Beneficiation – the pros and cons

Is Africa giving away the value of its minerals by exporting them unrefined? MJ Morgan sees signs that while beneficiation is growing, the issue is not entirely straightforward.

In his state of the nation address, South Africa’s President Jacob Zuma said: “One of government’s priorities this year is also to finalise and adopt the beneficiation strategy as the official policy of government, so that we can start reaping the full benefits of our commodities.”

The President’s thinking is that instead of exporting the country’s estimated $2.5 trillion worth of non-energy commodity wealth unprocessed, the value chain of this endowment can be more fully harnessed through greater beneficiation. The argument is that having mineral wealth alone confers next to no advantage – if you just export the raw materials without processing them. This is because, for instance, precious metals and diamonds are available at the internationally determined market price and beneficiation at present takes place largely in countries that have no mineral endowment.

If the absence of minerals in a country was a disadvantage, then Antwerp would not be the home of the diamond trade and Japan would never have industrialised. What matters is not the comparative advantage (having the minerals) but the competitive advantage (having the skills to produce competitively at the right price). If you’re producing aluminium, say, what matters isn’t having bauxite, it’s having cheap energy.

Mining Indaba

Ivanplats CEO Robert Friedland is a man who Steve Jobs, according to his biographer Walter Isaacson, “treated almost like a guru”. But in a barnstorming address to the 7,500 delegates at the annual Mining Indaba (a sort of Davos for miners) in Cape Town in February, it appeared to be Friedland who was channelling Jobs.

Whilst the Mining Personality of the Year did not don the black turtleneck of his old friend, he did emulate his marketing nous. Not only is Ivanplats’ Platreef project – already 17 years in the making – going to produce platinum, palladium and gold (given a reserve of 52.5m ounces) for 100 years, the company also plans to beneficiate (i.e. value adding processes ranging from the extraction of minerals from ores and the production of concentrate, through to the creation of alloys and saleable products) in South Africa. “Beneficiation will be key: we can make catalytic converters and jewellery, and we can do it all here” he said. Toyota, which manufactures in South Africa, is an obvious potential customer for Ivanplats’ catalytic converters. It may be no disadvantage that Ivanplats minority shareholder, with 18%, is Itochu – a Japanese company.

“We will have black economic empowerment of the broadest kind. Sustainability is the key driver of the way we will build our business,” Friedland said, adding “We have to build a mine where absolutely nobody dies and workers are more like skilled surgeons.” This is clearly more than wishful thinking and investors are buying it. Last October, Ivanplats enjoyed a highly successful IPO, raising $307m in cash to help develop the company’s projects in South Africa and the Democratic Republic of Congo. The Platreef project alone, which also includes considerable nickel deposits, is worth an estimated $3.5bn. Friedland may be the slickest of mining executives but there is little doubt that he, and his investors, are convinced of the wisdom of their plans.

Special Economic Zones for platinum

The South African Department of Trade and Industry (in conjunction with Limpopo regional government) will create a Special Economic Zone (SEZ) for the processing of platinum. Amplats are working with government to assess the feasibility of creating a hydrogen fuel-cell industry there. A second SEZ in Musina will target logistics and coal. At present, some 85% of platinum group metals (PGMs) are exported unprocessed.

There are used predominately in catalytic converters for cars, jewellery, dentistry and in fuel cells. Increasing concern about climate change and the growth in urban areas – in particular megacities – will require vast quantities of metals, especially PGMs, to clean the air. Last year, a pilot programme was launched to support the development of platinum beneficiation. Start-up Clean Energy produced and sold fuel cells to mobile phone provider Vodacom to be used to provide backup power.

Devil in detail

However, beneficiation is not a panacea. The Centre for International Development at Harvard University produced a policy brief on beneficiation for the government of South Africa which states “beneficiation is a bad policy paradigm and should be dropped from South Africa’s development strategy”. Despite acknowledging that “the exporting of raw natural resources is a legacy of colonialism, in which countries were precluded from developing their own processing capacities in order to supply the motherland with cheap raw materials”, the report points to the “comprehensive evidence” that “[both rich and poor] countries do not move downstream in their export development”.

The policy brief argues that since any given government does not have limitless resources, there should not be a presumption in favour of beneficiation. The issue should be considered on a case-by-case basis. The report concludes, “Concentrating on beneficiation may also lead policy makers to overlook more attractive ‘lateral’ development opportunities. Capabilities developed in mining may lead more naturally to other types of engineering for example, than to downstream minerals processing”. Whilst the notion of harnessing mineral wealth for development is admirable, the matter is nuanced. Chamber of Mines senior economist Ruqshana Hassan expressed her doubts to the Mail & Guardian last year:

“With the local power supply system in severe distress and unlikely to have readily available power until at least 2015–2016, beneficiation can’t work.”

The Chamber of Mines has called for the government to facilitate cheaper capital and input costs, promote R&D, improve skills and infrastructure, as well as create the SEZ’s we are now starting to see.

Mining Minister Susan Shabangu was keen to promote the government’s National Development Plan 2030 at the Indaba. The Plan suggests that policy makers are cognisant of these issues. In its only reference to beneficiation, it says “South Africa should be selective about the areas in which it intends to support first-stage beneficiation. Priority areas should include those where suitable capacity already exists, or where beneficiation is likely to lead to downstream manufacturing. Beneficiating all of the country’s minerals is neither feasible nor is it essential for developing a larger manufacturing sector.” So the question is not whether beneficiation is a good or bad thing, but a question of what, why and where. In spite of these challenges, Robert Friedland said that South Africa is one of the best investment destinations in the world and that, when it comes to issues such as labour disputes, he was “absolutely confident the South African government would find a way to a golden compromise”.

Metalloys

BHP Billiton is also beneficiating in South Africa. In March, Minerals Minister Susan Shabangu opened the Metalloys manganese smelter in Meyerton, south of Johannesburg. The R1bn ($105m) project is one of the largest in the world. The Kalahari basin contains the majority of the world’s high-quality manganese. The company is not new to beneficiation on the continent, having produced aluminium at its Hillside and Bayside smelters, near Richards Bay, since 1994 and 1971 respectively and in 2001, the Mozal aluminium smelter opened in Mozambique.

Collectively, they provide more than 3,200 jobs directly as well as work for a further 2,800 contractors. To those miners who protest at Nordicstyle policy changes to incentivise greater local beneficiation, President Zuma said, “I’ve said it to the private sector from the Western countries: ‘Look. You have got to change the way you do business with Africa if you want to regain Africa. If you want to treat Africa as a former colony … then people will go to new partners who are going to treat them differently’.”

But if Zuma is going to start backing winners, he’d better make sure he picks the markets in which South Africa can really compete.

First of all, he will need to invest far more heavily in training a skilled workforce and ensuring there is adequate energy, at a competitive price. South Africa’s dominance across so many commodities (not least manganese and PGMs) means that many miners will have to dance to its tune come what may but any complacency as a result of this natural advantage that results in the failure to create the right environment for the right kind of beneficiation will be as disaster for investment and jobs.

It took 10 years for Robert Friedland to find what he was looking for at Platreef, so his words might well chime with Zuma’s thoughts: “We won’t change the world overnight, but we have a vision.”