Investors Shunning the World’s Richest Mineral DepositsKevin Crowley and Andre Janse van Vuuren
South Africa has the world’s richest mineral deposits, with $3.3 trillion in platinum, gold, iron ore and coal. That’s not enough to satisfy investors.
Extended labor strikes, aging mines and regulatory uncertainty have dragged the stock-market values of South African miners to a four-year low compared with global peers. At the start of 2013, the stocks traded with almost no discount.
“Without a question, if I look on a national level, South Africa is one of the most difficult places to operate in the world,” said Charl Malan, who helps manages $33 billion at Van Eck Associates Corp. in New York. “If you’re a non-South African company you trade at a premium multiple to a South African company.”
The shifting investor sentiment is a key topic at the Joburg Indaba conference that started in Johannesburg yesterday. A five-month platinum strike, dwindling gold reserves, persistent power blackouts and uncertainty over policy have prompted mining companies to act.
Anglo American Plc, the largest platinum producer, is selling mines that supplied one-third of its output last year. BHP Billiton Ltd., the world’s biggest miner, is planning to spin off some operations into a new company that will hold most of its assets in South Africa.
Gold Fields Ltd. was the fourth-largest producer of the metal until it spun off most of its local mines last year. And a plan by the third-largest bullion company AngloGold Ashanti Ltd. to separate its local and foreign assets only failed because investors balked at an accompanying $2.1 billion share sale.
“The period 2004 to 2014, in our industry, should be regarded as a lost decade,” Anglo American Chief Executive Officer Mark Cutifani told the conference. “We have the single-largest measured minerals entry in the world yet in the course of the last 10 years, real values in terms of the prices for our companies listed on the JSE had declined 30 percent.”
The world’s largest platinum producers including Anglo American, Impala Platinum Holdings Ltd. and Lonmin Plc lost about 24 billion rand ($2.1 billion) in revenue from the strike that ended in June. It was the second prolonged stoppage at the mines since 2012, when police killed 34 employees near Lonmin’s Marikana operations in a single day during a wage dispute.
Anglo American will continue to invest in South Africa even as it sells some of its platinum mines, spokeswoman Shamiela Letsoalo said in an e-mailed reply to questions. Amplats is selling assets that accounted for 26 percent of revenue last year. The company plans to expand platinum production at its Mogalakwena mine in South Africa.
BHP Billiton’s decision to spin off some operations will lead to a company with “significant South African ownership,” Lulu Letlape, the local unit’s vice president for communications and external affairs, said in an e-mailed response to questions. The miner isn’t exiting its local operations, she said.
“The biggest guy in the street doesn’t think its assets are either scalable or worth the investment,” Peter Mallin-Jones, a London-based analyst at Canaccord Genuity Corp. said by phone, referring to BHP. “If you were sitting in the mining ministry, or in cabinet, you should be thinking ‘do we try and change things a bit here?’”
AngloGold spokesman Chris Nthite declined to comment. When announcing the plan to split its international and South African operations on Sept. 10, the producer said the separate companies would “allow each business to be more appropriately valued to reflect their individual investment cases and asset profiles.”
Citigroup Inc. in 2010 ranked South Africa the world’s richest nation by commodity wealth, with more than $2.5 trillion in mineral reserves, 56 percent more than second-placed Russia. The standings probably haven’t changed since then because of the slow rate of “resource exhaustion,” Craig Sainsbury, who wrote the Citigroup report, said by e-mail on Oct. 1. He now works for Goldman Sachs & Co.
South Africa’s government estimates the nation’s mineral-deposit wealth at about $3.3 trillion, the Mineral Resources Ministry said in November 2012.
Companies in the 104-member Bloomberg World Mining Index are trading at 14.8 times estimated earnings while those in the 16-member FTSE/JSE Africa Mining Index of South African commodities stocks are at 12.3 times projected earnings.
The difference between the two reached 2.7 on Oct. 6, the most since September 2010, according to data compiled by Bloomberg. That compares with 1.54 at the beginning of the year, before the platinum strike. The discount was as little as 0.1 at the start of 2013, the smallest since South African mining equities were at a premium to global peers in June 2010.
Companies are also bypassing the country as they search for future mines. Southern Africa attracted only 3 percent of the $14 billion that miners spent globally on exploration last year, according to a survey released in March by SNL Metals & Mining. That’s less than Canada, Australia, the U.S., Mexico and Chile.
South African lawmakers passed amendments to the 2002 Mineral and Petroleum Resources Development Act in March. The bill will let the minister declare some minerals strategic and force companies processing them to sell part of their output to local manufacturers. President Jacob Zuma has yet to sign it into law.
The discretion the bill affords the minister to interfere with market-pricing mechanisms will fuel regulatory ambiguity, Simon Hudson-Peacock, a money manager at Momentum Asset Management in Johannesburg, said by phone.
Changes to legislation are intended to speed up the transfer of wealth to black South Africans, who were largely excluded from the economy during white-minority apartheid rule, and aren’t meant to deter investors, Mineral Resources Minister Ngoako Ramatlhodi said in a speech to the conference.
“Government is fully alive to the fact that investment in the industry is dependent on regulatory policy finality as pronounced in legislation,” he said yesterday. The bill may be referred back to parliament if its constitutionality is in doubt, Ramatlhodi said.
Spinoffs and sales may create value and offer investors opportunities, Sibanye Gold Ltd. CEO Neal Froneman said by phone on Oct. 2. Sibanye, whose assets include three mines spun off by Gold Fields, is the best performer among 14 major bullion producers this year. Its shares have doubled in 2014, with the stock rising 4.4 percent to 24.62 rand by the close in Johannesburg today.
“Where you can deal with country issues in a focused way it’s very positive and should result in better outcomes for all stakeholders,” Froneman said. “I’m pretty sure we as a country will work those things out so they will turn from a negative to a positive.”