South Africa (SA) is known for its abundant mineral wealth and is renowned for having one of the oldest and most skilled mining industries globally. Although not as large as it was historically, the SA mining industry is still a significant force in the economy. SA mineral exports contribute around 25% of total exports annually. The mining sector is also a significant employer, with some 460 000 direct employees. It contributed R78B in taxes to the fiscus in 2021 and contributed R481B (7.7%) to the country’s GDP.
The Johannesburg Stock Exchange (JSE) was formed in 1887 on the back of SA’s first gold rush. The oldest trading mining company on the exchange, DRD Gold (JSE: DRD), listed in 1895. The JSE is the largest stock exchange in Africa with a market capitalization of US$976B, followed by the Nigerian Stock Exchange at US$56B as at December 2022, and the JSE ranks as the 17th largest exchange globally.
With the JSE being founded on the gold rush and being historically dominated by major mining companies, crucial questions arise: where are the junior mining companies and why is the JSE not inundated with listing applications from South African and African mining and exploration companies? Currently, the JSE has 39 mining companies listed. Three of these are suspended from trading and one is in business rescue (a provision in SA company law to facilitate the rehabilitation of a financially distressed company), leaving 35 actively trading. Of those there are only six which are true exploration or development companies. This compares to over 2,000 listings on the two Canadian Stock Exchanges of mining companies, for example.
Not only does SA have a dismal number of listed mining firms, analysis also shows that the total number of listings on the JSE has been declining year-on-year by a compound annual rate of -3% over the last two decades. Since 2000 the rate of contraction has more than doubled and the most recent figures from October 2022 show that total number of listings sitting at some 307 companies. This can be compared with data from the World Federation of Exchanges that show an increase of 52% in new listings on the Australian Stock Exchange (ASX) since 2020, a 226% increase on the Hong Kong Stock Exchange and a 256% increase on the Shanghai Stock Exchange.
Institutional shareholders lacking
Historically several reasons are to be blamed for SA’s declining number of listings, including red tape, high costs, and low valuations. Coming back to the dearth of listed exploration and mining companies though, the issues run far beyond these reasons.
Some of the obstacles include the failure to develop a well-functioning, automated cadastral system to apply for mining and prospecting rights, widespread corruption in the industry, and lack of tax incentives (like those in Canada) to encourage investment in exploration. It has even been suggested that the JSE needs to revise its listing requirements for junior exploration and mining companies. In discussions with some listed juniors, the issues appear to run even deeper. Most are duel listed, and issues creep in with discrepancies in the rules between jurisdictions, which prejudice smaller companies far more than larger competitors. Possibly the most pressing aspect, however, is the lack of institutional shareholders.
Of the six JSE-listed junior mining and exploration companies that we have analysed, only one had institutional shareholding of more than 20%, with the rest ranging from between 2% to 18%. These companies rely on international retail investors, high-net-worth individuals, or private equity (PE), for funding, and most of these types of investors are located outside SA. SA mining-focused PE funds, such as the New Africa Mining Fund, have long since closed and very little other private capital is available or interested in the exploration and junior mining arena. The African Private Equity and Venture Capital Association (AVCA) notes that Materials made up less than 1% of total PE and Venture Capital investments over the 2021/2022 period. Mining is innately a volatile, capital intensive and long-dated investment asset class, something that PE generally shies away from.
As for the glaring lack of institutional investors, most of their investments are governed by benchmarks which inevitably only include the Top 40 largest stocks by market cap, and often weighted by free float on the JSE. So not only are the junior mining stocks not able to attract institutional investors, but often too the other small caps. And in a country like South Africa, with very few retail investors or PE funds, this naturally means the small caps are very thinly traded, and capital raising is difficult.
Another notable trend was that none of the six firms analysed had their primary listings on the JSE. All had primary listings on the Australian Stock Exchange, the London Stock Exchange or the Toronto Stock Exchange with secondary listings on the JSE.
‘Significant changes needed’
Historically, exploration was carried out mainly by the majors, who had large well-funded, in-house exploration departments that covered the length and breadth of SA. However, as opportunities in SA diminished, as legislation changed (and changed again, decreasing security of tenure for investors), and greater capital opportunities outside SA, the majors have all more or less departed. With them went to the exploration departments, leaving a gaping hole in the amount of capital being spent in SA on exploration.
If SA has any hope of retaining its mining industry, let alone growing it, some significant changes are needed to attract and fund mining exploration. The few exploration companies that are bringing mining projects up the value curve need to be given the best footing possible to flourish, red tape and corruption that hold them back need to be eradicated, incentives need to be considered and importantly, investment into these scarce companies should be prioritized by more institutional and retail shareholders in South Africa.
Without investment, there will be no exploration, and without exploration, there will be no mining in the future. This would be an absolute travesty in a mineral-rich country like South Africa.