South Africa missing the point…and the cage

As South African mines minister Susan Shabangu launches a North American roadshow, the Toronto-based Fraser Institute is releasing its 2010-2011 global mining survey, which ranks South Africa 67, of 79 jurisdictions across the world.

Over the past five years, South Africa has fallen precipitously from 37 in the rankings and in many subsets of the survey South ranks very close to countries like Zimbabawe.

 “South Africa remains a good investment destination”, says the Department of Mineral Resources (DMR), disagreeing with 494actual mining investors polled in the survey. The DMR will nevertheless be taking this message on an international road show slated for early March in Canada and United States”.

I wonder which part of the report the ANC, Shabangu and the Department fail to understand. Maybe they just do not understand the business they are trying to regulate and govern.

It costs R 2 billion to start a medium sized mine and it takes 10 years or longer before that investment shows any returns and then the returns are limited to 20 years; a risky business indeed. Wiil you put 50% of your pension money into such a venture? Will you put a cent of your retirement money into such a venture if you were to retire in ten years time?

If South Africa is going to create 8 or 9 mines a year, required to create 140000 jobs in Zuma’s plan, in the next ten years, we are going to need these investors. The industry cannot be sustained or create jobs by taking the mineral rights of operating mines like Sishen and handing it to someone else in South Africa without any fixed  investment taking place.

Examining the results of the Fraser survey it is clear investors are steering clear of the South African mining industry for a number of very valid reasons. The uncertainty caused by the regulatory environment mitigates against the high risk posed by South African mining. The high cost of labour, restrictions on the employment of skills because of affirmative action, the general shortage of critical skills and the cost of strikes erodes returns and creates a business environment where high risk and low return is the norm. Add to that the possibility that your “property” are threatened with nationalisation, appropriation by connected individuals and with Mugabe style invasions a distinct possibility, the apathy of investors are understandable; in fact as a shareholder I would praise their caution.

The truth of the matter is that the biggest mining companies in the world avoid investment in the South African mining industry, not because they are ill informed, on the contrary, it is companies like BHP Billiton, Rio Tinto, Anglo American and Goldfield, most of them with strong South African ties and roots, who are reducing their exposure to South Africa.   

What is significant is that the mighty BHP Billiton ignored South Africa in their $50 billion expansion plan. It is significant that DeBeers are selling their South African properties and are investing millions of dollars in the Snap Lake Mine, a hell hole, in the icy Northern territories of Canada. It is significant that Goldfields prefer to invest in a mine in Finland, a place where people are notoriously expensive, rather than in a relatively easy, cheap and simple Uranium operation in South Africa. It is significant when Xstrata prefers to invest in an Iron ore mine in Mauritania rather than acquiring South Africa’s Lonmin, the third biggest platinum producer in the world.

 It is even more significant when, despite calls for increased mineral beneficiation, the leading producer of ferrochrome in the world, halts the expansion of ferrochrome capacity and reverts to ore exports to China. It is a tragedy when the biggest BEE mining company in South Africa whose connections with the top office of the country are legendary, prefers to export chrome ore rather than expand their benificiation capacity because, whilst the returns from ore exports are smaller it ameliorates the risk of the investment in smelters.

Shabangu and her cronies think the investors are stupid. You do not have to be a rocket scientist to see the folly of investing in South Africa.

It is interesting to note that Zimbabwe have the potential to create a second Rustenburg; they can produce as much platinum as are produced in the Rustenburg area yet it remained largely untouched for two for the same reasons why people are avoiding South Africa. This situation will be exacerbated every another, more restrictive labour law is passed, or another property hijacked, or another call for nationalisation is made, even when Mugabe calls for the attachment of foreign mines because we, in the eyes of the investors are now not much different to Mugabe.

If the Zuma government is to turn the tide they will have to start dancing to a different tune; Umshini Wham is just not cutting the ice.

Rats and sinking ships

It is official; BHP Billiton’s announced what I’ve been saying forever. They are divesting their coal prospecting and mineral rights in South Africa, in other words they are getting rid of their future in this country. They did say they will be spending $1.5 billion in streamlining her current mines. That means, in effect they will speed up their mining; get us much of that ore, in which they have already invested billions of dollars, out of the ground as soon as possible whilst the global demand for coal is booming. This strategy is also known as sweating the assets and getting the last drop from the cow.

Those easily fooled by the $1.5 billion investment in the dying cow; rest assured $1.5billion is a drop in the BHP Billiton ocean, you will be interested to learn that even Susan Shabangu has seen through the plan and warned the likes of BHP Billiton not too rape resources in their hast to depart these shores.

In the interest of completeness it may serve us well to take note that 4 years ago BHP saw the writing on the wall and flogged the best, or ,at the worst, the second biggest Chrome and Ferrochrome company in the world, South Africa’s Samancor. They followed that with the sale of all their Diamond interests in South Africa and then during the global crisis they moved South African Aluminium capacity to Brazil.

Unfortunately BHP is not the only one who decided that running is the best thing to do, Rio Tinto has done the same and so has Anglo, they are just not saying it in so many words.

Jacob Zuma’s Leaking Begging Bowl

Tom Albanese, CEO of Rio Tinto, said that said the company was “underinvested” in Africa. This hot on the heels of the announcement recently that Rio Tinto sold a large part of their stake in Palabora Mining and a large proportion of their prospecting and mineral rights. 

Rio Tinto does not stand alone. In the past week Xstrata announced a huge expansion project in Mauritania. A company holding some of the best ferrochrome assets in the world right here in South Africa find Mauritania less risky than South Africa? Surely something is wrong?  

The Xstrata decision is better understood when we read that Mark Bristow, South African CEO of Randgold Resources, prefers to invest in a DRC project rather than a South African project. If that is not enough, Harmony Gold announced that a project to sink a new shaft has been canned. 

Why this nonsensical decisions? I’ll tell you why;

In SA your mineral rights could be stolen by the family and close connections of the President – Sishen, ICT (Zuma, Gupta) 

In SA the labour is expensive and uncompetitive, their laziness being insttutionalised by government and legislation 

In SA management are vilified and threatened.

In SA, what is not stolen by the connected has to handed over to connected politicians in BEE deals 

In SA there are no skills, the skilled manager’s work abroad for the big mining houses 

It is because of this that we have fly-by-nights such as Khulubuse Zuma and Kodwa Mandela starting up companies like Aurora Mining; companies designed to destroy value whilst filling the pockets of their principals with money from “investors” with dark agendas. 

It is no wonder then that people with “Ubuntu integrity” like Lazarus Zim – Chairman of Kumba and closely connected with the crowd who effectively stole the Sishen Mineral Rights from Kumba – the failed Tokyo Sexwale and Mzi Khumalo replaced people like Marius Kloppers (BHP), Mick Davis (Xstrata) and Jan Du Plessis (Rio Tinto) as the great South African Magnates. In the modern and transforming South African, mining magnate is understood to be someone like the crooked swindler and ANC darling, Brett Kebble. How much further shall we fall.

No wonder then that whilst the rest of Africa has to fight of Chinese investors, eager to get their grubby little hands on their mineral resources, Jacob Zuma has to make speeches in Beijing in a tone of voice one would normally associate with that coming from a beggar, urging the Chinese to invest in our resources. 

Perhaps Zuma will still learn that mining requires huge investment and investors, no matter how rich, will not invest in business that could be stolen or driven into bankruptcy by a workforce that does not know the meaning of the term, work ethic

The ANC, Australia and the Super miners

 

Some may wonder why South Africa missed the boat, so to speak, during the last resource boon. Why did most resource rich countries, notably some of our African peers and in particular Australia, outperform South Africa by miles?

The answer lies in the policies of the ruling party, and not having learned a thing, the brilliant Fred Gona, chairperson of the Parliamentary Portfolio Committee on Mineral Resources, having flipped the Chamber of Mines the proverbial bird by not reading their objections to the course being plotted, are dead set on engineering a “compromise” that will satisfy Julius Malema’s nationalisation dreams and the Anti-Malema faction with the establishment of a state owned super mining company to be managed in the same effective manner as ESKOM, SABC, Denel, Transnet and SAA; a company which will, with the assistance of the taxpayer, distribute great riches to the deployed and their patrons. Like Malema, the well informed Gona assures us that, despite popular belief and countless reports to the contrary, South Africa remain the most mineral rich country in the world.

Ever wondered why foreign investors are not falling over their feet to invest in this untold mineral wealth? To add substance to the learned Mr. Gona’s claims we just have to look at the Pamodzi/Aurora great gold venture. For those who have not followed the saga; a year or so ago, Pamodzi Gold Mining Company – a company scavenging off the remains of mostly worked out gold mines, effectively abandoned by the bigger players reluctant to invest in these carcasses because of prohibitive regulations, restrictive labour practices and other risks – ran out of cash. Having assured investors of a major foreign investor, who subsequently miraculously disappeared, they; Pamodzi, went into liquidation with the only benefactors the BEE partners and their patrons – the directors.

The liquidators soon announced that Aurora, a company high on big names – Zuma, Mandela and Hulley better known for mining dirt in Presidential trials – but light on management savvy; with the backing of a filthy rich Malaysian, will take over Pamodzi. For good measure they will ad Primrose Mining who owns mines that were mined to extinction a century ago, to their magnificent portfolio. The Malaysian disappeared into the remote forests of Borneo it seems; the mines produced nothing but polluted water which was pumped, untreated, into the surrounding streams; the workers were not paid and apparently starved of the property but these small challenges did not deter the great new age miners. They soon found a new backer but somehow the tight fisted greedy bastard became dodgy and, much to the delight of many – including the great number of ANC parliamentarians who lauded and cheered Malema’s nationalization submission to Parliament – the liquidators announced that a Chinese Consortium are preparing an offer to take over this poisoned chalice.

Given the hullabaloo over the super mining tax proposed by the Australian Government, with the giants of the Mining world BHP Billiton, Rio Tinto and Xstrata threatening to take their toys and go play elsewhere, many must be wondering why the global miners are so relaxed about the intention of the ANC and the future of their investments in South Africa, especially in view of Gona’s tales of the untold mineral riches lying below our soil. Truth is; they’ve are here; they’ve experienced mining in South Africa and they don’t like. The big players do not trust the direction of the industry, they dislike the uncompetitve labour set-up and anarchic unions demanding pay way beyond their skill level; they do not take kindly to the implied and the real threats to their tenure. Knowing Africa however, they remain condescending. Their attitude; keep quiet, patronize them whilst sweating the assets, discount the in the balance sheet, they build for the distant future, twenty-thirty years hence, when, like with Zambia and the DRC, they can walk right back in, this time invited, and, in the ashes of a decimated industry find a few embers to nurture and build into new industry on their terms.

The rosy picture of our mineral wealth, pictured by some, is belied by the behaviour of BHP Billiton, a company with its roots in South Africa and being steered by a South African. They have sold much of their interests in South Africa; amongst others a thriving Chrome and Ferrochrome business and diamond interests, simultaneously allowing licences and options in other minerals and oil to lapse. The BHP Billiton exit strategy is simple, milk ESKOM for what they can, sweat their coal and manganese assets and avoid green fields projects investment.

The BHP Billiton model is closely followed by others. Rio Tinto, chaired by a South African, has not made a significant investment in South Africa for ages, preferring to invest in Zimbabwean Diamonds and Namibian Uranium whilst flogging a large part of their stake in Palabora Mining Company, a dying and marginal asset, to BEE entities. Barrick, the world’s biggest gold miner only maintains a token presence in South Africa whilst expanding their operations in Tanzania. Norilsk recently got rid of all the technical expertise housed in their Johannesburg office, deciding to maintain a small administrative staff to keep an eye on their joint-ventures with the likes of ARM, whose chairman Patrice Motsepe, is not against nationalization as long as he gets enough for his, not insubstantial, chunk of worthless Harmony shares. Meanwhile Xstrata, another miner being steered along by a South African, having dipped their toes into Platinum mining with their Angloplats joint venture and a small investment in their own Elands Platinum Mine are not prepared to convert their 25% investment in major platinum player Lonmin into full ownership and are seemingly reluctant and circumspect with any new Ferro Alloy and coal investments, probably considering the risk as excessive.  

It is ironic that the mighty De Beers – on the bones of their backside because of some worthless South African assets and the loss of their marketing stranglehold – consider sending their explorers trudging, like Frank Zappa’s Nanook and the evil seal hunters, across the Canadian Tundra, to dig through the perma-frost and the deadly yellow snow (where the Huskies go) so that they can mine the rich diamond veins lying underneath freezing lakes, less risky than investing in South Africa. Anglo Ashanti would rather invest in the war torn DRC than in South African gold projects whilst Randgold Resources would, according to their great African Leader – Mark Bristow, rather face the logistical nightmare of building mines in godforsaken parts of Mali, Ivory Coast, Senegal, DRC amongst other, than face the insecurity of super miners like Gona and his political backers Malema and others. As if all of that is not convincing; the mighty Goldfields, unable to make much from “the biggest known gold-resource” in the world – South Deep, are now celebrating the success of their exploration teams discovering new deposits in Peru and whilst the production from South Africa are shrinking with the dawn of every new day; their investments in places like Ghana, Peru and Australia – in some instances they have to build their own power generation plants – are showing excellent returns in the wake of a high gold price.

To think that study tours to Venezuela will bring answers is rather foolish and a thinly veiled reason for another overseas trip. Perhaps the wannabee miners like Gona, Malema, Kulubuse Zuma and Kodwa Mandela, their friend Hulley and others like them should visit 3762countries that are struggling to rise from the ashes of socialist agendas and learn how to stay out of the quagmire. Perhaps Jacob Zuma should’ve dragged his friends from COSATU of to India to see how they the Indians work and find out why they can be competitive.

In Australia, when Kevin Rudd announced his populist “mining super tax”, his ratings initially shot up. However, the Aussies being relatively educated, and having assessed the effect of this tax on the goose laying the golden eggs, are now giving Rudd the thumbs down and his ratings are dropping. In South Africa, if a politician conjures a populist hair-brained scheme, any opposition to that plan will result in thinly disguised threats and punitive measures by deployed cadres, making life impossible for such opponent whilst hardening the resolve of government to destroy. Makes one wonder; what did those convicts that built Australia have?

The Graceful Flight of Money

It was reported in a recent study that South Africa was the third least attractive investment destination for international mining investors. The only African countries found to be less attractive than South Africa, was the DRC and Zimbabwe. Whereas environmental regulations and tax do deter investment in South Africa, the biggest deterrents remain the uncertainty as to the interpretation of new mining legislation, regulatory inconsistencies and misgivings about land claims. South Africa also received a poor score in terms of labour relations and security.

The aforementioned deterrents are caused by actions perceived to be negative, risky and counter productive Investor perceptions are reinforced by statements politicians make and resultant expectations based on past performance. The impact of affirmative action and BBEEE coupled with the behaviour of the DME and labour in the area of safety and health is having an impact on perceptions and expectations. The delays in the promulgation of the land bill coupled to delays in expected amendments to the mining charter and promised changes in Royalty charges, does little to change perceptions. On the contrary, they serve to create more pessimism amongst investors. Promises, by politicians, to turn the Northern Cape into a mineral powered Utopia, by distributing more of the areas’ vast “mineral wealth” to the inhabitants, do not go unnoticed. Statements about radical changes in economic policy and the ascendancy of labour in the new ANC leadership do not add to investor’s confidence. Few statements by current and future leaders during the run-up to elections inspire confidence with investors. We know, from experience, that many things said during election campaigns are empty promises, populist rhetoric and mostly outright lies. However, with players the likes of Mantashe, Vavi and Nzimandi involved, this time around may be different and we can expect some vigour in implementing the populist promises.

Understanding potential investors and the way in which they express themselves, always politically correct with words wrapped in layers of cotton wool, so as not to offend, hurt and compromise future opportunities. This in mind, the problem as mentioned in the report, is probably understated. The people we are talking about here have never felt the need to criticise Robert Mugabe; they just make sure they fly under the radar. Tony Trahar and Neil Pretorius of DRD remains two of very few  miners who had the gall to openly attack government and government departments, on these issues, Trahar’s reward for his effort was to, be branded a racist sell-out by Thabo Mbeki. The lack of protestations from the mine owners and potential investors, coupled with the flight of capital from the mining sector, confirms that actions speak louder than words. People may consider the silence of the investors and decision makers to be tacit condonation, their actions when they withdraw investments and participation, often under the guise of economic pressure, indicates otherwise. Their intent is shown by their actions and it is only the naïve and stubborn that ignores BHP Billiton who, despite having some of their roots in this country, sold assets (Samancor Chrome and recently their interesting in Petmin) whilst limiting new investments. Other Tier 1 Miners limiting investment includes Lonmin, Barrick and Rio Tinto, whilst Anglo-Ashanti, Goldfields and Norilsk have escape strategies in place, or are in the process of setting up such strategies. The naïve may insist on believing that the sale of Anglo-Ashanti had nothing to do with getting rid of the South African operations and the management restructuring at Goldfields was done in the interest of corporate efficiency. Foreign investment in South Africa reduced to a trickle in 2008 with an effective outflow in the last quarter. The JSE, during the past week , has been almost devoid of any foreign players.

The realists, the investors that vote with their money, sees a new South Africa with a strongly left leaning government with a lot of power in the hands of the Unions. They see a government where left leaning leaders with a labour background, Vavi and Mantashe, holding sway over economic and fiscal policy decisions. The actions and anarchy shown in the latest SATAWU strike – amidst desperate economic conditions and the worst lay-offs in South African history – are indicative of what can be expected in future. They see a continuing stubborn adherence to AA  in it’s current form, despite the failures and irreparable harm done to the economy to date They see a place where they will operate with their rights, to the minerals they mine, held over their heads like a sword. They clearly, in their mind, hear the words of Vavi saying to Manuel; “we know where to squeeze you if you step out of line”. With the likes of Gwede Mantashe having declared the intent of the government to establish a State owed mining company, investors can see the nationalisation of their assets becoming a real possibility, this despite assurances to the contrary. 

The sad part of this is the fact that people do not speak out. This “quiet diplomacy” is doing the country irreparable harm. We must heed the words of Mamphela Rhampele when she urges us to speak out against what is wrong, even at the prospect of being called racist and “Counter-revolutionary”.