The Marikana margin

Oct 30 2012 12:19
*Jarred Myers

AS we revisit the Amplats dozen, the 12 000 fired and rehired, we do so with an unhealthy dose of schadenfreude. As detailed in my post two weeks ago 'you're f/ hired' the title proved to be prescient and not surprisingly so.

Both sides of the table understood that workers would be rehired but the conditions of returning to work this time are fundamentally different.

The stakes are now clear; organised labour may be able to halt industry but to do so their members need fall on the sword, not an auspicious model.

To recap on the different strategies employed by Amplats vs Lonmin discussed in the above-mentioned Op-Ed, Lonmin believed they were in wage negotiations and played the economic strategy to their detriment.

Amplats, with the benefit of hindsight, understood that they were in a political brawl and played a political strategy where they fired all striking workers, immediately drawing unions into the final stages of negotiations, pre-empting a replay of Lonmin's capitulation to disorganised labour.

As predicted with Amplats, once the workers were all fired and began burning through their cash flows which are handicapped at the best of times, miners placed pressure on their unions who in turn resorted to flaccid violence, but union leverage had been neutered and they succumbed to their members pressures as expected, returning to work, tails between their legs with no pay increase.

This is good news, because despite unions not being influenced by logic they are deeply influenced by human nature. Despite not understanding that any gains made in their short game will haunt their long game, they understood that mines could survive without production for longer than miners without wages.

So the miner burn rate, the rate at which they consume cash is essentially 100% in 1 month, a useful fact for anyone negotiating in this space.

Even more fundamental, the industry as a whole will need to factor this 'Marikana margin' into their risk strategies. A new paradigm in South African mining has dawned with the fateful Marikana mess.

Gearing ratios, the indicators of the extent to which companies are leveraged with debt will need to be lowered; anticipating strikes much like routine shutdowns.

Mines will look to the financial sector for precedence; banks are all too familiar with the false comfort of statistical probability. Once upon a time Wall Street took comfort in the belief that black swans and ten sigma events were mythical creatures like unicorns, events whose likelihood were once in ten thousand years, i.e. never.

Unfortunately, ten thousand years is shorter than it used to be and as it turns out unicorns do exist, we know them as rhinos and historical risk models have revealed themselves to be equally anti-climactic.

Stockpiles will fundamentally change, be they ore stockpiles where a solid month supply need be available or downstream stockpiles in smelting and refining where capacities and constraints will need to conform to the new paradigm.

Cash stockpiles will also grow; this belt tightening will impact growth significantly in an industry already reeling from low metals prices and cyclical downturns in demand.

More cash reserves means less growth, capital adequacy rates will rise, profits will dim.

Innocuous as this may sound its implications are vast, much like synergies in a merger means job losses, lower gearing ratios leads to other polite sounding phenomenon like downsizing, right sizing, stream lining and reorganizing, none of them good for the knobkerrie squad.

So as they return to their shafts, miners should not be asking their unions to negotiate higher wages, rather they should demand skills training because in the near future they will need the latter in the absence of the former.

The South African mining industry and quite possibly that of all emerging markets will henceforth be viewed through Marikana lenses.

Based on the level of workforce risk in a country the 'Marikana margin' will be applied in an industry with decades long pipelines by mining houses as they revaluate their strategic roadmap.

New investors may stand on the side-lines for years to come but let us not forget there are billions already sunk into current infrastructure and mine bosses will begin fast tracking returns on investment... stay tuned for a fresh slew of projects involving wham-bam-thank you-ma'am-mining.

 - Fin24

*Fin24 user Jarred Myers doubles as guest columnist.

marikana  |  mining unrest


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