South Africa mining sector two biggest risks

Wednesday, 07 Sep 2011

Many governments are looking at ways to get more money from miners as companies report record profits. The higher the returns and the higher the profits, the greedier governments become. As commodity prices rise governments try to boost their share of the proceeds from their countries energy and mining sectors.

Country risk
Where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.

Resource nationalism
The tendency of people and governments to assert control, for strategic and economic reasons, over natural resources located on their territory.

The major benefit for developing countries from natural resource development comes in the form of:
1. Employment/wages
2. Government revenues - taxes, royalties or dividends

There can also be indirect benefits such as knowledge and technology transfers. Foreign investments can also involve infrastructure investments, sometimes on a massive scale, like electricity, water supplies, roads, railways, bridges and ports.

The PricewaterhouseCoopers Mine 2011 survey highlights what governments across the globe are looking at in regards to the world’s top 40 miners:

1. Achieved net profits of USD 110 billion last year
2. Halved their debt
3. Built cash reserves of USD 105 billion
4. Announced capital programs of USD 300 billion for 2011

In 2011, resource nationalism became the number one risk for mining companies.

Miners are an easy target as mining is a long term investment and one that is especially capital intensive mines are also immobile, so miners are at the mercy of the countries in which they operate. Outright seizure of assets happens using the twin excuses of historical injustice and environmental/contractual misdeeds. There is no compensation offered and no recourse.

Mr Mike Elliott Ernst & Young Global Mining & Metals Leader said that “Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation.”

The result is a spate of recent news regarding resource nationalism:

1. A government backed ouster of Brazilian mining giant Vale SA’s CEO, Roger Agnelli. Brazil’s government is considering a proposal that would make it easier to raise or lower mining royalties depending on economic conditions and minerals prices as part of a broad overhaul in Brazil’s mining sector which includes revamping the licensing process and boosting state income from mining companies.

2. Panamarecently repealed part of its mining code allowing investments from foreign governments.

3. A handful of African countries have also increased tax revenue from miners in recent years ie Ghana plans to double royalties on mining to increase government revenues.

4. South Africa is pushing to nationalize its mines and banks. The Youth League wants the government to take 60% of private mining assets without compensation to distribute wealth and create jobs. As part of an empowerment driveSouth Africa’s mining charter already calls for 26% of the mining industry in Africa’s largest economy to be transferred to black owners by 2014.

5. Papua New Guinea introduced a plan to hand state ownership of mineral and energy resources to landowners a move that may prove disastrous to foreign miners and their shareholders.

6. President Hugo Chavez nationalized Venezuela’s gold industry.

7. Peruvian president Humala (recently elected) promised, during his election campaign, to initiate windfall taxes on mine profits and to harden tax and royalty regimes.

8. AustraliaandChileare proposing fresh tax or royalty regimes.

9. In the past 12 to 18 months at least 25 countries have increased or announced intentions to increase their government take from resources via taxes or royalties.

10. Zimbabwenow requires foreign owned companies indigenize their operations in the country by transferring at least 51% ownership to locals. Youth Development, Indigenisation and Empowerment Minister Saviour Kasukuwere rejected a number of foreign companies plans and set a 14 day ultimatum for the submission of what he considers acceptable plans.

Mr Scott Jobin-Bevans president of Prospectors and Developers Association of Canada said that “We know it’s tempting, at a time when government debt is mounting and metal prices are rising, for some governments to try to grab an even higher proportion of the revenue from mining. But we urge governments to remember that the cumulative effect of these unreasonable tax hikes will be to push up world prices and slow global growth.”

(sourced from Resource Investor)

SAfrica court orders release of Eskom-BHP price deal

Fri Aug 5, 2011

JOHANNESBURG (Reuters) - A South African judge on Friday ordered state utility Eskom to release details of an undisclosed pricing deal with mining giant BHP Billiton, which could prove embarrassing to both parties.

A local publishing group had requested the information, saying it showed a cosy relationship kept secret from the public in which Eskom provided electricity at cut-rate prices.

Judge Frans Kgomo said the release was in the public interest, radio broadcaster Eyewitness News reported.

Eskom spokeswoman Hilary Joffe said the company would not appeal the ruling.

BHP could not immediately comment.

Regulatory uncertainty puts investors off SA mine assets

Feb18, 2011
By Londiwe Buthelezi

Uncertainty about the regulatory framework and the outcome of the nationalisation debate is set to hinder mergers and acquisitions (M&As) in the local mining sector this year, compounding the outlook for the industry.

Investment analysts say the country is unlikely to see any jockeying by investors to plough money into deal making until there is clarity on key policy issues and power supply concerns are tackled.

Major mining companies, on the other hand, are increasingly considering disposals of non-strategic assets. That push partly reflects a bid by some companies to pare back some of the exposure to the risks now associated with the industry.

BHP Billiton Energy Coal South Africa is putting up some of its undeveloped coal assets for sale, and has invited tenders from parties interested in the assets.

Anglo American announced earlier this month that it had completed the sale of its Black Mountain Mining zinc interests in South Africa to Vedanta Resources for cash proceeds of $346 million (R2.5 billion).

Toby Mannock, the head of investment banking at Renaissance Capital, said asset disposals would be commonplace in 2011, if the investment climate was perceived to be increasingly risky, particularly to capital-intense, long-term projects.

He said international mining companies would undertake an extensive risk analysis when deciding to either acquire assets or dispose of interests in any geography.

“However, in South Africa, considerations will likely include technical mining risks like deep level mining, the rand’s volatility, local cost inflation and the political climate (for example, the nationalisation debate).”

Analysts say the country could lose out as investors are swayed by the emergence of new mineral wealth in the western parts of Africa.

Investment analysts say that, with other African countries increasingly revealing commodities in high demand, attention is gradually being diverted away from South Africa, which used to be the magnetic pole for investment in the continent’s mining sector.

South Africa has not seen a major deal in its mining sector since 2007, when Gold Fields acquired all the remaining Western Areas and the South Deep gold mine for R22.2bn.

According to a Zephyr report published by Bureau van Dijk, there were only 38 M&A transactions to the tune of e3.4bn (R33.5bn) in the South African mining sector last year, compared with 28 deals worth e2.71bn in 2009. In terms of value, the 2010 deals put South Africa in the bottom half of the top 10 biggest mining deals by value, behind Canada, Australia, Russia, China, US, Papua New Guinea and Brazil.

Rishon Chimboza, a senior consultant at pan-African investment consulting firm africapractice, said he expected a slowdown in mining M&As because shareholders did not appear to have much appetite to pursue major deals, with all the regulatory approval and price regulation they had to go through.

On the other hand, the picture is more encouraging for junior companies.

Percy Takunda, an analyst at Imara SP Reid, said: “In the junior platinum space there is always room for consolidation. But the problem is that they (junior companies) do not come widely discounted anymore.”

Peter Leon, a partner at Webber Wentzel, said the existence of regulatory uncertainty in the form of a more interventionist revised Mining Charter and the uncertainty around the proposed amendments to the Mineral and Petroleum Resources Development Act were some of the factors already pushing investors to look elsewhere.

This was not only detrimental to the M&A outlook but to investor confidence as well.

“The pending decision of the ANC with regard to mine nationalisation, coupled with the continuing difficulty that some foreign investors have in understanding and complying with black economic empowerment requirements, could hinder investment in the (local) mining industry,” he said.

Leon said clarity was necessary for investors to commit money in mining, particularly with its long lead times and massive capital expenditures. - (sourced:Business Report, www.iol.co.za)

Tags:high-vol (high volatility) met coal, political climate, Pan- African investment, Africanpractice, Mining Charter, technical mining risks, long-term projects, risk analysis, acquire assets,Anglo American Plc, Black Mountain Mining zinc, Renaissance Capital, capital-intense,