
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FOR SOUTH AFRICA TO PROMOTE GREATER MANUFACTURING
BENEFICIATION WHAT IS REQUIRED?

• Dont try and force mining companies to subsidise
  beneficiation or to go into areas where they have
  little competence or skills (the wrong diagnosis
  of the wrong patient).
• A thorough assessment of why South Africa has
  done poorly in respect of manufacturing
  beneficiation is necessary (investigate the right
  patient - manufacturing, industrial policy).
• Provide an enabling environment that attracts the
  manufacturing fabrication companies to come and
  invest in SA. These include
• Improving access to foreign markets for
  manufactured products.
• Quantum leap productivity levels.
• Lowering the cost of capital in SA.
• Access to inputs at world competitive prices
  (e.g. steel)
• Providing the right types of skills for such
  projects.
• Improving logistical infrastructure (cost,
  efficiency, etc.).
• Incentives for RD.

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BUT DO NOT FORGET SIDE-STREAM BENEFICIATION

• The mining sector has played, and continues to
  play a critical role as a foundation industry,
  which helps the development of other industries
  (especially the side-stream input industries).
• The economic health of the mining sector will
  materially affect the economic health of these
  side-stream industries.
• As per the Australian and Canadian examples, due
  recognition is given to side-stream
  beneficiation. Active support of the capital
  goods sector, the financial services sector, the
  research sector and other side-stream mining
  related sectors will further grow the countrys
  competitiveness and export capability to the
  benefit of all.

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CONCLUSION

• The mining sector is so much greater than just
  the sum of its direct contribution to the
  economy.
• While business supports the concept of growing
  the downstream mineral beneficiation sector, this
  can only be achieved by creating a facilitating
  investment environment that attracts
  manufacturing companies to invest in South
  Africa. Mining companies are specialised in
  mining, their core business.
• The contribution of mining to side-stream
  beneficiation has traditionally been overlooked.
  This contribution is meaningful and has
  contributed significantly to the industrialised
  economy that South Africa is today.
• Supporting and facilitating downstream and
  side-stream beneficiation will create more value
  in the economy, help grow exports and investment
  to the benefit of all.