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NATIONALISATION of South Africa’s mining industry isn’t going to happen, according to both the ANC and the mining establishment. Or is it? What if mining legal eagle Hulme Scholes is right in the way he’s “connected the dots” on the various actions taken by Government and he’s on the money with his assessment that nationalisation is already under way?
For the past few weeks Scholes has been giving a presentation titled “The road to nationalisation” to top executives at banks and mining companies. His message is straightforward: “Nationalisation is happening now and the mining industry needs to catch a wake-up fast.” He adds that his driving motivation is to shake SA’s mining industry out of its “complacent attitude” because he believes it’s “apathetic and unaware of how much work Government has already done on a nationalisation initiative”.
Scholes is also highly critical of the role played by the Chamber of Mines. He comments: “I believe Government views the chamber as a discredited organisation it doesn’t take seriously. That’s because Government sees the chamber as a relic of the country’s apartheid mining past. The end result is the chamber isn’t functioning as an effective interface between the mining industry and Government.
“For me, a good example of that was the promulgation of the Codes of Good Practice in April last year – where the chamber’s comments were simply ignored.”
The mining industry doesn’t appear to be worried, with one executive dismissing Scholes’s views as “alarmist”.
Gold Fields CEO Nick Holland says: “All indications from Government are that nationalisation isn’t official policy and there’s nothing in our interactions with Government that leads us to believe it will change its stance.”
In his latest annual review, DRDGold CEO Niel Pretorius reckons nationalisation “is simply being given too much airtime by the media. Both our President and our Minister of Minerals have been clear and unambiguous in stating the current Government’s position on this issue”.
Actions speak louder than words, and miner Xstrata clearly believes nationalisation isn’t on the cards, otherwise there’s no way the group would be pumping in R4,9bn to expand its ferrochrome production facilities in SA. Xstrata Alloys spokesman Songezo Zibi says: “The amended Mining Charter doesn’t countenance nationalisation of existing mines and related operations in SA. Accordingly, Xstrata remains committed to the sustainable transformation of the South African mining industry.”
And yet, Scholes is no lightweight. He’s one of the top specialists on SA mining legislation, which he’s been dealing with since 1993. Prior to his current position as mining law consultant at CJM Corporate Advisers he was a director of Aquarius Platinum SA and before that a director at Werksmans Attorneys.
Scholes’s view is SA’s mining industry is being “set up for failure” because there’s no way it will be able to meet the black empowerment targets set out in the revised Mining Charter and the codes to be achieved by the 2014 deadline.
In particular, he singles out the requirement that the empowerment shareholder’s stake in any mining operation be unencumbered by that date to be counted towards the target of 26% “net value” in a mining operation, as required by the codes. “Those failures will provide the political justification for radical intervention by the State in the mining industry to achieve its transformation objectives.”
Scholes says the vehicle to be used will be the “State-owned mining company” over which Parliamentary portfolio hearings were held on 28 May. He comments: “The statement by Government that nationalisation isn’t policy is hollow. Draft legislation for the creation of a State mining company is inevitable – and that’s how nationalisation will take place.”
Scholes believes the State mining company will take over the existing African Exploration Mining Finance Corporation (AEMF), a wholly-owned subsidiary of SA’s Central Energy Fund. AEMF has already sent shock waves throughout SA conservation circles due to the cavalier way it’s set about exploring in environmentally sensitive regions wisely left alone by the private mining sector.
By way of explanation – and as a harbinger of what might still be to come – Scholes points to the string of exemptions AEMF has been granted by Government to the regulatory requirements a private sector mining company must meet. Those exclude AEMF from complying with requirements for prospecting rights, bulk sampling permission, mining rights and permits and the need to meet various environmental management requirements.
Positive spin from some in the mining industry in the debate over the “N” word is the view the ANC has effectively neutralised nationalisation’s main protagonist – the ANC Youth League – until 2012. One well-placed mining sector source says: “The decision by the ANC National General Council to carry out a study on nationalisation as part of a broader look at the role of the State in the transformation of SA buys time, because nothing can now happen until the 53rd national conference in 2012, where the study will be discussed.”
He says the “panic” approach of the Youth League that disregarded normal ANC processes has been stymied and there will now be a sober assessment of the options “in accordance with ANC traditions”.
However, the source does acknowledge that the danger of nationalisation remains and he recommends the mining industry becomes involved in “proactive and sophisticated” action to influence the State’s study rather than adopt a “wait and see” attitude.
That sounds a lot like what Scholes is saying but in far blunter terms.
Says Scholes: “The industry needs to make a greater effort to get Government to understand just how disastrous nationalisation would be for SA’s mining sector and the entire country. It’s clear to me Government has no real comprehension of the complexity of the mining business and the very real difficulties inherent in running mines in SA.”
The huge problem for shareholders in SA mining companies is that the merest whiff of the possibility of nationalisation will do severe damage to their investments. Royal Bafokeng Platinum spelled it out in its pre-listing statement, stating: “There can be no assurance the position of the SA Government regarding the issue of nationalisation will not change in the future. Any perception nationalisation may occur could have a material adverse effect on the trading price of the company’s securities.”
And that assessment comes from a group you’d think has bulletproof empowerment credentials, ruling out any chance of the nationalisation of its assets.
ALTERNATIVE INVESTMENT OPTIONS
Don’t panic! Why not do a swap?
You do have options to minimise possible damage
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 (ETF) 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, north of 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!”
foreign mining shares
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. If Hulme Scholes is right about the possibility of nationalisation of SA’s mining industry, then one obvious strategy is to take full advantage of that investment allowance while the rand is currently so strong. 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”.
For the past few weeks Scholes has been giving a presentation titled “The road to nationalisation” to top executives at banks and mining companies. His message is straightforward: “Nationalisation is happening now and the mining industry needs to catch a wake-up fast.” He adds that his driving motivation is to shake SA’s mining industry out of its “complacent attitude” because he believes it’s “apathetic and unaware of how much work Government has already done on a nationalisation initiative”.
Scholes is also highly critical of the role played by the Chamber of Mines. He comments: “I believe Government views the chamber as a discredited organisation it doesn’t take seriously. That’s because Government sees the chamber as a relic of the country’s apartheid mining past. The end result is the chamber isn’t functioning as an effective interface between the mining industry and Government.
“For me, a good example of that was the promulgation of the Codes of Good Practice in April last year – where the chamber’s comments were simply ignored.”
The mining industry doesn’t appear to be worried, with one executive dismissing Scholes’s views as “alarmist”.
Gold Fields CEO Nick Holland says: “All indications from Government are that nationalisation isn’t official policy and there’s nothing in our interactions with Government that leads us to believe it will change its stance.”
In his latest annual review, DRDGold CEO Niel Pretorius reckons nationalisation “is simply being given too much airtime by the media. Both our President and our Minister of Minerals have been clear and unambiguous in stating the current Government’s position on this issue”.
Actions speak louder than words, and miner Xstrata clearly believes nationalisation isn’t on the cards, otherwise there’s no way the group would be pumping in R4,9bn to expand its ferrochrome production facilities in SA. Xstrata Alloys spokesman Songezo Zibi says: “The amended Mining Charter doesn’t countenance nationalisation of existing mines and related operations in SA. Accordingly, Xstrata remains committed to the sustainable transformation of the South African mining industry.”
And yet, Scholes is no lightweight. He’s one of the top specialists on SA mining legislation, which he’s been dealing with since 1993. Prior to his current position as mining law consultant at CJM Corporate Advisers he was a director of Aquarius Platinum SA and before that a director at Werksmans Attorneys.
Scholes’s view is SA’s mining industry is being “set up for failure” because there’s no way it will be able to meet the black empowerment targets set out in the revised Mining Charter and the codes to be achieved by the 2014 deadline.
In particular, he singles out the requirement that the empowerment shareholder’s stake in any mining operation be unencumbered by that date to be counted towards the target of 26% “net value” in a mining operation, as required by the codes. “Those failures will provide the political justification for radical intervention by the State in the mining industry to achieve its transformation objectives.”
Scholes says the vehicle to be used will be the “State-owned mining company” over which Parliamentary portfolio hearings were held on 28 May. He comments: “The statement by Government that nationalisation isn’t policy is hollow. Draft legislation for the creation of a State mining company is inevitable – and that’s how nationalisation will take place.”
Scholes believes the State mining company will take over the existing African Exploration Mining Finance Corporation (AEMF), a wholly-owned subsidiary of SA’s Central Energy Fund. AEMF has already sent shock waves throughout SA conservation circles due to the cavalier way it’s set about exploring in environmentally sensitive regions wisely left alone by the private mining sector.
By way of explanation – and as a harbinger of what might still be to come – Scholes points to the string of exemptions AEMF has been granted by Government to the regulatory requirements a private sector mining company must meet. Those exclude AEMF from complying with requirements for prospecting rights, bulk sampling permission, mining rights and permits and the need to meet various environmental management requirements.
Positive spin from some in the mining industry in the debate over the “N” word is the view the ANC has effectively neutralised nationalisation’s main protagonist – the ANC Youth League – until 2012. One well-placed mining sector source says: “The decision by the ANC National General Council to carry out a study on nationalisation as part of a broader look at the role of the State in the transformation of SA buys time, because nothing can now happen until the 53rd national conference in 2012, where the study will be discussed.”
He says the “panic” approach of the Youth League that disregarded normal ANC processes has been stymied and there will now be a sober assessment of the options “in accordance with ANC traditions”.
However, the source does acknowledge that the danger of nationalisation remains and he recommends the mining industry becomes involved in “proactive and sophisticated” action to influence the State’s study rather than adopt a “wait and see” attitude.
That sounds a lot like what Scholes is saying but in far blunter terms.
Says Scholes: “The industry needs to make a greater effort to get Government to understand just how disastrous nationalisation would be for SA’s mining sector and the entire country. It’s clear to me Government has no real comprehension of the complexity of the mining business and the very real difficulties inherent in running mines in SA.”
The huge problem for shareholders in SA mining companies is that the merest whiff of the possibility of nationalisation will do severe damage to their investments. Royal Bafokeng Platinum spelled it out in its pre-listing statement, stating: “There can be no assurance the position of the SA Government regarding the issue of nationalisation will not change in the future. Any perception nationalisation may occur could have a material adverse effect on the trading price of the company’s securities.”
And that assessment comes from a group you’d think has bulletproof empowerment credentials, ruling out any chance of the nationalisation of its assets.
ALTERNATIVE INVESTMENT OPTIONS
Don’t panic! Why not do a swap?
You do have options to minimise possible damage
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 (ETF) 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, north of 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!”
foreign mining shares
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. If Hulme Scholes is right about the possibility of nationalisation of SA’s mining industry, then one obvious strategy is to take full advantage of that investment allowance while the rand is currently so strong. 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”.
