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New mining charter:
what does it mean for SA investors?
Sanlam Private Wealth
Jun 22, 2017
Written by ALWYN VAN DER MERWE & SHIRAAZ ABDULLAH
There are two aspects of the new mining charter which will directly affect our valuation of companies in this sector:
There are several other aspects of the mining charter which are also likely to stymie investment in the sector:
In our view, the biggest challenge the new mining charter presents from an investment perspective is the fact that the goalposts are constantly shifting. BEE ownership has now jumped from 26% to 30% – how do we know this won’t change to 40% in future? The charter seems to be fairly prescriptive in some areas, but vague in others. There appears to be a lack of understanding of the economics of the industry and the current challenges of underinvestment and job losses. The absence of any collaboration with the private sector is also of grave concern.
The importance of the new mining charter should in our view not be downplayed – its impact may well spill over into the banking and other sectors supporting the mining industry, such as chemicals, explosives, steel, and mining equipment importers. Indirectly, if misinformed government departments are used to sway votes in the ANC’s leadership elections later this year, other sectors may also be at risk and subject to similar poor pieces of legislation.
The Chamber of Mines, which represents 90% of South African mining by value, has stated that transformation of the industry needs to be done in a sustainable manner. The charter has paid no heed to this, and the chamber has indicated that it will seek an interdict to suspend its implementation, taking the matter all the way to the Constitutional Court if necessary.
If a negotiated settlement is reached with the Department of Mineral Resources, it is likely to take the form of previous iterations of the mining charter. We don’t believe the charter will be implemented in its current form – it could very well destroy an already frail industry.
The proposals in the new charter have unfortunately had an impact on the performance of the local equity portfolios of SPW clients. We argued earlier this year that we still see substantial value in diversified miners Anglo American and BHP Billiton, even using conservative assumptions. We also hold Sasol and Mondi in our client portfolios, but we have no exposure to platinum or gold mining companies.
In its current form, the mining charter will impact Anglo American through its stake in Kumba Iron Ore and South 32’s South African coal assets. Sasol’s coal assets will be marginally affected. We don’t expect BHP Billiton to be impacted at all.
We maintain our view that despite the new proposals, the value in both Anglo American and BHP Billiton is still evident. Simply based on value, we won’t be selling at these prices. However, while the uncertainty and the potentially negative implications of the proposed charter provide the backdrop to investments in the sector, it would be naïve to expect strong performance by Anglo American in particular. Investors will naturally demand a higher premium for an investment where the risks are higher, which implies that these shares are unlikely to re-rate, despite our views on valuation.
From a broader portfolio perspective, we are concerned about what appears to be highly reactive policy formulation against the background of so-called ‘radical economic transformation’. We therefore still maintain a healthy exposure to rand-hedge counters in our local equity portfolios.
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