Value creation in mining : an analysis of South Africa’s platinum industry

Abstract

The superiority of economic over accounting metrics is established and an analysis of the value created by platinum mining companies since 1994 is made. The link between growth and market value is shown to depend on earning an incremental return on invested capital (ROIC) that exceeds the weighted average cost of capital. The competitive advantage gained through capital budgeting is analysed using a ROIC tree to disaggregate ROIC into its component ratios, showing that firms’ performance is differentiated through capital turnover rather than operating margin. The impact on value creation of the Mining Charter, of the Mineral and Petroleum Resources Development Act, and of the proposed Royalty on mineral production is assessed through a survey of executives and analysts to the industry, revealing cautious optimism that negative impacts will be both temporary and manageable, but that considerable uncertainty surrounds the value of old order mineral rights under the new order. Through a hypothetical example, Real Options Valuation is shown to be an appropriate methodology to quantify the value of old order rights, should expropriation necessitate claims for compensation.