Political Risk to the Mining Sector in South Africa

Journal of Political Risk, Vol. 10, No. 8, August 2022

Randfontein Mine, Johannesburg, November 2014. Source: Paul Raad via Flickr.

Ndzalama Cleopatra Mathebula 
Institute of Risk Management South Africa

Generally defined, political risk is the expected cost or loss incurred by a business due to political decisions, events, and actions. With the evolution of the discipline, it is not only government or organizations that can generate  political risks, but also labour unions and civil society that can emanate risks. The South African mining sector includes abundant political risk yet is an attractive investment destination given its large platinum, gold, and coal reserves.

In fact, the sector accounts  for 7.3% of South Africa’s GDP and 25% of export earnings. With a good business climate, well-established infrastructure, advanced technologies, and mining policies, this sector continues to attract investors and is mutually beneficial to both the economy and investors.

However, political risks continue to impede on its prosperity. The internal conflict, discontent, and fragmentation within the ruling party is now a risk multiplier resulting in a failure to manage state owned enterprises (SOEs), such as the indebted Eskom, and poor policy implementation. After the pandemic, unreliable energy supply, lesser resilience to geopolitical risks, expropriation of land, industrial action, and cyber-risks have emerged as prominent risks to mining companies.

The unreliable energy supply has worsened to stage six load shedding where Eskom must shed 6000 megawatts of power, resulting in  six hours per day without electricity. Not only did this result in the economic loss of over R4 billion (USD 241 million) a day, but it further deteriorated the value of the rand against the dollar. Stage 6 was attributed to the Eskom workers’ strike, which started early June 2022, over a salary increase above the inflation rate. With reluctance from the government to ease the process of obtaining the license for independent energy generation and restrictive regulations, building resilience in mines is further delayed. Infrastructure hurdles, such as poor rail services from Transnet- a South African SOE offering rail, port and pipeline services- attribute these poor services to cable theft incurring additional costs in the sector. Mineral sales plummeted 14.4% in 2022, with coal decreasing by 14.7% and gold by 27.8%, according to Platinum Group Metals. Load shedding remains the highest risk that needs urgent attention and an effective mitigation plan.

The geopolitical risks triggered by the Russia-Ukraine war also disrupted the sector and trade with higher fuel prices, food insecurity, a weaker rand, and inflation. In response to global inflation, the mineral and energy sector witnessed numerous  labour strikes over salary increases above the inflation rate to compensate for the rising cost of living in the country. These labour protests slumped production in mines. Consequently, the ruling party’s governance challenges and internal tension continue to weaken the rand. The efforts to implement necessary action plans for an economic recovery lack urgency due to inner tensions that exhaust the political will needed to administer these plans.

Land reform also poses increased uncertainty for investors in the mining sector. It is much like the redress of past apartheid injustices, and, thus, is growing in momentum. Land talks were expected to dominate the ANC’s agenda this year. The first step towards fixing skewed land ownership includes addressing the land court bill, which aims to accelerate the land reform programs. This will further enable the government to expropriate land without compensation. But what does this mean for mining companies and investors? This means ownership of mine lands is not guaranteed. Such would be a breach of contracts by the government, while the fallout from land redistribution may be detrimental to both the economy and investors. Land reform talks can spark civil unrest and have a severe impact on mining. With the current socio-economic state and mounting social discontent attributed to the high rate of unemployment, inequality, and the rising cost of living, social unrest has a high probability of impacting the sector. Such social discontent can be directed to mining lands where people can use land reform as a scapegoat to show their frustrations and also because they believe they are more deserving of the land. Such scenarios were experienced in the 2021 July lootings that were blamed on the incarceration of the former president Jacob Zuma. These lootings were a tipping point of the unpleasant socio-economic realities of many South Africans. Investors and mining companies may choose to strengthen security procedures and processes in the near future to mitigate such risks.

Lastly, cyber risk has emerged with the harnessing of the 4th Industrial revolution in the industry for efficiency and fast production. Espionage and hacktivism have been flagged as the most common and severe forms of cyber-attack in the sector. Adversely, the latter can disrupt and destroy the cyber-systems of a company. In efforts to circumvent cyber-risk, it is critical for mining companies to build more resilience into their computing systems.

Though political risks are inevitable, mitigation and management remain significant in circumventing the effects of numerous risks. Bearing in mind that not all flagged risks can be managed since some are macroeconomic or otherwise out of the business’s control, it is essential for investors to prioritize green energy generation, swiftly settle wage agreements, strengthen cyber-systems and have appropriate insurance plans that can help reduce the effects of these risks.

Ndzalama C. Mathebula is a master’s candidate at the University of Johannesburg in the Department of Politics and International Relations and a member of the Institute of Risk Management South Africa. This writing does not necessarily reflect the opinion of the institutions with which she is affiliated.