Presentation to FFF Conference- Junior Mining in South Africa -

27 June 2014

L LanduSustainable Development Researcher

MINERAL ECONOMICS AND STRATEGY UNIT (MESU)

Presentation Outline

• Introduction & Background• Objective & Methodology• Definition• Junior Mining industry in SA• Key Opportunities & Risks• Preliminary Database• Future Outlook and Conclusions

Introduction and Background• For many decades LM dominion in SA• More than 90% mining companies are LM in SA• Most R&D including regulations have focused on LM and

much lesser to JM in SA context• JM relatively small, but important sector• Provides market intelligence and analysis of SAJM sector • MPRDA enactment in 2002 compelled LM to sell assets to

HDSA prompted JM creation in SA• Main reasons: low investment, low contribution to national

economy, no definition, etc.• No clear demarcation between LM, SSMB, JM, etc.

Objective and Methodology

q Literature Reviewq Primary interviews, meetings and workshop attendanceqMaps indicating location of junior mining sites in the countryq Analysis of opportunities, risks and threats

q Objective: the study seeks to provide an understanding of thejunior mining industry in SA context and develop apreliminary database of junior mining companies in SA. Thiswas achieved through the following methodology:

Definitions

Distribution of Mining Operations (Seeger, M, 2007)

Definitions (Cont’d)q The Casey’s International Speculator Report (2013):JMC is a small-cap, high-profit company sitting on discoveries that could significantlyincrease its profits and of course the value of its stock.

q Seeger (2007)JMC as a small, entrepreneurial mining company that is focused on the identificationof exploration targets, undertakes exploration, develops feasibility studies and in somecases develops mines in-house.

q The mid-tier producersJMC that would have transitioned into production on properties that they havediscovered and acquired.JMC in the process of graduating into a major mining company, with various miningoperations and mining projects.

Definitions (Cont’d)• Large scale Mining

• Cover bigger sizes/concession area (2x) to JM• South America ± 5000 hectares• 85% global production• 2.5 million employees• Revenue ±$4.3 billion in 2012• Heavy equipment, high-tech, large output, etc.

• Junior Mining• Much smaller concession area • South America ± 1000 hectares • Focus on exploration, little or no revenue from production, • Active in high risk zones with high investment risk of exploration, • Critical in the initial stages of mining value chain

• Small scale mining: • 15% global production• Turnover of less than R7.5 million• Employs less than 50 people• Manual labour using ordinary instruments to mine

Definitions (Cont’d)

Category Micro Very small Small Medium

No of employees <5 <20 <50 <200

Assets (property excluded) <R100,000 <R1.8m <R4.5m <R18m

Annual revenue <R150,000 <R3.0m <R7.5m <R30m

Classification of mining and quarrying operations

Country Number of minersSouth Africa 10 000Zambia 30 000Malawi 40 000Mozambique 60 000Zimbabwe 350 000 - 500 000Tanzania 550 000DRC 2 000 000

Estimated number of ASM miners in Southern Africa

“Definition: artisanal mining refers to small-scale mining involving the extraction of minerals with ordinary tools on a” survival level.

Definitions (Cont’d)

Percentage of the population depending on ASM

Definitions (Cont’d)

ASM rudimentary approach

ASM rudimentary tools ASM rudimentary toolsJMC High-tech approach

ASM rudimentary approach

ASM Low-tech

Junior Mining in South Africa• History

• Since 1990s was to build and strengthen exploration dominated by big “mining houses” • Companies from Canada, Australia started JMC and also developed an exploration sector• 13/30 on BIC only listed on JSE, Platinum JMC dominated by Australian and Canadian• SA investment banks are slowly joining the idea, IDC and other institutions are injecting significant capitals

into JMC. • Support structures include SAMDA , Bakubung initiatives giving birth to NAMF.

• SA JMC is made up of the following:• Emerging, small to medium sized mining companies• Capitalisation of between $20 million to $1 billion in 2012• Most of them are product of BEE• Have weak corporate and management profile — Investment banks reluctant to fund mining projects• Despite ambitious projects pipeline to graduate into mid-tier mining size • South America ± 5000 hectares• Revenue ±$4.3 billion in 2012• Heavy equipment, high-tech, large output, etc.

• Location • Most of JMC in SA are coal mines located in Highveld coalfield/Witbank followed by gold JMC.

Junior Mining in South Africa (Cont’d)• Legal Framework

• MPRDA is the principal piece of legislation governing activities of SA JMC• Other supporting piece of legislation: NEMA, OHS, BCE, etc.• MPRDA created opportunities by making exploration and mining permits available to all people of SA

• Market Dynamics• A complex interplay of global and domestic factors affect JMC in SA• Assets a re not diversified but located in a single commodity (e.g. gold, platinum, coal, etc.)• Difficulties in penetrating are the same including infrastructure, resource (water and energy), legislation

compliance, etc.• Follows growth of national and global economy• Mining assets are principally located in SA

Junior Mining in South Africa (Cont’d)Drivers of growth Impact

2014-2015 2016-2017 2018-2019

Continuing industrialisation and urbanisation of China and

India

High High High

Increasing global and regional demand for commodities Medium High High

Increasing commodity prices Medium Medium High

Transformation of South Africa’s Mining Industry Medium Medium Medium

Significant deposits of platinum, coal and diamonds Medium Medium Medium

Challenges Impact

2014-2015 2016-2017 2018-2019

Unavailability of funding High High High

Transportation and logistics constraints High High Medium

Compliance with environmental, health and safety

laws

Medium Medium Medium

Resource and technological barriers to entry Medium Medium Medium

Unstable global commodity markets Medium Medium Medium

JMC drivers of growth

JMC challenges

Junior Mining in South Africa (Cont’d)

Mine Name Commodity Mined Latitude Vele Coal LimpopoUmlabu Coal MpumalangaFairview Gold MpumalangaBarberton Gold MpumalangaBankfontein Coal MpumalangaWelgedacht Coal KwaZulu NatalBurnstone Gold MpumalangaMiddleburg Town Coal MpumalangaSavemore Coal MpumalangaGraspan Coal MpumalangaBokoni Platinum Platinum Northwest Crocodile River Platinum Platinum NorthWestBuffelsfontein Gold Northwest

Location of some junior mines in South Africa

Most of JMC are coal mines located in Highveld coalfield in Mpumalanga followed by platinum and gold

Junior Mining in South Africa (Cont’d)

Coal producers

Production Capacity (Millions of coal per annum)

Share (%)

Type

Tier 1 10 - 60 91 Large scale

Tier 2 1 - 10 9 Merging, small to medium sized junior

q SA Junior coal sector is ±30 small to medium sized coalproducers with annual production of between 1 and 10 millionton of coal per annum.

q Majority are privately owned companies, not listed on the JSE

q Coal of Africa, SA coal mining holding and continental coal are the only listed junior coal producers.

q Have flexible management structure q In 2012, junior coal producers made approximately 22 million

of coalq Bulk of coal is consumed by Eskom to generate power

Characteristics of SA Coal JMC

Key Opportunities and RisksLong-term opportunities

q SA mineral endowments, q largest exporter of strategic mineral commodityq Substantial mineral reservesq JCPs have the potential to become key suppliers of

strategic minerals to Asiaq Continuing industrialisation in Asia demand is highq Although LCPs export greater portion of minerals to

international markets, JCPs can complement the export activities.

q Mineral supply opportunities to domestic markets (e.g. Eskom expansion projects)

q Sasol synthetic fuels expansion projectsq Lower costs of mineral extraction and processing

compared to Australia and Canada, NIP, etc.

Short-term opportunities

q Junior minerals, e.g. industrial minerals

Key Opportunities and Risks (Cont’d)Risks in Junior Mining Sector

Economic Risks Technical Risks Human RisksMining company forced to usegovernment services even if notcompetitive.

The geology does not materialiseaccording to the studies:

Host government does not honour agreement:

Insufficient capital underestimation of costs

Environmental risk: Threat to health and safety of employees:

Underestimation of operating costs:

Equipment failure: Land claims

Decreasing control in project management:

Cost and availability of electricity andwater

Lack of project performance from the state:

Incorrect market-forecast: Wrong selection of mining method: Importation restrictions:Change in tax regime: Poor yields Political instability:Cannot obtain finance: Infrastructure failure: Delay in obtaining leases, permits and mining

rights.Delay in production start-up: Geological data and record

losses/unavailabilityUnstable, unionised labour force:

Cost and availability of electricity and water

— Mining company cannot adapt to cultural diversity:

Decreasing commodity prices — Lack of consensus between joint venture partners:

Preliminary Database

Full name Status TypeProd C 2010 (Mt)

Prod C 2011 (Mt)

Prod C 2012 (Mt)

Controlling company (short name)

(end-2012)Coal rank Resources (Mt) Reserves (Mt)

Black Wattle Coal Mine Operating OP,UG 1.460 1.450 1.870 Bisichi Mining Bituminous 7.00

Ferreira Coal MineOperating, exp/constr OP .. 0.377 0.690 Contl Coal 1.30 0.82

Koornfontein Coal Mine Operating UG 2.900 3.100 3.000 Glencore Interna Bituminous 208.12 60.78Magdalena Coal Mine Operating OP,UG .. 1.010 1.009 Forbes Coal Bituminous 78.80 24.60Middleburg Coal Mine Operating OP 14.000 14.328 14.848 BHP Billiton … …

Mooiplaats Coal Mine Suspended UG 0.400 0.883 1.226 CoALAnthracite, Bituminous 45.10 30.10

Optimum Coal MineOperating, exp/constr OP 13.100 14.000 14.108 Glencore Interna Bituminous 699.20 230.10

Shanduka Coal Mines Operating 7.888 6.722 7.541Shanduka Group, GlencoreInterna

Somkhele Coal MineOperating, exp/constr OP 0.468 0.524 0.637 Petmin Anthracite 75.17 21.70

Spitzkop Coal Mine Operating OP,UG 0.593 0.548 0.600 Imbawula Bituminous 173.50 15.00Tselentis Coal Mine Operating OP 0.519 0.473 0.500 Imbawula Bituminous 60.60 10.40Umcebo Coal Mines Operating .. --- 7.034 Glencore Interna

Vele Coal MineOperating, exp/constr OP,UG .. --- 0.161 CoAL Bituminous 803.82 332.71

Vlakvarkfontein Coal Mine Operating --- 0.895 1.240 Contl Coal 17.40 12.56Woestalleen Coal Mine Operating OP 3.500 3.526 3.543 CoAL Bituminous 6.82 6.16

The basic data for individual junior mine were organised in the following categories: mine id, production,commodity, reserves, controlling company, type, status, location, etc.

Future Outlook and Conclusions v Based on commodity demand and supply in international market.v Continuing industrialisation and urbanisation of China, India and rising global

demand of energy, increasing consumable incomes are long-term drivers ofgrowth.

v Forecast to grow in line with the mineral supply opportunities in the global marketv Policy makers expected to address regulatory factors (security, permitting, SLP,

etc.).v Anticipated recovery of the global economy between 2014 and 2015 is expected

to boost demand fro mineral commodities.v Favourable conditions in global market will result in JMCs consolidating their

contribution to the country’s economy.v Key agent of employment generation, foreign currency and transformation of the

MI.

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