When Anglo American persuaded South Africa’s government to relax exchange controls and allow the group to shift its corporate domicile to London, a central argument was that London domicile would allow it to raise money more cheaply for investment in this country.
Much the same argument was put by BHP Billiton when it moved domicile out of South Africa.
It has not worked out quite that way. And the latest financial reports from the two mining groups go some way to explaining why.
In a year in which most metals and minerals markets were taking off to record levels, you would have been better off invested in Australia, ”the lucky country”, than in South Africa celebrating its first decade of democracy. That, at least, is one interpretation of the latest results reports from Anglo American and BHP Billiton.
Of course, the outcomes of the two groups that make up about one-fifth of the value of all shares listed on the JSE Securities Exchange were not determined solely by geography.
This past year you would have done better producing minerals whose demand was directly linked to consumer spending, such as aluminium, rather than producing precious metals and gems.
Reporting in dollars, Anglo put in a very respectable performance during 2004, with group turnover rising by 28% to $31,8-billion and operating profit 58% higher on the year at $4,6-billion.
While the figures may not be directly comparable, BHP Billiton’s $15,5-billion turnover in the half year to end-December was 42% higher than in the comparable six months of 2003. And its interim $5,2-billion operating profit was two-thirds higher than in 2003.
Why? Give or take a few percentage points, almost one-third of BHP Billiton’s turnover came from Australia this past six months, while only less than one-sixth came from Southern Africa. And of this region’s contribution, a hefty part came from the Mozal aluminium smelter in Mozambique.
In contrast, well more than one-third of Anglo’s 2004 turnover came from South Africa against less than 6% from Australia and the Far East.
And 30% of Anglo’s operating profit came from gold, platinum and diamonds — all three hammered by the rand’s strength against the dollar.
As for BHP Billiton, only 7% of operating profit came from diamonds and specialty minerals.
Anglo has to diversify, out of South Africa and into a more balanced spread of minerals.
Sure, it has invested heavily in local iron-ore miner Kumba, but that is equity investment rather than investment in the establishment of new mines.
It has also increased its stake in Angloplats, the world’s largest platinum producer, but rand strength has persuaded Angloplats to scale back its earlier, ambitious mine expansion plans.
Worse, 45%-owned associate De Beers is talking of diamond mine closures here.
Anglo’s exploration efforts, like those of BHP Billiton, are directed towards base minerals in areas as diverse as Russia, Latin America, Australia, Canada and China.
Can this be put down to perceptions of political risk, tenure or simply the economics of minerals demand and prices and of currency expectations?
It is hard to tell. And Anglo chief executive Tony Trahar is unlikely to be caught out again by the unfortunate if sensible comment on country risk that triggered last year’s vitriolic broadside from President Thabo Mbeki.
If either of them does invest in greenfields developments here, our vicious exchange controls will almost certainly ensure than funding will be internal rather than sourced from abroad.
Anglo, for example, has already sold its 20% stake in Gold Fields and, in conjunction with BHP Billiton, is in the process of selling part of the chrome operations of jointly owned Samancor.
Both groups are ploughing capital into expanding their wholly-owned South African coal mines — eventual profits can and will be externalised.
Perhaps things will change if the rand tumbles sharply enough against the dollar to restore South African mining profits.
But remember, international groups do not plan short-term. Nor are they persuaded by national sentiments. They want the security that diverse operations offer.
South Africa, like other countries, has to live with that reality.