These are frustrating times for South Africa’s miners. Commodity prices have been on the rise fairly consistently over the past few years, although they have retreated a bit over the past month, amid concerns about the global economic outlook. China, India, Brazil and other emerging markets have been devouring minerals as fast as South African miners have been getting them out the ground. This is reflected in solid profits for JSE-listed miners.

BHP Billiton recently reported staggering annual earnings of almost US$24 billion, and other large mining firms, such as Anglo American and XStrata, are reporting record or near record-high results. Still, share prices of South African mining stocks have been languishing in the doldrums of late. Both the JSE mining index and the gold index are virtually unchanged from the level they were at a year ago. What is going on?
There are some fundamental pointers to the dark mood hanging over the entire mining sector. Foremost is the beleaguered state of the world economy, amid the double contagion of sovereign debt problems in many European states, as well as the high US federal debt. This has caused concern that the demand for metals and minerals could be affected by slowing demand, even though China continues to chug along quite nicely.

Then there is the political and social uncertainty that hangs over the SA mining industry like a sword of Damocles. At its most extreme, it’s the threats to nationalise mines by ANC Youth League president Julius Malema and the failure by the government to put the issue to rest, although ministers insist that nationalisation is not state policy. Inept management by the Department of Mineral Resources in the allocation of mining rights adds to investor concerns, which is further compounded by the militancy of the National Union of Mineworkers, with its successful push for double-digit salary increases and other costly remuneration packages. Finally, with the deadline nearing for the sector to implement the 2014 Mining Charter, companies are spending billions in facilitating black ownership, as well as meeting their other obligations under the charter. Putting it together, it is therefore not surprising that South Africa is ranked as one of the least investor-friendly mining destinations in the world by Canada’s Fraser Institute. In its latest annual rankings, South Africa was placed 67th out of 79 countries and regions. This makes the country a worse jurisdiction than countries such as Zambia and Tanzania, although still ahead of Zimbabwe and the DRC.

There are also ‘metal-specific’ issues, particularly around gold mining. As South African gold mines push ever deeper to access the gold-rich ores underneath the Witwatersrand and the Free State goldfields, it is becoming more costly to do so amid surging energy and labour costs, as well as continued high fatalities. It is thanks mostly to the high gold price of over US$1 600 an ounce that gold miners continue operating underground.
Furthermore, investors have preferred to put their money into exchange traded funds (ETFs), which have been proliferating in recent years, and which give them direct exposure to gold held in bank vaults around the world. Prices of gold mining shares have thus been languishing at levels that are well below their record highs of a few years back.

RBC Capital Markets analyst Leon Esterhuizen summarised the situation in a recent interview with the MiningMX website: “South African gold shares are trading at all-time low valuations relative to the gold price. That’s due to a significant political discount but also reflects low or no profitability from SA’s asset base over the past 10 years.” That fact that South African gold miners, such as AngloGold Ashanti (AGA) and Gold Fields, still manage to report good results is largely due to the strong gold price and, critically, due to their increasing internalisation in recent years. The rising diversification from their South African base is a theme that is common to all South African mining firms not just gold miners. Thus the majority of the earnings they are making now is reinvested not in South Africa but in other mining regions of the world.

There are exceptions. Gold Fields is investing over R8 billion in its South Deep mine and AGA has announced a major project to make its existing West Rand gold mines even deeper. Platinum and coal miners are also investing in extending their operations. But, on the whole, the overriding trend is to spread the risk by diversifying into other jurisdictions – most of them with a friendlier mining regime. Anglo American, South Africa’s largest mining company, now only derives 40% of its assets from the country, but its share price still gets hammered whenever talk about nationalisation makes the headlines.

For large diversified miners like Anglo American, BHP Billiton and Xstrata, the geographic diversification they have implemented, and are continuing to pursue, is matched by an increasing geological spread by mining a range of different metals. The thinking behind this is that the more different metals you have in your portfolio, the more immune you are to lower prices for one of them.

For specialist miners, like the gold miners, moving into other metals is not an option, and therefore geographical diversification has been the priority. Gold Fields now derives about 55% of its revenue from its non- South African operation, compared with about one third two years ago. At AGA, that percentage is even higher, at 60%. And there are no signs that the offshore expansion is letting up. AGA’s new big mines are in Colombia and Australia, while Gold Fields, apart from the South Deep project, is looking at Ghana, the Philippines and Peru for new projects to replenish its declining reserves.

This is frustrating the South African government in its bid to address rising unemployment among the vast majority of the potential workforce, which is unskilled or semi-skilled. But it shouldn’t be surprised – the government is making it increasingly difficult for SA companies to invest at home through a lax regulatory environment and by refusing to squash, once and for all, talk about the nationalisation of the country’s mining industry.