If you’re fed up with the doom and gloom and think that mining as an industry in South Africa is finished, you could do worse than check out the minerals sector — equity prices are up 30% this year.
Mining houses have been in the doldrums, with the sector plagued by policy uncertainty, load-shedding, ongoing labour disputes, and lacklustre demand and prices. But key South African-produced minerals — platinum group metals (PGMs), iron ore and gold — are, for different reasons, back in favour.
All are being boosted by a relatively weak rand caused by uncertainty about trade agreements between the United States and China and sluggish investment in emerging markets, coupled with weak economic growth.
Gold was trading this week at an eight-year high, driven in part by investors seeking a safe haven as US President Donald Trump continues to wage Twitter wars on his perceived adversaries.
The JSE’s gold mining index is up about 50% in the year to June 2019, versus 11% for the All share index.
Platinum group metals (PGM)prices have seen the Impala Platinum share price rocket 93% over the past six months.
Anglo American Platinum saw share price growth of 59% in the same period and on Monday its share price rose more than 5% after it predicted an 80% jump in earnings ahead of the release of its interim results in July.
In a trading statement, the company cited the “increase in the rand PGM basket price” as the reason behind anticipated high earnings.
PGM producers have seen handsome returns as the basket price of the precious metals has risen dramatically in the past year, driven in part by demand for use in catalytic converters in diesel vehicles.
Kumba Iron Ore expects a 160% jump in earnings, bolstered by high iron-ore prices and a weaker rand-dollar exchange rate. In a trading statement released in May ahead of its publication of its interim results in July, Kumba said headline earnings are “expected to increase by at least 160%”.
Local mining stocks haven’t had it this good since 2008, Bloomberg reported this week. “Thanks to surging iron ore, gold and platinum-group metals, a Johannesburg index of mining equities has climbed 30% this year. Miners account for seven of the market’s 10 best-performing stocks in 2019.”
The seven best-performing mining companies listed by Bloomberg are Impala (93%), Kumba (77%), Sibanye-Stillwater (68%), Gold Fields (66%), Anglo American Platinum (59%), Northam Platinum (44%) and AngloGold Ashanti (40%).
The rand’s 3.4% nosedive against the dollar over the past month has also improved the perspective for the country’s mining houses.
An investment analyst at Anchor Capital, Seleho Tsatsi, said the performance of iron ore has exceeded market expectations after the shortage in supply from Brazil’s Vale dam disaster in January.
“The big four Australian iron ore miners have had operational issues which put pressure on their shipment, so iron ore’s supply is quite tight this year,” he said.
The rise of gold, PGM and iron-ore prices is good news for a sector expected to face ongoing difficulties that could negatively affect its profitability and efficiency.
Higher prices for these metals comes against the backdrop of lower production. Data released in April by Statistics South Africa showed mining production was down 1.5% on a year previously. The main contributors to the decline were a 19.2% drop in gold production, 11.9% lower output in iron ore and a 7.2% decline in chromium ore.
The data showed mining production is in the red, but mineral sales increased 16.15% year-on-year in April. The largest contributors were iron ore, PGMs, coal and manganese ore.
The PGM performance comes in the wake of ongoing wage negotiations in the sector. Earlier this year, the Association of Mineworkers and Construction Union (Amcu) led a five-month strike during gold-sector negotiations with Sibanye. A deal was finally concluded in April.
For this year’s round of platinum-sector negotiations, Amcu has increased its base demands fromR12 500 — originally tabled during wage negotiations with Lonmin in Marikana in 2012 — and has asked for a basic wage of R17 000 a month, citing increased earnings for top platinum producers Anglo American Platinum, Impala and Sibanye.
Tsatsi said it was unlikely that the PGM negotiations will result in protracted industrial action, because Amcu has just come out of a bruising strike in the gold sector and would be “hesitant” to repeat the strike from earlier this year. “Unions will start at the very highest demands, companies will come out with a low demand and they will meet somewhere in the middle,” he said.
Portfolio manager at FNB Wealth and Investments, Edgar Mafoko, said investor interest in the gold sector is slowly returning, after years of prices languishing at less than $1 350 an ounce. Earlier this week gold prices hit their highest level in eight years, when the price reached $1 418.70 an ounce.
Mafoko said the boost in returns was unlikely to see increased production, because the industry is still recovering from disruptions in operations following the strike by workers at Sibanye, among other factors.
Mafoko said those gains come against the backdrop of a potential interest rate cut in July in the US.
Higher rates in the US and a stronger dollar “haven’t been good for gold and now … we have a situation where there might be rate cuts and generally the dollar weakening, and that’s why we’ve seen a surge in the gold price. Whether that will be sustained is a completely different story,” said Mafoko.
Mineral Resources and Energy Minister Gwede Mantashe told Parliament on Tuesday that the country should look to improve its energy sector to retain its status as a highly attractive investment destination for mining.
“Every time there is load-shedding, mines only produce a maximum of 70% of their capacity,” he said. “It becomes important for us to put our efforts in not only turning mining around but the energy sector in general and electricity generation in particular.”
Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian