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State of SA’s mining sector raises fundamental questions

Jun 11 2018 14:32
Leon Kok

The mining landscape in South Africa has changed almost beyond recognition during the past four decades, with the number of JSE mining and metals counters having nose-dived from north of 130 up until the 1990s to barely 30 today. 
  
This inevitably has impacted the relative performances of the sector’s domestic unit trusts. If anything, it’s been a massive roller-coaster ride with diffuse results. 

Leader of the pack, Coronation Resources Fund, for instance, produced a 64% return in 2016 and 26% last year. But its 10-year annualised return has been a mere 1.9%. 

The fund’s maximum gain since inception has been 93% and its maximum draw-down 58%.  

Does this tell us anything about the current state of the sector? Not really. 

More poignant perhaps are comments by veteran fund manager Peter Major, director: mining at Cadiz.  

SA was the top international mining investment destination for decades. Would you still consider that valid?  

No, not at all. In 1980 SA was almost 50% of the world mining market capitalisation. That is when SA’s mining market cap peaked.

Its number of employees and producers peaked in 1988. 

The Fraser Institute in Canada ranked SA 48th out of 91 last year in terms of its overall investment attractiveness for mining companies.

It ranked 74th out of 104 destinations in 2016.  

Would you consider this a biased finding?  

No, I don’t. There is always room for error, but the bottom line is that you need to be in the top 10 to be on people’s radar screens.

Who cares about number 48 or even 28? As Warren Buffett has always said, “keep the odds in your favour”.   

So how would you rate SA today?  

It’s probably as unattractive as it could ever be.  

What is your assessment of the country’s political leadership charged with mining?  

It couldn’t be managed worse. I’m not a conspiracy theorist, but in the years gone by I’ve found it increasingly difficult to believe this situation is not intentional, collusive and orchestrated. 

It’s just too deliberate to be a mistake.

Where has SA gone wrong?  

If you had asked mine managers in the 1980s and 1990s, they would have told you that the main problem was the unions. 

They had been given enormous power and didn’t care about managing it rationally and responsibly for the good of the country, let alone the industry. And, in the end, we saw power corrupted absolutely.  

In 1987 the gold miners’ strike brought everyone to their knees. It became apparent to mine management, shareholders and funders that they no longer had control of the future of these mines. 

This translated into the termination of real investors placing serious money into the sector.  

Then with Nelson Mandela’s release in 1990 emerged talk about the wholesale nationalisation of mines, which he initially endorsed. This was compounded with the change of regime in 1994 and all the policy changes that followed. 

Despite following a short respite, numerous pieces of legislation were introduced that culminated in the nationalisation of all mineral assets. The result was that overnight tens of billions of US dollars of mining assets became almost worthless.  

The situation was worsened further by the granting of massive control rights and obligations to communities that for the most part were hugely uninformed about mining. 

Today, no matter how rationally you act, the odds are still great that the community will trash you.  

What local stocks do you favour?  

I’m not comfortable with any local stocks because they are all under siege and operating in an almost impossible environment. If I were forced to place something in my pension fund, I’d probably go for BHP, Glencore and Anglo American. 

And note – all three have most of their assets and operations “outside” of the country.

In Glencore’s case, Ivan Glasenberg is driving the bus. He is investing in himself and his commodities trading division gives him an edge. If countries and commodity prices collapse, he can still make money.  

Are we still in a super cycle? 

The super cycle of the 70s and early 80s wasn’t a fairytale.

Several things precipitated it, such as the US coming out of the gold standard, the Arabs nationalising their oil, the breakdown of Bretton Woods and the US running up debt huge debt and inflation. 

That was predictable and justifiable and ran for about eight years.  

Likewise, with the new millennium commodity boom. You could see things lining up in the early 2000s and the boom lasted until 2013/14 (peaking in 2011/12). 

By early 2016 commodity prices had fallen for four straight years and nearly everyone had lost a lot of money. There were the Middle Eastern issues, Afghanistan, and China was flexing its muscles. Then came capitulation at the end of 2015. 

In 2016, a mini super cycle emerged for about two-and-a-half years, but which I think will now recede until 2020.

This article originally appeared in the June 2018 edition of FundFocus. Buy and download the magazine here or subscribe to our newsletter here

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