How South Africa can kill foreign investment in mining

Nationalise South Africa's mines? There's not much left to nationalise, given the ongoing predations of crazed policymakers.

JOHANNESBURG - 

Julius Malema, often referred to as the leader of the ANC Youth League, has managed to elevate language to a new level of gobbledygook, previously unknown to humans, with his vented demands that South African mines be nationalised. Malema has been very careful to avoid any acknowledgement of foreign investment, assuming he has even countenanced such a rare beast, the key driver of South African mining investment for more than a century.

The nature of such financing is recognised in the name of a well known South African-founded mining house, Anglo American, founded in 1917 with capital from investors in the UK and US. This year alone, mining companies have raised tens of billions of dollars on global capital markets, outside any banking system. While a number of these companies operate in South Africa, and of course also often in other countries, in general, some of this cash is destined for investment, and re-investment, in South African mining ventures. That story may continue drying up.

In saying "welcome" to a "debate" on nationalisation of South African mines, ANC spokesperson Jesse Duarte likewise does not so much as mention foreign investment in a released statement. She reminded that "it is true that the nationalisation of banks, mines and the heavy industry is provided for in the [ANC] Freedom Charter". She argued that "it is necessary and important that any debate takes stock of what has happened, in this particular area, since 1955," when the ANC Freedom Charter was signed off.

While Malema looks for the next avenue to raise gobbledygook to art form, he too may come to realise that a few things have happened since 1955. For one thing, there is pervasive evidence of privatisation of previously nationalised mining assets right across the African continent. Starting with the brownfields resurrection of Ghana's gold fields in the early 1990s, mining has made a powerful reappearance on the world's most troubled continent. As this process has grown and intensified, spreading to previously communist chattels such as Tanzania, South Africa has dragged itself in the opposite direction, leading to a net contraction in its mining sector over the co-called commodities supercycle, which stretched from 2002 to mid-2008.

Since South Africa's first democratic elections in 1994, the mining sector has been increasingly harassed and chided, no matter how elegant the wording. The Mineral and Petroleum Resources Development Act (MPRDA) contains a fundamental principle: recognition that South Africa's mineral resources are the common heritage of all South Africans, and, ipso facto, belong to all the people of South Africa. The precedent for this is unclear.

The MPRDA vests the right to prospect and mine, including the right to grant prospecting and mining rights on behalf of the nation, in the state, to be administered by the government of South Africa. Thus, the state is the guardian of all mineral rights and has the right to exercise full and permanent custodianship over mineral resources.

By phasing out privately held mineral rights, the MPRDA nationalised the most basic requirement of an operating mine; viz. unfettered security of tenure. Miners were required to convert "old order" to "new order" mining rights, in return for being forced to comply with a plethora of onerous and interventionist regulations. Amid an awkward and souring alphabet soup, so-called Broad Based Black Economic Empowerment (BBBEE) underpinned the "mining scorecard" and set out "clear" targets for BBBEE. It was made law on 9 February 2003.

The scorecard measures ownership, management and control, employment equity, skills development, procurement, enterprise development, and socio-economic development. Mines were forced to adopt responsibilities way, way beyond any other kind of economic enterprise, say, a factory that manufactures basic steel products.

In short, mines were forced to become mini governments, effectively nationalised by the central government, but still obliged to pay tax, when profitable. If anything is left after that, and also pushing hard cash into ongoing capital expenditure, mines are allowed to pay dividends to shareholders, as a reward for risking their capital. For its part, national government has seemingly stood by as national standards of all kinds have deteriorated by the day, be it in healthcare, education, justice, or crime prevention.

By now, the country's skills shortage is legendary. The Mining Charter, together with the "scorecard" published on 18 February 2003 requires mining companies to ensure that HDSAs (historically disadvantaged South Africans) hold at least 15% ownership of mining assets or equity in South Africa within five calendar years, and 26% ownership within ten calendar years from the enactment of the new MPRDA, in force on 1 May 2004.

The Mining Charter further specifies that the mining industry is required to assist HDSAs in securing finance to fund their equity participation up to ZAR 100bn within the first five calendar years after the MPRDA came into force. Beyond this ZAR 100bn, the Mining Charter requires that participation of HDSAs should be increased towards the 26% target on a "willing-seller-willing-buyer basis at fair market value".

Given that the global resources sector has been under severe pressure for a year now, it would be no surprise to find any number of South African mining BEE deals sitting deep underwater. As a sample, in September 2007, Anglo Platinum, global leader in its field, announced the (enforced) sale of PGM (platinum group metal) assets to Anooraq Resources, for ZAR 3.6bn. The latter transaction finally exploded and imploded on 14 May 2009, with the announcement that the value of the deal would be reduced by ZAR 1bn in favour of Anooraq; further extensive details were added to the bail out package.

History shows quite clearly that some of the continent's most unforgiveable wealth destruction was occasioned by the nationalisation of mines. Not so many decades ago, countries such as the Democratic Republic of the Congo and Zambia ranked as genuinely wealthy economies.

The depredations of erstwhile dictator Joseph-Désiré Mobutu in the Congo are well recorded; in 1972, he renamed himself Mobutu Sese Seko Kuku Ngbendu Wa Za Banga (something like "The Great Unstoppable Warrior who goes from Victory to Victory"), and continued to loot the copper-cobalt mines in Katanga Province until some of the richest grade mines of their kind in the world were piles of rusted wreckage. The swathe of mining privatisation that has swept the continent over the past decade has seen a slow, but painful, return to some former glories.

Canada- and London-listed First Quantum, pretty much at the forefront of efforts to revitalize the historic copper belt that straddles the DRC and Zambia, acquired Zambia's Bwana Mkubwa in 1996, a grand old man of the copperbelt that exhausted the last of its own ore reserves in mid-2002; those "reserves" in any event were poor quality tailings from previous operations.

The mine had been worked on and off since its discovery in 1902. So tattered and torn was Bwana Mkubwa that First Quantum's acquisition was a straight commercial deal; the Zambian government wanted nothing to do with such a pile of trash. Responsibilities and capital demands have been severe; earlier this year, First Quantum raised CAD 346m in a share placing, and more recently raised USD 500m by selling convertible bonds. For new arrivals in the area, it has been far tougher going; Katanga Mining, which arguably holds one of the region's best brownfields sites, sits with a stock price that has fallen more than 90% from its highs.

Katanga Mining this week completed a massively dilutive USD 250m rights issue. For now at least, development plans are back on track; planned expansion could see copper production increase to 70,000 tonnes a year. It seems, however, that Katanga Mining will be looking for around USD 500m in extra funding over the net three years or so, to complete further development plans. If such funding is located, there is little question that the bulk of it, if not all, will come from private sector sources; the world's capital markets.

There is no easy money to be made in mining, not anywhere. Harmony Gold, which continues to focus heavily on South Africa, but is expanding offshore, is well ahead on its restructuring plans. But extracts from its cash flow statements for the past three financial years, to 30 June 2006, 2007 and 2008, show that it was heavy going for a group exposed even to gold bullion, which, among commodities, has been the least impacted by the severe punishment meted out over the past year.

Harmony was able to continue in business for the three years to 30 June 2008 essentially because it had financial assets for sale, and transacted, raising hundreds of millions of dollars in cash. In each of the three years, capital expenditure on new and existing assets was substantial, but not sufficiently covered by internal cash flows. Beyond raising cash from asset sales, Harmony was also able to tap, and refinance, bank debt.

Late in December 2008, Harmony raised nearly ZAR 1bn in a share issue, as private sector investors confidently backed its restructuring plans. This showed up the power of private enterprise, and just how a mining company beset with a muddling South African government could make it through a long night.

Sasol, which, like Harmony, is quoted both in Johannesburg and on the New York Stock Exchange, operates substantial coal mines in South Africa, but is best known for its downstream synfuels business, based on reformulated coal. The liquid fuels are sold - at prices linked to moves in spot rates for international benchmark crude oil - into the trade in South Africa, and comprise the bulk of Sasol's profits.

Sasol, which has been required to implement substantial BEE equity deals in both its mining and liquid fuels areas, ranks as one of South Africa's biggest taxpayers, in its own right. Its employees add to the tax take, as does the substantial imposts that are exacted from consumers at filling stations.

In the financial year to 30 June 2008, Sasol recorded overall cash turnover of USD 14.8bn (ZAR 124bn). Most of this cash flowed out of Sasol in the direction of suppliers and employees; after net financing costs, USD 1.2bn cash went to the tax authorities, leaving investors with a dividend of USD 693m. Additions to non-current assets, spanning various classes of capital expenditure, amounted to USD 1.3bn in cash, nearly twice the dividend paid to shareholders. 

As a potential PhD in gobbledygook, Malema does not see any detail. He puts it so: "We are vividly aware of the Minerals and Petroleum Resources Development Act, which retains State control of all mineral rights, but what we are calling for is State ownership and control of both the mineral wealth beneath the soil, and the extraction and production of these mineral resources in mines". He expresses some awareness that there may be some kind of a backlash: "The threats of disinvestment are simply threats that cannot disorientate the South African economy".

Disinvestment, the antithesis of foreign investment, could become an overnight reality; capital flight is a well-known phenomenon in global capital markets, and one of the most destructive and frightening. The importance of global capital markets clearly has no resonance with the likes of Malema; he preaches for an elite that wishes to "own" all mining production in South Africa.

There is no mention of how Malema proposes that such nationalisation could take place. Would there be expropriation and compensation, and would the compensation be market related? If no to all of these, would the process simply be one of confiscation?

South African gold mining stocks, listed in Johannesburg and elsewhere, are currently valued by investors at more than USD 25bn, in aggregate. While such valuations necessarily encompass gold mines that certain companies operate outside South Africa, the domestic see-through valuation would still amount to an aggregate running into billions of dollars.

While a crazed Malema and his crazed cohorts, not least COSATU, the loud mouthed congress of South African trade unions, and the comedy show Youth Communist League, continue with wanton and destructive talk, global capital markets lurch on. Just as Malema has referred to various bail outs offshore, he fails to mention that there's nothing that's gone the way of the global resources sector. On the contrary, miners have been supported by the most demanding off all capital providers, in the form of the private sector. Precious little has come from banks.

This year alone, London- and Johannesburg-listed Lonmin, with PGM operations in South Africa, raised the equivalent of just over USD 500m in a rights issue, amid a PGM sector that has taken severe pain under depressed PGM prices, and continues to take pain. Aquarius, a Tier II platinum digger, raised more than the equivalent of USD 100m in a rights issue;  other successful capital issues in the platinum space have come from Platmin, PGM, WeSizwe, Jubilee, and Pt Australia.

Great Basin Gold raised CAD 130m, mainly for the ongoing build of its Burnstone gold mine in South Africa's Free State province; AngloGold Ashanti raised USD 733m in a convertible bond issue; First Uranium has been involved in multiple issues for mine build purposes in South Africa; ditto, Simmer & Jack, and also Metorex, mainly for ongoing build requirements at its Ruashi project in the DRC. Uranium One raised the equivalent of more than USD 200m.

Among the transnational mining companies that operate in South Africa, Xstrata this year raised the equivalent of nearly USD 7bn in a rights issue. Anglo American, BHP Billiton, and Rio Tinto have raised billions of dollars this year selling corporate bonds; there has been a convertible from Anglo American, and a USD 15.2bn rights issue from Rio Tinto. Brazilian supergroup Vale today priced USD 942m in convertible bonds.

Vale is busy constructing a very substantial coal mine, one of the world's biggest, at Moatize, in Mozambique, a South African neighbour, for a capital cost of USD 1.3bn. Moatize is set to have a nominal production capacity of 11m tonnes a year, with production set to start up in the second half of 2010. In 2008, Vale signed a memorandum of understanding with the government of Mozambique establishing a railroad tariff; a port is being built, and Vale is building a big power station. Coal will be exported to Brazil, Asia, the Middle East, India and Europe.

To date, BHP Billiton has ranked as the biggest investor in Mozambique, given its 47.1% interest in Mozal, the aluminium smelter complex near the capital, Maputo. Along with Mitsubishi Corporation (25% stake in Mozal), South Africa's Industrial Development Corporation (24%), and the government of Mozambique (3.9%), USD 1.34bn was invested in Mozal 1, which was launched in 1998, and officially opened on 29 September 2000.

The Mozal 2 expansion project was approved in June 2001, expanding total smelter output from 253,000 to 506,000 tonnes a year of primary aluminum ingots. Mozal 2 was fully commissioned in August 2003, for a capital cost of USD 860m.

Vale, privatized in 1997, today ranks as the world's No 2 miner by value.

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Sell out if you can For the past 10 years, I've been telling anyone who will listen that SA is finished as a mining Country. It's over, for at least 100 years. Sell out if you can. To whom ? The Russians; the Chinese; the Indians. The Europeans, . .more Americans, Japanese, Canadians and Australians are all clued in and have long since gone home. Fred25 . .less by Fred25 on July 09 2009, 11:17 Find this comment inappropriate? Report it

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