South Africa: Mining tragedy weighs on corporate finance

By:
Dominic O’Neill
Published on:

Moody’s downgrades sovereign; Urge to broaden employee shareholding

Strikes and disturbances in South Africa’s mining sector continued last month, after the police shootings of 34 miners in August. The events contributed to Moody’s downgrading the sovereign from A3 to Baa1 in late September.

Bankers in Johannesburg say that in the longer term, the events will also have a big impact on corporate finance, especially in mining. Asset swaps between mining groups, for example, might be necessary to rationalize the configuration of mining shafts within the mineral belt. Furthermore, bankers say mining-industry consolidation is now more urgent.

Although platinum prices have risen 20% since the strikes, prices have fallen overall since 2010. Higher wage settlements trade unions have won, as well as safety stoppages, have also affected South African mining firms’ profit margins, according to Citi research. Now further wage concessions are happening.

Asked about growth for banks in South Africa, Mike Brown, CEO of Nedbank, says that, as the unsecured-credit sector slows, corporate activity could pick up, and the mining sector could play a role. "Mining-resource players are in a tough place," he says. "In general, if a sector is under pressure, it is often the catalyst for M&A activity that, in turn, can provide advisory and lending opportunities for banks."

Overall, bankers say it will be the better capitalized and more experienced Black Economic Empowerment (BEE) groups – including, perhaps, Exxaro and African Rainbow Minerals – that could lead consolidation.

BEE groups aim to increase black ownership of South African corporations. They benefit from industry charters on black ownership, and although some experienced troubles during the financial crisis, others remain among South Africa’s biggest business conglomerates.

One example is the Shanduka Group: it has stakes in several South African corporations, including the local McDonald’s franchise and Lonmin, the London and Johannesburg-listed platinum firm that owns the mine where the shootings occurred. Cyril Ramaphosa, Shanduka’s founder, chairman and 30%-owner, was a trade union leader in the 1980s and a key figure in the anti-apartheid struggle.

Today, however, bankers say the issue might be more how to restructure mining firms in a way that is not just politically feasible via BEE transactions, but also more sustainable in terms of relations with labour and mining communities.

The feeling is that if this does not happen, it could give more credence to politicians, as yet still on the fringes, who are advocating moves to nationalize assets in the mining industry. Indeed, BEE groups have come under increased criticism since the tragedy at Lonmin.

BEE structures criticized

Ramaphosa is not the only anti-apartheid figurehead or governing-alliance stalwart to own, or have owned, a large BEE group with holdings in the mining sector. Tokyo Sexwale’s Mvelaphanda Group is another example.

Criticism that BEE groups have served only to enrich a few has increased in recent years and there has been a move towards what is known as broad-based BEE. After the Lonmin tragedy, this trend is likely to increase, says Colin Coleman, head of Goldman Sachs’s South Africa office.

BEE deals in the mining sector will have to be focused on mineworkers and the communities around the mines, says Coleman. "Any new corporate restructurings or empowerment deals will have to think in that direction: how to expose mineworkers and communities to long-term wealth creation, perhaps via trusts established for the purpose of collective investments," he says.