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Downgrades to Curtail Prospects in Mining Industry

South African mining companies could face harder times, and higher costs

The downgrades of South Africa’s sovereign rating to sub-investment could see mining companies delay investments in projects owing to, among others, increased borrowing costs, according to a local mining expert.

Warren Beech, the head of mining at law firm, Hogan Lovells, said on Friday that the mining industry would not be spared the effects of the recent downgrades in the sovereign ratings, which included higher borrowing costs.

“The cost of borrowing will go up The mining companies raise money, whether it is from shareholders or financial institutions. Investors get nervous because they look at the political and financial risks,” said Beech.

Ratings agencies S&P Global and Fitch's recent downgrades, are expected to increase the cost of capital, weaken the currency and raise inflation.

Beech said the downgrades came just as optimism in the mining industry was on the rise. "We had a good first quarter,” he said.

After putting on hold projects in the wake of the global financial crisis, mining companies last year decided to revive some of their shelved projects.

“It takes a while to get the projects going. It can take up to a year,” he said. “But the downgrades could prompt mining companies to rethink some of their projects.”

In recent data, Statistics SA said job losses slowed down last year, while mining production grew by 3.2percent in the first two months of this year.

Beech said when the industry stabilised employment figures would also settle from the steady fall that had been experienced since 2012.

“Each year, the employment has been going down,” he said.

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Paul Edwards
Editor for HSME
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