South African mines shunned in favour of foreign-listed peers
Commodities make up a large chunk of Africa indexes and foreign listings give exposure to their growth potential without the high risks connected with low liquidity, local currency, lax corporate governance and legal safeguards.
South Africa is Africa's biggest mining economy, but recent violent strikes have put 59% of the sector's platinum mines into marginal or loss-making position in 2012, according to the South African Chamber of Mines.
Many funds have dropped mining stocks, often on ethical grounds. The basic materials index, which is composed almost entirely of miners, lost nearly 12% since the start of 2012.
But investors are wary of being underweight for the sector. "We're under-exposed to that sector generally and we do want a bit more exposure," Shelley McKeaveney, who manages Neptune's Africa Fund, told investors at a lunch in London.
"With the trouble on the Impala Platinum mine in February last year we got a bit spooked and have been out of those stocks [South African miners]," she added.
Foreign listings, typically in Britain, Ireland or Canada, are often the only way of accessing commodity producers in frontier markets where few are listed on the local exchange.
McKeaveney at Neptune recently added mineral sand producers Ireland-listed Kenmare, operating in Mozambique, and London-listed Sierra Rutile, working in Sierra Leone.
She also invested in London Mining, an iron ore producer in Sierra Leone listed in London.
"These London-listed miners are very cheap. Sierra Rutile is on less than six times earnings," she said. This compares to a median price to earnings multiple of 23 for South African miners, according to Thomson Reuters data.
Labour relations in frontier markets tend to be less volatile than in South Africa due to a legacy of highly politicised unions in Africa's largest economy.
"I'd say the labour situation is much better in other countries," said Tyler Broda, precious metals analyst at Nomura.
"South Africa's unions have a very long history intertwined with the fight against apartheid and they are in a different place in terms of the mentality of the workers than more burgeoning countries."
Funds that understood the complexity of labour problems were fast to pull out of mining stocks or were already underweight.
"Our concerns about human rights in the South African mining sector have meant our exposure there is pretty minimal," said David Mcilroy, chief investment officer at Alquity, a pan-Africa fund that operates under a sustainable and ethical mandate. For Mcilroy incidents in South Africa were further evidence that investing along environmental, social and governance (ESG) lines is financially sensible.
"We don't invest in an ESG fashion solely for ethical reasons, we do it for hard-hearted investment reasons because we think it adds value," he said. Alquity invests in small or mid cap UK-listed commodity firms operating in Africa, such as London-listed oil firm Afren, which operates across the region.
"The hoops companies have to jump through tend to be a bit more stringent [for listing outside Africa] which gives it an added degree of comfort," Mcilroy said.
Going for a song
Others argue South African miners are now a bargain.
"You've got to acknowledge what the risks are, but the question is, are those risks priced into the shares? And we would argue that they are overly priced in," said Malcolm Gray, portfolio manager at Investec Asset Management in Johannesburg.
Gray has continued to add South African mining stocks, including some of the firms caught up in the unrest such as Anglo American Platinum and Impala Platinum.
Sven Richter, head of frontier markets at Renaissance Asset Managers, has a similar view but says the sustainability issue is one that investors now need to take into account.
As well as providing a return for investors, Richter said miners have to ensure the local community benefits as well.
"Any mine you invest in has to be aware of these issues and be dealing with them, otherwise you can get some nasty surprises." – Reuters