Just how much is the South African government interfering with the operations of the country’s major mining groups through undue political pressure to save jobs at all costs?
The question has to be asked after the climb down by Anglo American Platinum (Amplats), in May, over its restructuring plans to cut 14,000 jobs. The company bore the brunt of a full-scale political assault and subsequently revised its plans to cut 6,000 jobs. There is also speculation that AngloGold Ashanti (AGA) had been denied permission by government to restructure its South African mines into a separate unit.
The bottom-line is that this level of interference could hurt both business prospects and share prices.
In the case of Amplats—the world’s largest producer of platinum—interference by government risks are not only keeping the group’s working costs higher than they should be, but also prolonging the oversupply in the market.
That is because the South African mines, which account for more than 75% of world platinum production, are being hampered in their actions to chop back on uneconomic output and so reduce the metal surplus, which is holding the platinum price down.
Holding platinum prices lower for longer would affect the entire platinum industry and not just Amplats.
The point was made clearly by GFMS research director, Will Tankard, in the consultancy’s 2013 Platinum and Palladium Survey.
Tankard says the platinum market was in a delicate position with any production recovery in South Africa likely to be very restrained. He expected mine supply to rise by “a small two percent provided restructuring is allowed to take place”. The situation on the gold mines is not as crucial for the gold price because the days when South Africa dominated the gold market, as the world’s largest producer, are long gone.
Investors would dearly love to know if the South African government blocked a proposal by AGA to separate its South African operations from its international ones, after allowing Gold Fields to go ahead with such a restructuring in February.
Newly appointed AGA CEO Venkat Venkatakrishnan is not telling.
“That’s market speculation and we never comment on market speculation,” he says.
That was in reply to questions at the group’s presentation in May, regarding its March quarterly results, which stated that AGA was reviewing its assets and that there might be another asset sale later this year.
Venkatakrishnan also drew attention to the poor response from investors to Gold Fields’ decision to split off its high-cost South African mines into separately listed Sibanye Gold, although he did not mention Gold Fields by name.
Assuming that AGA tried to split off its South African operations there is an immediate question: Why was it blocked but Gold Fields was able to carry out its restructuring with minimal hassle?
There are various reasons for that according to Gold Fields CEO, Nick Holland. He reckons it could have depended on the kind of restructuring AGA was trying to do, although he stressed that he also did not know whether AGA had approached government for permission.
“It all depends on what kind of deal AngloGold might have proposed. With Sibanye, we made sure we left those assets with plenty of financial juice and put them in a position where they could finance their own future growth. We were very sensitive to the issues around ensuring the sustainability of those assets into the future,” says Holland.
Holland added that Gold Fields had one major advantage in that the mines which the group formed into Sibanye—Kloof, Driefontein and Beatrix—were already housed in a separate company within the Gold Fields corporate structure, apart from the group’s foreign operations.
That restructuring was carried out a decade ago when Mvelaphanda Resources became the BEE partner for Gold Fields’ South African operations.
“As a result we did not need to get a whole lot of regulatory permissions to do the deal,” says Holland.
But Holland described undue interference in the mining sector as a hot potato, saying that restructuring of the industry and the way it does business was essential for its survival.
Last year, Holland reckoned the South African gold industry would largely cease to exist within five years, unless major changes were made to improve productivity.
“We are going to go down the slippery slope, that much quicker, if government does not listen to the industry,” he says.