[miningmx.com] — SOUTH African miners worrying about the continued strength of the rand – 9% stronger this year alone – will be eagerly seeking direction from Finance Minister Pravin Gordhan on Wednesday.
Gordhan, due to present the so-called ‘mini-budget’, has been under pressure to assist weakening the rand, the strength of which has seen the country’s miners unable to benefit from the improvement in the dollar price of most commodities.
A well-known example is the gold industry. Gold has witnessed a 47% increase in the dollar price since January 2009 but, owing to a 28% strengthening in the rand over the same period, has meant the rand price of gold has gained only 16% to R294,000/kg. Increases in electricity and wage costs have taken most of the remaining benefit of the higher dollar gold price away from those operations South Africa’s gold miners own in the country.
So far, Gordhan has resisted unilateral efforts to tackle the currency, although there is the real prospect that exchange controls may finally be dumped. Other measures, such as buying dollars and taxing so-called hot money, investors seeking the better yields in South Africa, don’t appear to have any chance of adoption.
One other possible measure to help the miners, curbing the effects of the Royalty Act, is unlikely to receive much favour either. In February 2009, then Finance Minister Trevor Manuel delayed the implementation of the Royalty Act amid the effects of the economic crisis which was biting hard. Could a similar view be taken on this legislation amid the crushing rand?
Unlikely. Suspending the Royalty Act is not like delaying it even though it might save the mining industry billions of rands in levies. Anyway, there were recent amendments to the Royalty Act which effectively factored in lower than expected revenues.
Introducing the Taxation Laws Amendment Bills 2010 in parliament earlier this year, Gordhan said the royalty system would be imposed on a gross basis with the rate decreasing or increasing, depending on company profitability.
A more interesting prospect, perhaps, is the fact that President Jacob Zuma is due to call a special cabinet meeting this week aimed at discussing the country’s new growth plan. This, and the recent G20 meeting Gordhan has attended means the mini-budget may yet deliver surprises in respect of how government tackles the rand.
ANGLO OPTIMISM
Analysts have taken a relatively sanguine view of that other mining company with strong South African exposure – Anglo American – which has seen its share price surge 12.4% since the beginning of October. It ended Friday at R317/share with stockbrokers setting a target price of R390 to R400/share.
Anglo has roughly 40% of earnings exposed to operations in South Africa where rand strength is exerting margin pressure. Yet, the group’s third quarter earnings report proves miners’ only possible riposte to currency strength is to improve efficiencies.
The bullishness around Anglo at present remains the continued improvement at Anglo Platinum in which it has an 84% stake. Third quarter output at the platinum producer was 26% higher, but importantly, 11% higher year-on-year. This means 2.5 million ounces in production remains a distinct possibility, a target considered ambitious earlier in the year.
Where there were production problems in the Anglo fold, such as the lower output of metallurgical coal at its Australian operations, the root cause was exongenous (rainfall). De Beers turned in a much better performance which is now in line to hit $1bn in pretax earnings for the current financial year. We shouldn’t get ahead of ourselves, however, since De Beers comprises a mere 5% of Anglo’s pretax earnings.
Interestingly, some of the optimism about Anglo is actually reconsidered perspectives. As with some other stockbrokers, Nomura believes Anglo had suffered from overly negative exposure, especially on South African matters.
Said Nomura: “At our recent conference, Susan Shabangu, Minister of Mineral Resources, acknowledged recent mistakes by the ministry but also that mine nationalisation is not and will not become government policy’.
The advance of nationalisation is something of a moot point considering Miningmx’s story last week of how the intervention of the country’s state-owned mining company could be viewed as nationalisation by stealth. But has the pressure on Cynthia Carroll, Anglo American CEO been a little overdone?
It will be interesting to see the demeanour and comments of Carroll, whom I thought looked world weary when we met in June, and who is presenting at a business school in Johannesburg this week, primarily about issues of gender in the high flying corporate world.
Recent events in the diversified mining sector have presented complexities to Anglo’s peer group, Rio Tinto and BHP Billiton. Rio is in dispute with its partner Ivanhoe over how to finance the Oyu Tolgoi copper/gold project in Mongolia, while BHP Billiton’s $130/share bid for Potash Corp has stumbled into regulatory problems. It’s also worth remarking that neither Rio’s nor Billiton is immune from emerging market currency strength.
