South Africa: $563M Lost in Gold, Platinum Production

September 18, 2012 at 08:18

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The labor unrest that has spread across South Africa’s mining industry is pushing up borrowing costs for companies relying on Africa’s largest economy for much of their output.

Yields on Gold Fields Ltd bonds due October 2020 last week jumped to a two-month high after 15,000 workers at its biggest mine started an illegal strike. Rates on AngloGold Ashanti Ltd’s notes due April 2020, which traded at a premium to its Johannesburg rival before violence started at Lonmin Plc’s platinum mine in Marikana last month, have dropped, GoldFields gets half its output from South Africa while 66 percent of AngloGold’s production comes from outside its home market, according to latest filings.

The shutdown of mines because of labor upheaval, which has resulted in the death of 45 people over the past five weeks and criticism of the government’s handling of the violence, is pushing up dollar-borrowing costs, threatening to undo efforts by the Reserve Bank to stem slowing economic growth with an unexpected interest rate reduction in July. Rates on South African dollar-denominated corporate notes over emerging-market peers last week narrowed to the smallest gap since Jan. 6, according to JPMorgan Chase & Co. EMBI indexes.

“One of the reasons for the yield spread between AngloGold and Gold Fields has to do with where the two companies’ assets are located,” Rudi van der Merwe, chief investment officer at Standard Stockbroking, said by phone from Johannesburg on Sept. 14. “If the political situation in South Africa doesn’t change, it will become increasingly difficult for corporates to issue bonds at lower yields.”

South Africa is the world’s biggest platinum producer and depends on mining for 8.8 percent of gross domestic product, two-thirds of exports and about 500,000 jobs in a nation of 50.6 million, according to the South African Chamber of Mines. Fitch Ratings, Standard & Poor’s and Moody’s Investors Service have cut their outlook on South Africa credit to negative from stable since November, citing unsustainable spending and political instability in Africa’s largest economy.

Strikes over pay and working conditions shut down operations at Anglo American Platinum Ltd. and Lonmin, two of the three biggest platinum producers, and Gold Fields. At Lonmin’s Marikana mine, 34 people were killed on Aug. 16 when police opened fire at protesters who the police said were armed with spears, machetes and pistols. Another 11 people have died in violence at the mine.

Aquarius Platinum Ltd. on Sept. 14 said it is temporarily closing its Kroondal mine in the Rustenburg area near Marikana, while workers at an Xstrata Plc chrome operation in the same area were sent home as a precaution. The South African National Defense Force deployed about 150 army personnel to help quell protests at Lonmin’s mine two days ago, army spokesman Xolani Mabanga said by phone yesterday.

Yields on government bonds rose, capping their first weekly increase in four. Rates on the nation’s 6.75 percent bonds due March 2021 were unchanged at 6.78 percent by 5:10 p.m. in Johannesburg. The rand rose 0.1 percent to 8.1960 per dollar.

The shares of Gold Fields, the world’s fourth-largest producer, have slumped 4.4 percent strike started Aug. 10 at Lonmin’s Marikana operations. AngloGold, the world’s third- biggest, have gained 6.4 percent, while the shares of Toronto- based Barrick Gold Corp, the world’s largest producer, and Newmount Mining Corp, both jumped 21 percent. Gold for immediate delivery added 9.5 percent over the period to $1,770.52 an ounce.

“Why would you take a risk of buying South African mining stocks if you can buy an Australian or Canadian mining stock?” Ryan Wibberley, equity dealer at Investec Asset Management in Cape Town, said by phone. “Gold Fields and other South African miners have attracted a lot of selling on the back of labor unrest.”

Yields on Gold Fields’ 4.875 percent notes, rated BBB- by Standard & Poor’s, dropped 12 basis points to 4.96 percent on Sept. 14, 36 basis points higher than before the strike started at Lonmin. The rates on the bonds jumped to 5.08 percent on Sept. 13, the highest intraday level since July 11, according to data compiled by Bloomberg. Yields on AngloGold’s 5.375 percent security, which has the same S&P rating, climbed 16 basis points to 4.53 percent on Sept. 14, 10 basis points lower than on Aug. 9.

“We have seen very little impact on our bond pricing over the last couple of weeks, in fact the secondary pricing of our bonds are almost the same as early August,” Gold Fields spokesman Sven Lunsche said in e-mailed comments today. “The yields on our bonds make no difference as the rates on them are fixed,” Alan Fine, AngloGold’s spokesman, said by phone yesterday.

The number of protests in South Africa over issues from wages to living conditions is at the highest since monitoring began in 2004, with 88 percent of demonstrations in the past month turning violent, according to Johannesburg-based Municipal IQ, a research company. The ruling African National Congress holds leadership elections in December.

The mine violence could curb growth, production and exports, widen the current account deficit and deter investment, which would be “extremely damaging” to Africa’s largest economy, Finance Minister Pravin Gordhan told reporters on Sept. 14. Gordhan has said the economy will probably expand less than the 2.7 percent he forecast for this year in the budget, while the International Monetary Fund on Aug. 23 estimated growth this year of 2.6 percent.

The protests come as South Africa posts its biggest current account deficit in almost four years and a record budget shortfall in July after state expenditure surged. The gap in South Africa’s current account, the broadest measure of trade in goods and services, grew to 6.4 percent in the second quarter, the widest shortfall since the third quarter of 2008, from 4.9 percent of gross domestic product, the Reserve Bank said Sept. 11.

The extra yield investors demand to hold South Africa’s dollar debt rather than U.S. Treasuries was unchanged last week at 160, while the average emerging market gap closed 20 basis points last week to 281 on Sept. 14, its narrowest since April last year, according to JPMorgan indexes. South Africa’s 5.875 percent dollar bonds due in May 2022 rose 13 basis points today to 3.29 percent.

“It’s a negative cocktail of events that have all lined up,” said Conrad Wood, who helps oversee the equivalent of $8.5 billion of fixed-income investments, at Momentum Asset Management in Johannesburg. “Inequality, social instability and labor reforms are all high on the agenda of ratings agencies and while they’re looking at these very issues, they’re all moving in the wrong direction.”