At this week’s Investing in African Mining Indaba there has been far more positive sentiment towards South Africa than there has been for many years. With the local political landscape changing, there is reason to hope that the local industry can resolve many of its issues.
“Certainly the underlying optimism is much greater than it was 12 to 18 months ago,” says Allan Gray equity analyst Rory Kutisker-Jacobson. “If new leadership comes in, the 2017 Mining Charter is withdrawn and a new, more practical charter is negotiated, that would be hugely bullish.”
That doesn’t however mean that asset managers are piling into South African mining companies. There are still good reasons for caution.
The first is that the growing optimism towards South Africa has led to a much stronger rand. This may be good for the country more broadly, but it is a headwind for mining companies who sell commodities in dollars.
“I think that the impact of the strong rand is going to be severe,” says portfolio manager at Investec Asset Management, Hanré Rossouw. “We are not going to see it in results now, but in half year or full year results to June we will see it coming through the numbers.”
In addition, while the sentiment may be a lot more positive, the political and policy uncertainty in the industry still has to be addressed. Rossouw points out that even if a new minister were to take over the mineral resources portfolio, that would take some time to permeate throughout the department.
“We already saw a strong rally at the back end of last year where South African mining counters did reasonably well,” he notes. “We don’t think those prices are now reflecting the realities of the day.”
He is therefore taking a more cautious approach to investing in the sector.
“We’d want to see a proper shake-up at the Department of Mineral Resources,” says Rossouw. “We would like to have certainty not only on licences, but the principle of once empowered always empowered, and ownership targets. The hope is that potentially with a new cabinet and new mining minister we can get that clarity.”
Kutisker-Jacobson says that there is already a sense that government recognises that there must be a change in approach.
“There is a realisation that without much greater government support, the industry will be in decline, and that without certainty over property rights [makes] it almost impossible to invest,” says Kutisker-Jacobson. “We are seeing a greater understanding of that in government.”
If this kind of cooperation and positive engagement does take hold, then certainly there will be reason for investors to look more seriously at the local industry.
Rossouw says that something investors could watch is the level of interest from international companies for South African mining assets. Even what Anglo American does with its local interests will be telling.
“Anglo has talked about spinning off Kumba and potentially exiting South African platinum as well,” Rossouw says. “They may however be signalling a u-turn on that strategy. It will be interesting to see if they now adopt a wait-and-see approach.”
For the moment, however, the South African mining industry looks interesting for investors without being exciting. Investec is therefore still preferring the offshore, diversified miners.
Allan Gray does not have much exposure to mining at all, although it has begun to pick up some relatively small holdings in some platinum producers. Kutisker-Jacobson believes that valuations in this sector are attractive.
“We think that if you look at what’s happened in South Africa, primary supply has fallen from 6 million tons to 4.5 million tons,” he explains. “There is almost a structural decline and the industry has been starved of capital. We think at some point things will have to change.”
They have therefore been taking small positions in Impala Platinum, Northam and Royal Bafokeng.