Half a loaf is better than none
THE biggest piece of news coming out of Zimbabwe this week is probably the decision by Anglo Platinum (Amplats) to give away 51% of its stake in its Zimbabwean mine Unki.
The most pertinent question, however, is why Amplats bothers to hang on instead of walking away.
For a law that has been condemned the world over, one would have expected foreign-owned businesses operating in the country to just close shop and invest their monies elsewhere.
To date no company has shut down or threatened to up sticks.
One would wonder whether it’s a case of companies saying that half a loaf is better than none, or if they still see value in the remaining 49% stake, or better still, whether they are hoping for a new government to come in and reverse the decisions made by the current government of national unity.
Half a loaf is better than none is an old adage that has been proven true in many circumstances, but does it apply to business? Is half a loaf better when the other half is taken away from you without compensation?
Yes and no. Half a loaf is better than nothing when you know for sure that you might lose the entire stake if you refuse to comply, just like the farmers experienced.
Half a loaf is, however, not better if you are the one to invest 100% only to give away 51% of the profits to someone who did not bring anything to the table.
The 49% stake could, however, be better than nothing if there is going to be minimal investment that needs to be pumped into the company after new investors have come in.
Judging by the agreement at Unki, where new shareholders will wait for 10 years to get any dividend, the 49% stake is a better option. At least for the next 10 years you are assured of getting 100% of the profits while you wait for the new investors to acquire their stake.
Is it a question of the mining houses seeing value in the 49% stake? That line of thinking is not far-fetched if one considers the situation in South Africa.
South African mines are no longer as viable as they used to be. The mines, described by some to have reached sunset, are now too deep and costly to operate. In the interim results to June 2012 the bulk of the country's mines recorded losses.
Emperors without clothes
In summary it has been a grim year for South African miners, with rising costs, labour disputes, falling prices and surplus supply all combining to wipe out billions of rands of shareholder equity. If the truth is to be told, conditions in South Africa are far from ideal for running a lean, efficient business.
Over the last year, both labour costs and electricity rates have risen sharply. At the same time, industrial unrest and absenteeism are regular problems. The recent labour unrest resulted in the loss of billions of rands; add to that increased wages and salaries and you have a recipe for disaster.
The bottom line is that there is just too much political and economic risk in South Africa. If things don’t turn around sooner, the industry could be in for more lean years as profitability is no longer a guarantee, especially if metal prices come off, as they will eventually do.
The dire financial situation faced by miners is evidence enough that South African mining emperors have no clothes any more.
If costs keep rising and the future of the industry remains uncertain, thanks to nationalisation debates and labour unrest, more and more marginal South African mines could be pushed out of business, and this would have a serious effect on employment and the broader economy.
The bleak picture in SA leaves Zimbabwean mines in a better position, if the government could only change its policies. Zimbabwean operations are low on the cost curve and according to Implats spokesperson Rob Gilmour, the company’s Zimbabwe and SA operations cannot be compared.
"The Zimbabwe mine is shallow and highly mechanised, while our Rustenburg mine is a deep operation and manpower intensive". Gilmour added that Zimbabwean mineworkers are highly literate compared to their South African counterparts, and this is a function of that country’s education system.
This obviously does not go unnoticed by big mining houses like Amplats, Impala Platimun and Aquarius, already enjoying operating in Zimbabwe. They will do everything in their power to hold on to whatever stake they can own in Zimbabwe.
The other advantage is that Zimbabwe has already gone full cycle with its economic and political challenges, something SA might have to go through if it doesn’t play its cards right.
The recent mine unrest is a good example of how things can change overnight. Instead of walking away on Zimbabwe, miners would rather hang around just in case what is happening in Zimbabwe is a picnic compared to what might happen in South Africa or elsewhere.
Remember, Indonesia and Kenya are now also advocating for local ownership of mines. Media reports in March said Indonesia had adopted a policy similar to Zimbabwe’s indigenisation model, compelling foreign-owned mining companies to cede 51% of their share ownership to Indonesians.
International media reports said under the new ownership structure, foreign mining companies operating in the Asian country would be limited to a 49% ownership share. In October, the Business Daily reported that Kenya had gazetted new laws meant to curb the repatriation of mineral wealth.
The new laws require foreign mining companies to cede at least 35% of their shares to Kenyans. With this in mind, the 49% stake in Zimbabwean mines can still prove to be valuable to the mining firms.
The other school of thought is that mining firms are hoping that with the coming elections a new government will take over and reverse the current laws. The Movement for Democratic Change (MDC) is on record as saying that empowerment laws are flawed.
MDC leader Morgan Tsvangirai said: “The warped indigenisation policy has eroded investor confidence and created a sceptical international business community that has developed a wait-and-see attitude."
Against this background, it is not far-fetched to think that the mining houses are hoping the MDC will win the coming elections and reverse indigenisation laws.
It is, however, very unlikely that the new government will reverse the laws entirely. The best case scenario might be the reduction of the 51% threshold or the extension of the timeframe for compliance.
Only time will tell, but in the meantime Amplats and other foreign companies like British American Tobacco would rather comply and hope for the best.