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Ramaphosa a double-edged sword for mining companies

The so-called Cyril Spring has certainly put some esprit back into the SA mining sector. 

Roughly two months after Cyril Ramaphosa’s election as president of the ANC, it feels as if nine years of Jacob Zuma-linked skulduggery has been swept away. 

Although not given to emotional excess – or indeed much emotion at all – international banks and brokerages are talking of re-ratings of South African mining stocks, Anglo American principal among them.

“Anglo American’s valuation is at a 25% discount to its UK peers which, in our view, largely reflects an SA discount; however, we highlight signs of improving SA regulatory risk,” said JP Morgan Cazenove on a note about Anglo’s 70% owned Johannesburg-listed subsidiary, Anglo American Platinum (Amplats).

Chris Griffith, CEO of Amplats, told finweek that political developments, not to mention the company’s   own rehabilitation of its balance sheet, could completely alter how international investors see both his company, and Anglo as a whole.

“It [regulatory change] is certainly helping Anglo’s case for being a shareholder in platinum group metals [PGM],” he said. “The current political environment is very positive.”

The events of mid-February have been especially seminal in changing the investment mood. President Ramaphosa announced during his maiden State of the Nation Address on 16 February that he would “intensify” discussions about a redraft of the Mining Charter which, at the time, was heading for a three-day High Court review.

Two days later, the Chamber of Mines scrambled its PR machine to announce that the court review had been postponed because Ramaphosa wanted a negotiated outcome.

Tebello Chabana, senior executive director for public affairs and transformation at the Chamber of Mines, described the postponement, which came after Ramaphosa’s personal intervention, as “a leap of faith”, but investors are bullish. 

“The emergence of a more pro-business ANC should allow for an improved operating environment,” said RBC Capital Markets, a Canadian bank. 

Said Goldman Sachs in a recent note: “Mr Ramaphosa has a reputation for being market friendly and this has seen investors getting interested in SA after a long time.” 

The bank cautioned, however, not to get carried away: “We believe that the rally [in SA mining stocks] is premature and that any structural changes related to miners are likely to take time and in the meantime, a stronger rand will hurt the margins and cash generation of the SA miners, especially gold miners.”

Rand strength

South African mining stocks benefit when there are political shocks, because their costs are in rand but the price received is dollar denominated. 

It makes for a dubious business case that while political strife weakens the country’s business environment, it strengthens short-term revenue.

Speaking at the firm’s December quarter numbers, Harmony CEO Peter Steenkamp said the weaker rand per kilogram gold price “...simply served as a reminder to reassess excess costs – if any – and to cut back on expenses that do not support the core business”.

At the time of writing, the company was receiving R90 000 less per kilogram of gold produced owing to a combination of a weaker dollar gold price and the stronger rand – which strengthened by more than 14% in the past two months.

In the case of Petra Diamonds, which has most of its production in South Africa (it has a single diamond mine in Tanzania), the strength of the rand contributed towards it holding back some $60m in capital expenditure. “We will have to spend that later,” said Jacques Breytenbach, the firm’s chief financial officer. 

He also conceded that “significant further strengthening of the rand will affect our liquidity”.

Petra posted a pre-tax loss of $95.2m in the six months ended December from a previous interim profit of $51.6m, although it’s important to add that a large portion of the loss was from a write-down.

Some precious metal firms listed in Johannesburg are less negatively affected by rand strength.

Moody’s reported that the net effect of the stronger rand was not too much of “a damper on profitability for AngloGold Ashanti’s remaining SA gold operations, Gold Fields’ South Deep gold mine, and Sibanye-Stillwater’s SA gold and PGM operations”. 

“Over the same period, the US dollar gold price along with platinum and palladium prices have appreciated as the rand has appreciated. This led to prices in SA rand being broadly stable,” it said. Amplats’ Griffith acknowledged the same dynamic, but added: “If the rand appreciates heavily, we will just manage the business.”

What does seem apparent, however, is the long-term effect an improved regulatory environment could have on Anglo. Several analysts have pointed to the possibility that an easing in the business environment could assist Anglo in setting about fresh corporate activity.

Said RBC Capital Markets: “There is also a likelihood that Anglo, should it desire, could make structural changes to its corporate structure that could streamline previous challenges like capital controls on South African profits.”

This article originally appeared in the 1 March edition of finweek. Buy and download the magazine here.

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