Talk about nationalisation adds to the negative environment

International analysts and investors are increasingly viewing South Africa’s once world-leading mining sector – already suffering from a variety of serious pressures – in negative terms. The latest is a suggestion by Bank of America Merrill Lynch that Anglo American plc should split its international assets from its South African operation and thereby up its value by as much as 17%. Renewed talk about nationalisation is the last thing this sector needs, as the country’s largest employer.

The African National Congress Youth League (ANCYL) has been able to persuade its parent organisation to place the issue of possible nationalisation of South Africa’s mines on the agenda of its forthcoming National General Council, with the Youth League claiming it is not a matter of if, but how the nationalisation will be implemented.

Meanwhile, research by Bank of America Merrill Lynch concluded that Anglo American should split into two London-listed companies worth $30 billion and $34bn respectively. This is the second time within months that such a suggestion has surfaced in international financial circles. The same suggestion was previously made in respect of AngloGold Ashanti.

Such a move would lay both companies wide open for takeover bids from major competitors and it is unlikely that either company would follow this advice. The South African government is likely to oppose any such move vigorously.

It should nonetheless serve as a serious warning to the government to get its house in order concerning the mining sector. Furthermore, this negative judgement on the state of the South African mining industry is in a sense also an indictment of the broader South African economy, as a number of the underlying factors that negatively impact on the mining sector affect most other economic sectors in the country.

The mining sector was long recognised as the most prominent economic sector in South Africa, but in recent years it has slipped back from pole position to being only the fifth or sixth largest contributor to total gross domestic product. The sector is nonetheless still regarded as a cornerstone of the economy, but has in recent years been at the receiving end of a number of crises and negative developments, some of which are listed in the Bank of America Merrill Lynch report as part of the underlying causes of its negative perception.

Relief from the effects of most of these pressures lies within the political realm and thus within the power of the government to help effect positive change. Among the pressures and issues that are shaping these negative external impressions are the following:

·      Eskom power crisis: The Eskom electricity supply crisis in late 2007/early 2008, caused by an ailing national power supply infrastructure, had a severe impact on the mining sector, with more such problems being anticipated from 2011 onward;

·      Global recession: The Eskom power crisis was followed by the global recession in 2008/2009, which impacted severely on the mining sector due to a fall in exports and commodity prices;

·      Labour laws: An often cited impediment to economic growth and investment In South Africa, which also impacts adversely on the mining sector, is the country’s rigid labour legislation regime that is stacked in favour of labour. This has further contributed to ongoing falling employment rates in the country, with the focus shifting to mechanisation;

·      Labour demands, strikes: Coupled closely to the rigid labour law regime in South Africa, are the high, often unrealistic wage demands by labour unions, frequently leading to militant labour action. In its 2010 outlook for South Africa’s mining industry, Frost & Sullivan warned of unions exploiting the recovery from the recession to demand unrealistically high wage increases;

·     Exchange rate: The volatile rand exchange rate has frequently been criticised as making South African exports uncompetitive;

·     New order mining licences: While there were some concerns over the effect on existing mineral rights and some criticism of the government’s new Mineral and Petroleum Resources Development Act introduced in 2005, the new law did lead to a significant increase in transactions, with more foreign companies getting in on the local mining act. But there remain serious reservations about aspects of the Act, particularly pertaining to black economic empowerment (BEE) and abuses of the Act by those who are politically connected;

·      Corruption and the Kumba debacle:  A prime example of scepticism toward the new-order mining rights in South Africa, coupled to corrupt practices, is contained in the Bank of America Merril Lynch report. The report refers to the Kumba debale earlier this year when ArcelorMittal apparently failed to apply for a new-order mining licence for its share of the Sishen iron-ore deposit, with control over the deposit reverting to the state as a result;

·       Mining Charter and BEE: Analysts abroad – including the latest Merril Lynch report – are sceptical of South Africa’s mining charter introduced in 2002, which includes provisions for BEE and which compelled mining companies to reapply for mining licences and sell stakes in their businesses to BEE vehicles. The Merrill Lynch report is rather scathing when it concludes that “mining equity underperformed the wider market and miners with more exposure to SA underperformed the sector”; and

·      Nationalisation threat: Confidence in the future of South Africa’s mining sector is being negatively affected by the ongoing, much publicised threats to nationalise the sector.

The South African mining sector has consistently veered toward becoming less competitive in the global market due to some or all of the above factors.

There are many other examples. As the Bank of America Merrill Lynch report suggests, the problem is the overall mining environment in South Africa which, the report says, seems to move “from crisis to crisis”. The report states that it “really struggle[s]” to be positive on the outlook for the metals and mining industry in South Africa.

(For full report click here)