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Mining investors weigh Zuma ousting

If a draft mining charter is the next political casualty, sentiment towards South African resources stocks might improve
February 15, 2018

International miners have a word to describe the challenges of operating in South Africa: ‘politics’. The catch-all term signals everything from perceived corruption, concerns over a lack of investment in infrastructure and accusations of heavy-handed regulation of an economically vital sector. Its use sometimes skates euphemistically over the country’s historic racial and labour divisions, and the empowerment and ownership redress that remain a contentious feature of the sector’s regulation.

Though long in the plotting, this week’s move by the ANC to force President Jacob Zuma from office has been broadly viewed as a positive instance of politics by investors in South Africa-focused miners.  Ahead the president's resignation – shares in Lonmin (LMI) and Petra Diamonds (PDL) were both up more than 7 per cent for the week, while Anglo American (AAL), which is headquartered in Johannesburg and has around a quarter of its capital deployed in South Africa, climbed 4 per cent.  

Movement in the shares of the more diversified South32 (S32), and the thinly-traded Tharisa (THS) was more muted. Indeed, the impetus for any market reaction is likely to remain company-specific. In general terms, investors are hopeful that Mr Zuma’s replacement, deputy president Cyril Ramaphosa, will move to resolve a long-running impasse over the terms of a draft mining charter.

The proposals, forcefully opposed by miners, include a new 1 per cent royalty on turnover, greater black and local community ownership rights and rules that mandate majority employment of black staff and the procurement of services from black-owned businesses. As it stands, the draft legislation is generally regarded as a deterrent to new investment.

Analysts at Liberum previously contended that while a President Ramaphosa would “undoubtedly boost sentiment from the current lows”, the South African economy – strained by massive youth unemployment – remains a poisoned chalice. One problematic element for South Africa’s miners, which are paid for their output in dollars, is the steady appreciation of the rand against the greenback. Though often volatile, the rand has climbed 19 per cent in three months, adding to miners’ cost pressures – as demonstrated by the recent fortunes of gold miner Pan African Resources (PAF).