[miningmx.com] — REMEMBER the famous piece of advice offered in The Hitchhiker’s Guide to the Galaxy when it’s discovered Earth is about to be obliterated?
It was: “Don’t panic!’ Even the remotest prospect of nationalisation being foisted on South Africa’s mines – despite it having been proven to be a bankrupt economic philosophy – falls into the same category.
It’s beyond belief the lessons learnt the hard way through the failures of nationalisation in countries such as Zambia and Tanzania can be summarily ignored by the likes of the ANC Youth League.
However, as a South African resident owning a portfolio of SA mining shares you do have options to minimise the damage if the worst comes to worst. All isn’t lost, says Cadiz Corporate Solutions mining consultant Peter Major, who quips: “We’re ready for Julius.’ (Youth League head Julius Malema.)
Major reckons the best investment to go for in the event of nationalisation would be the rand-denominated platinum exchange-traded fund (Standard Bank’s exchange traded note SBAPL1) on the JSE. That strategy plays to the strength of SA’s platinum sector, which accounts for 80% of world supply and with little likelihood that replacement sources can be found.
The other major producers of the metal are Russia – where it’s a by-product of its nickel mines – and Zimbabwe, which has its own problems. But more about Zimbabwe later.
Says Major: “If they nationalise SA’s platinum mines, then the US dollar price of platinum is going to jump and the value of the rand against the dollar is going to weaken.’
Major also likes various country ETFs available on the JSE, such as Deutsche Bank’s DBX-Japan (DBXJP) and its British instrument – DBXFT100 (DBXUK) – both of which will benefit from a weakening rand. Likewise the JSE’s gold ETF, which will benefit from the impact of a weakening rand on the US dollar gold price, although Major believes the platinum ETF will way outperform the gold ETF in the event of nationalisation.
His advice on gold equities is to get out of them. “SA gold shares have been a horrible investment for years. That’s not likely to change anytime soon – irrespective of nationalisation developments.’
There are certain mining shares listed on the JSE with no or minimal exposure to SA and which, therefore, wouldn’t be affected by nationalisation. Pick of the bunch has to be the world’s largest diversified resource group, BHP Billiton. All its South African assets – including its coal mines and manganese mines, its aluminium smelters at Richards Bay and its 50% stake in titanium producer Richards Bay Minerals – account for around 7% of the group’s net asset value.
By comparison, Anglo American’s exposure to SA is around 40%, as 80% held subsidiary Anglo Platinum is the group’s most important asset.
So swap out of Anglo American and into BHP Billiton.
In terms of specific commodity plays, the shares that could be bought – obviously depending on your assessment of their management and prospects – include Metorex and Uranium One.
Over the past two years Metorex has deliberately sold off all its South African assets to focus on its copper/cobalt operations in Zambia and the Democratic Republic of Congo (DRC). The company’s HQ is still in Rosebank, Johannesburg, but it may as well be relocated to Lubumbashi.
Following the sale of its failed Dominion mine, Uranium One now gets all its revenues from uranium operations in Kazakhstan. To all intents and purposes it will be a Russian group once Uranium One’s deal with Russian state company ARMZ is completed, and its stated growth prospects are in Australia, the United States and Africa outside of SA.
Another example is ZCI, which now mines and explores for copper in Botswana after buying a controlling stake in African Copper plc.
Investors could also look at diversifying out of mining shares into suppliers and services providers linked to the industry.
Another mining boom is being predicted for Africa that SA will certainly miss out on should its mining sector be nationalised. However, this country should still be a good base from which to operate into the rest of Africa and local manufacturing and construction groups should benefit. Therefore, look to logistics and infrastructure providers, such as Bidvest and Grindrod, and engineering/construction/contract mining groups, like Basil Read, Group 5 and Murray & Roberts.
Other investment candidates are mining groups that already have substantial operations outside SA that could be split off into separate foreign holding companies should the worst come to the worst. Obvious examples are AngloGold Ashanti and Gold Fields, where there’s already been considerable speculation the two should list their foreign operations separately to get rid of the “South African discount’ – one of the reasons for their “horrible’ investment performance, as Major puts it.
Impala Platinum (Implats) is another possible candidate for a split, depending on what you think may happen in Zimbabwe, because – all going well – Implats could be mining 1m oz/year of platinum in Zimbabwe within 15 years through ASX-listed subsidiary Zimplats. It’s worth noting the two best-performing assets in Implats’s portfolio over the past few years have been Zimplats and sister Zimbabwe mine Mimosa, despite that country’s massive setbacks.
Reaching 1m oz/year in Zimbabwe would match the level of production currently coming from Implats’s flagship lease area at Rustenburg. And, yes: it’s entirely possible Zimbabwe – despite all its problems – could be viewed as a preferable investment destination to SA should we go the nationalisation route.
Major put it thus: “Even Mugabe never nationalised any mines. He might be a madman but he’s not crazy!’
GO FOR GOLD OFFSHORE
South African residents are currently allowed to take R4m out of the country to invest in foreign assets – which is way in excess of the amount the average investor is likely to have available to play with.
Consider cashing in a chunk of your SA mining portfolio in order to pull a worthwhile amount out for investment in mining shares offshore.
Holding back hoping for appreciation in South African mining shares before cashing in could be self-defeating, because one of the main reasons for expecting a surge in the prices of SA’s mining equities is anticipated depreciation of the rand.
What you gain on the swings you’d likely lose on the roundabouts.
Getting your money offshore opens up a whole new range of possibilities for the mining investor on bourses such as the Toronto Stock Exchange, Australian Stock Exchange and the London Stock Exchange.
The JSE has lost out heavily on the mining equity boom, as only a minority have listed in Johannesburg – and then often only due to pressure to set up dual listings for the benefit of their black empowerment partners.
Though the variety on foreign bourses is mouth-watering, it also brings with it a whole new range of risk factors. Bluntly stated: You should have a far better handle on local shysters than the Australian and Canadian varieties, as well as a better understanding of the business fundamentals that rule in SA than in, say, Colombia or Alaska.
So perhaps the way to go initially is to play safe and stick to the lower-risk, established groups – such as Xstrata or Rio Tinto, along with majors like Barrick Gold – instead of falling for some smooth entrepreneur talking up his piece of “moose pasture’.
– First published in Finweek
