New South African Leadership is Credit Positive for Gold and PGM Mining

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Last Friday, at his State of the Nation Address, South Africa’s (Baa3 review for downgrade) newly elected President Cyril Ramaphosa said that he is certain that the impasse between mining companies and the government over the country’s revised mining charter would be resolved. Mr Ramaphosa emphasised the need for agreement to a charter that would grow the mining sector, a vital part of South Africa’s economy. He also indicated that the Mineral Resources and Petroleum Development Act (MRPDA) amendment bill (supporting legislation for the mining charter) would be reasonably finalised during first quarter of this year. The bill will entrench existing regulatory certainty, provide security for mining lease agreements and establish a framework for investment. Mr Ramaphosa, who was a successful mine labour union leader early in his career and has a strong understanding of the mining sector, said he intends to revitalise the sector and is determined to work with mining companies to attract new investment.

A resolution of the issues around the revised mining charter and the finalisation of the MRPDA amendment bill would be credit positive for AngloGold Ashanti Limited (Baa3 positive), Gold Fields Limited (Ba1 positive) and Sibanye Gold Limited (Ba2 stable). Net investment in South Africa’s mining sector has declined 57% over the past decade.

Following the spirit of the State of the Nation Address, South Africa’s Chamber of Mines, which represents most mining companies operating in the country, and South Africa’s Department of Mineral Resources agreed on Sunday to give negotiations a chance. One issue to which miners object is that the revised mining charter requires South African mining companies to increase black shareholders’ equity holdings to 30% from 26%. Miners would likely have to use cash or raise debt to facilitate the equity transfer. We believe that current shareholders are unlikely to support dilution of their equity interests.

Additionally a number of the revised mining charter’s proposals will add to the costs of operating mines and reduce free cash flow generation. One such proposal would require holders of new mining rights to pay a minimum of 1% of annual turnover in a given financial year to these empowerment shareholders, in accordance with legislative solvency and liquidity requirements and partly offset by ordinary dividend payments.

International investor optimism since Mr. Ramaphosa was elected leader of South Africa’s ruling party on 18 December 2017 has contributed to the South African rand’s 11.5% appreciation versus the US dollar to date. A stronger rand negatively affects South African gold and Platinum Group Metals (PGM) mining companies because their production and operating costs are mainly denominated in rand, but their revenue is earned in US dollars. Therefore, when the rand appreciates against the US dollar, dollardenominated operating costs increase relative to revenue streams given that gold, platinum and palladium prices are dollardenominated. To better assess cash flow generation, we use gold and PGM prices in rand terms which better represent profit margins.

The net effect however appears not to have had too much a damper on profitability for AngloGold Ashanti’s remaining South African gold operations, Gold Fields’ South Deep gold mine and Sibanye’s South African gold and PGM (around half of production is platinum and a third is palladium) operations. Over the same period, the US dollar gold price along with platinum and palladium (referred to as two-element PGM) prices have appreciated as the South African rand has appreciated. This has led to prices in South African rand being broadly stable. Rand gold (down 4.5%), platinum (down 0.4%) and palladium (down 9.5%) prices were down by less than the 11.5 % appreciation in the rand relative to the US dollar.

South Africa

 

By Douglas Rowlings, vice president and corporate finance analyst at Moody’s

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