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The mining sector’s biggest enemy

Jun 07 2018 11:28
David McKay

Generally speaking, mining stocks trade at a discount to the market, even the powerful ones that rank highly on the JSE such as Anglo American, Glencore, BHP and South32. 

These are multinationals producing a range of minerals essential to daily civilisation from a variety of geographies. They ought to be doing better as an investment offering.  

This was explored in a note by Bernstein, a New York-headquartered bank, which made the point that the sector operates in a market where demand growth has been continuous for the past 270 years. 

Moreover, the mining sector has no meaningful substitute to displace it; has incumbents that “enjoy a fundamental competitive advantage over any new entrants, holding completely non-replicable industry position”, and doesn’t have any radical industry disruption on the horizon.  

Mining stocks did, in fact, show a remarkable recovery last year after commodity prices staged a comeback following three or four years of reversion.

But on almost any metric compared against the broader market, they continue to trade at a discount, be it “price-to-book” or “price-to-cash flow”.  

Rising risks

Perhaps one of the factors that works specifically against mining company valuations is the increasing risk of environmental, social and governance issues, or ESG as it’s called.

Mining is considered potentially harmful to both the health of, say, communities that live in its vicinity as well as humanity and the planet in general.

There is a host of examples to draw from where ESG works to depress mining stock valuations. 

Goldman Sachs said in a recent note on Sibanye-Stillwater that notwithstanding the tragedy at its Driefontein mine in which six miners lost their lives following a seismic event in May, the accident would have no impact on its fundamental business case. 

Yet the protest made by the Association of Mineworkers and Construction Union (Amcu) around the event – some of it justifiable – which then drew public attention to subsequent, but much smaller and quite typical seismic events – unjustifiably – raised the ante on regulatory and workforce risk for the company. 

The fatalities were aired in Parliament among the members of a select committee and then taken up by the minister of mineral resources, Gwede Mantashe, who has called a safety summit for November.

Few other sectors of the economy are so at risk to political intervention than mining.  

Deaths and disasters

Although not listed in Johannesburg, Vedanta saw one of its large copper smelters shut late in May by India’s Tamil Nadu state following the deaths of 13 protestors who were demonstrating against the smelter’s poor environmental track record. 

It’s a heavy blow for Vedanta as the 400 000 tonne/year copper smelter was forecast to contribute about 5% to pre-tax earnings, according to a report by Goldman Sachs. The closure halves India’s copper production.  

“ESG issues are fast becoming prominent factors that influence investment decisions, particularly in mining,” said a UK-headquartered bank that is not permitted to be quoted by the media. 

It’s for reasons around ESG that South32, for instance, decided to divest from its thermal coal mines in SA.  

As early as 2016, a year into South32’s existence following its unbundling from the then named BHP Billiton, the group’s CEO, Graham Kerr, was raising the risk 
of having exposure to thermal coal. 

“We wouldn’t look for new coal investments as it’s not worth it for the investor exposure,” he said.  

As for BHP, it is contending the continuing fall-out of the Samarco disaster in Brazil in which a tailings dam, holding the discards of iron ore mining, burst, killing scores of people in the nearby village. 

The mine is jointly owned with Vale, Brazil’s state-run mining group.  

According to analysts, the potential legal action and censure following the disaster represents “an open liability”. Said one: “Open liabilities present high levels of uncertainty. 

Past examples highlight the uncertainty on timing and settlement cost. Timing can range from six months to over 20 years and final costs from zero to north of $65bn.”  

Silicosis settlement

In SA, there has been particular introspection among members of the Chamber of Mines, which has subsequently re-branded itself the Minerals Council of South Africa. 

A “council” sounds more inclusive than a chamber, which has more negative connotations – read echoing hollowness – than good ones.   

Mxolisi Mgojo, president of the council, said at its recent annual general meeting that a R4bn out-of-court settlement between the country’s gold miners and miners suffering from tuberculosis and silicosis contracted while employed on the mines was “one example of what can be done with good cooperation and careful strategic planning”. 

There’s also the prospect that the regulatory dissonance of the past three years will be replaced by greater agreement with the Minerals Council and the department of mineral resources undertaking to renegotiate the Mining Charter, although the final shape of that document is yet to be decided.

This article originally appeared in the 7 June edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.

business  |  economy  |  mining
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