POLITICAL intrigue and corporate manoeuverings are likely to dominate South Africa’s mining sector in 2017 with firms Anglo American, Glencore and Gold Fields featuring while Eskom and the elusive mining charter will also top the newslist.
Glencore announced it had come to the end of a restructuring in which it lowered debt roughly $10bn to about $16.5bn – a development that opened up the resumption of dividend payments starting with a $1bn payout this year.
The Swiss-based group also wasted no time looking for new assets unveiling in December plans to buy a 19.5% stake in Russian oil company, Rosneft, as well as raising the possibility it could buy up shares it doesn’t already own in Mutanda, a copper mine in the Congo.
These developments alone have had analysts speculating whether this signals the end of the three- to four-year long bear market in commodities, or whether it is just a measure of the strength of Glencore’s own asset base. Regardless, here are some of the other issues likely to cross your path in 2017.
2017 is a doubly important year for the South African mining bellwether: firstly, because it turns 100 years old; secondly, the company is due to hive off its coal, iron ore and manganese assets, possibly through a demerger.
The investment opportunity is whether to hold on to shares in the demerged entity should Anglo take this restructuring option (instead of selling its coal and iron ore assets which might raise difficult, head-spinning BEE challenges).
Demergers have done relatively well on the JSE.
Shares in Sibanye Gold are two-thirds higher since its creation in 2012 whilst South32, built from the non-core assets of BHP Billiton, is 35% stronger. There’s a likelihood Anglo’s progeny might fare just as well.
The demerger may also put a spring into Anglo’s step – already the top performing mining share in London last year – with analyts suggesting there could be a 20% uplift in the stock.
Gold Fields & Sibanye Gold:
All eyes on Nick Holland, CEO of Gold Fields, in February when he unveils new production targets and reserves for the firm’s large South African asset, South Deep – the last of the major Witwatersrand gold orebodies.
The expectation is that production could be significantly reduced from the 650,000 to 700,000 ounces a year target currently in the company’s plans while the asset’s life of mine could also be lowered.
Whilst shares in Gold Fields could be knocked on this bad news, evidence of more realistic production and cost targets could see the project finally contributing to Gold Fields’ bottom line.
Beware, however, that a downgrade in South Deep’s productive power will put a new spin on Gold Fields’ somewhat aggressive merger and acquisition strategy of 2016 in which it promised to spend $1.4bn over eight years at its Ghana mine, Damang, as well as $268m for a 50% participation in the Gruyere gold project in Western Australia.
A further joint $1bn bid may also be made by Gold Fields for Kirkland Gold if that firm’s shareholders reject its own expansion plans. Bidding for Kirkland would cap a massive outlay for Gold Fields and place a pressure on its operating team to make good on its investments.
The efforts of Gold Fields will be mirrored in some way by Sibanye Gold which is hoping shareholders will approve its R30bn bid for Stillwater Mining Company, a US palladium and platinum firm – a piece of corporate activity that will involve a minimum R10.3bn rights offer.
Neal Froneman, Sibanye CEO, may not stop there having tellingly remarked that owning Stillwater would put Sibanye in possession of dollar revenues which would lower the company’s cost of debt – a signal that the expansion is not over (having already bought Aquarius Platinum and Rustenburg Platinum Mines).
Froneman’s corporate journey is also partly informed by disaffection with the business climate in South African mining. He commented at the end of last year that the country’s mining sector was close to breaking point owing to delays with the mining charter and state capture.
The Mining Charter:
The expectation was that the Department of Mineral Resources (DMR) was to gazette changes to a redraft of the mining charter in the dying days of December, but that did not materialise.
This raises the possibility that changes recommended by the Chamber of Mines, which it thought had been ignored, might be incorporated into the redraft after all through sensible give-and-take negotiation.
The alternative is too ghastly to contemplate: that the Chamber of Mines fights certain aspects of the redraft through the courts which would place a new layer of uncertainty on regulations in the mining sector, a situation that would almost certainly limit – if not kill – new investment.
It’s worth noting that some 50,000 jobs were lost in the mining sector over the last 18 months to two years, partly owing to the decline in commodity prices. If the markets are improving, it would be a crying shame that South Africa mining missed out on the opportunities owing to regulatory uncertainty. It may happen.
The regulatory uncertainty also extends to the relationship between the power utility, Eskom, and its coal suppliers; most notably, Exxaro Resources which in November announced plans to restructure its empowerment holding which resulted in 30% BEE compared to as much as 53% previously.
Eskom took exception to this saying that suppliers of coal to it had to be 50% plus one share empowered. A spat ensued in which Eskom interim boss Matshela Koko dubbed Exxaro’s restructure “an insult” that had “shown the finger” to Eskom.
Exxaro’s response is that the 50% plus one share rule is one held true only by Eskom and not supported by policy. It added that policy was supported by the Department of Trade and Industry’s Code of Good Practice which has set an ownership target of 25% for broad-based black economic empowerment (BBB-EE) which is similar to the 26% target currently set down in the mining charter.
Quite where this leaves Glencore and South32, as well as Anglo American’s demerger were it to happen, or indeed the country’s entire coal supply system given that only a teaspoonful of mining firms actually comply with this rule, is a bit of a head-scratcher.
The State of Capture report by the Public Protector made a number of findings, some of which have their origins deep within the relationship of coal supply to Eskom. Quite how these conclusions will be borne out is perhaps the key political and economic question in SA in 2017.
The influential Gupta family, led by brothers Ajay, Rajesh and Atul, are thought to have used their benefaction of President Jacob Zuma to influence the award of Optimum Coal Holdings out of business rescue to their subsidiary company, Tegeta Exploration – a transaction also helped by Eskom which greased the deal, allegedly.
Should Eskom taking this on judicial review, it will surely open a fresh can of worms whilst it’s also unclear if the Gupta company, Tegeta Exploration, intends to sell Optimum Coal Holdings 7.5%% stake in 81 million tonne a year Richards Bay Coal Terminal (RBCT) to Vitol, a Dutch trading company.
It’ll be worth keeping an eye out, also, for whether the shareholders in Richards Bay Coal Terminal (RBCT), which includes Glencore, Anglo and South32, will trigger their pre-emptive rights over the entitlement.
If the entitlement were to be sold to Vitol it would ironically up-end Eskom’s BBB-EE strategy as black companies may have to apply to the Dutch group for export exposure.