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January 10, 2017
South Africa: The carbon tax impact on mining’s EBITDA
By: Segran Pillay

In South Africa, policymakers and businesses have discussed a carbon tax for years, starting with the country’s signing of the Copenhagen Agreement in 2009. But progress has been slow. Indeed, the first draft of a carbon tax policy, which aims to reduce emissions through a fixed price paid by polluters, was introduced in December 2010. However, that development was followed by postponements and relatively little action.

Now it appears that a carbon tax bill will take effect at the end of 2017 or early 20181, and that will have significant ramifications for the mining industry, as well as the electricity and manufacturing sectors. South Africa’s draft carbon tax bill calls for an initial marginal carbon tax of R120 per ton2 of CO2 produced, with that amount potentially reduced by various allowances and offsets. These allowances may not exceed 95 percent of the total greenhouse gas (GHG) emissions of the taxpayer.

Costs and trade-offs

It’s worth noting some of the concerns that have been raised about the tax over the years. Following the publication of a draft carbon tax bill in November 2015, the South African Chamber of Mines requested that the imposition of the tax be delayed for five years to allow time for an economic and benefits impact assessment.

Even earlier, in February 2013, a number of metal and mining companies objected strongly to the bill,3 citing the narrowing margins that would result from the estimated 10 percent increase in costs4 the bill would bring. This was expected to discourage investment, cap growth and dampen job creation. In addition, they argued that the cost positioning of the country’s coal-export sector would be threatened by reductions in coal project valuations of 30 percent,5 which would in turn threaten that sector’s competitiveness by 7 percent compared to larger country producers.

Carbon tax to inflate miners’ cost base

To help miners gain a better understanding of the bill, Accenture conducted an assessment of the impact that an R120 per ton of CO2 tax would have on EBITDA (earnings before interest, tax, depreciation and amortization) in key sectors of the country’s mining industry. Historical direct CO2 emissions data for top Johannesburg Stock Exchange-listed miners was forecasted for 2017. Then, the R120 per ton of CO2 pricing factor and the projected EBITDA performance for 2017 were used to calculate the EBITDA impact.

As Figure 1 shows, the carbon tax is likely to result in a total US$187.5 million loss in EBITDA across the South African mining industry in 2017, calculated on a total allowance basis. Diversified miners will experience the greatest impact at US$119 million, followed by the gold sector at US$39.6 million. As the assessment indicates, not all sectors are affected equally. That suggests a need to create tailored, sector-specific reduction targets to account for these nuances.

This expected high cost burden is likely to create an additional barrier to entry for new players, which runs counter to the objectives of South Africa’s Mineral and Petroleum Resources Development Act (MPDRA). Despite a few miners’ attempts to become energy self-sufficient6 with carbon-reduction projects, the cumulative effects of above-inflation electricity price increases (along with more increases expected from a carbon tax levy on Eskom), an environmental levy and a carbon tax will make some mining assets unprofitable.

Figure 1: Carbon Tax Impact on the South African Mining Industry

Figure 1: Carbon Tax Impact on the South African Mining Industry

Source: Accenture Research analysis

Miners: Taking action

A low-carbon future is on the horizon not only in South Africa, but globally. In December 2015, more than 175 countries signed the Paris Agreement, which focuses on controlling GHGs. That only puts more pressures on miners7.

However, South African miners have an opportunity to proactively reduce their carbon footprint by adopting new technologies and strategies. For example, they should consider:

  • Deriving big gains from incremental technology adoption. Miners can use technology to enable a range of cost-saving operational improvements. They can utilize drones for surveying; artificial intelligence for operations support; big data and advanced analytics for production optimization and maintenance; robotics in drilling/digging/ transporting; autonomous stockpile management; and much more.
  • Collaborating with academia to develop clean technology. Miners can look beyond company boundaries to support innovation. Recently, a diversified miner8 and a major university teamed to explore new carbon capture and storage technology in the steel sector.
  • Investing in on-site renewable energy capacity. South Africa’s geography and its climate provide enormous renewable energy potential in terms of wind and solar electricity generation.

Clearly, the South African carbon tax presents challenges for the mining industry. But as is so often the case, innovative approaches can be key to overcoming those challenges.


Footnotes:

1 Hilary Joffe, Treasury Modelling Exercise - Carbon tax will lower growth rate, Business Day, 11 November 2016. https://global.factiva.com/redir/default.aspx?P=sa&NS=33&AID=9ACC001400&an=MEWBUD0020161111ecbb0000e&cat=a&ep=ASI
2 Carbon tax couldn't come at a worse time, The Mercury, 22 October 2015. https://global.factiva.com/redir/default.aspx?P=sa&NS=33&AID=9ACC001400&an=MERCRY0020151022ebam0002u&cat=a&ep=ASI
3 Carbon tax delayed after companies' disapproval, Pretoria News, 28 February 2013. https://global.factiva.com/redir/default.aspx?P=sa&NS=33&AID=9ACC001400&an=PRETNW0020130228e92s00044&cat=a&ep=ASI
4 Bianca Markram, South Africa mining industry faces up to carbon tax challenge, Metal Bulletin, 18 November 2011. https://global.factiva.com/redir/default.aspx?P=sa&NS=33&AID=9ACC001400&an=METBUL0020111219e7bi0001g&cat=a&ep=ASI
5 SA carbon tax in current form will kill coal exports, American Metal Market, 8 December 2011. https://global.factiva.com/redir/default.aspx?P=sa&NS=33&AID=9ACC001400&an=AMM0000020111208e7c80001d&cat=a&ep=ASI
6 Gold Fields - Renewables, Eskom's death grip, ENP Newswire, 16 September 2016. https://global.factiva.com/redir/default.aspx?P=sa&NS=33&AID=9ACC001400&an=ENPNEW0020160916ec9g000am&cat=a&ep=ASI
7 Sonia Thimmiah, Beyond COP 21: What does a low carbon future mean for mining companies? Accenture.com, 08 September 2016. https://www.accenture.com/us-en/blogs/blogs-low-carbon-future-mean-mining-companies
8 BHP Billiton, Chinese university sign deal on clean tech.

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