The recent cabinet reshuffle and Standard & Poor’s and Fitch downgrade to junk status has caused great concern for the South African economy as well as the mining industry’s future.
Perception of Policy Discontinuity and Capital Risk
Mining investment projects are long term and require political policy certainty and continuity for large capital commitments. Recent political reshuffling, rhetoric and manoeuvring have cast doubt on the direction of public policy and refocused investors on the risk to large capital investments in the South African mining industry.
As an investor, there is always worry about the decisions you must make and the mitigation of risks is complex as it is, and when there is uncertainty about what is going to happen then that worry increases.
Credit ratings agencies play a crucial role in determining the ability of governments, financial institutions, and corporations to pay their debts on time and in full.
Essentially, these institutions contribute to investor perceptions and credit risk.
It is also clear that populist narrative has reopened the nationalisation debate in the interests of political elite under the guise of radical economic transformation and combatting ‘white monopoly capital’.
Rising Commodity Prices
With some global stability influencing the markets, the demand for South African exported commodities is showing some signs of improvement in the slight increase in prices.
In addition, South African mining companies are finally seeing the benefits of operational rationalisation of the last 8 years.
Stability in the Rand
The rand has lost about 10% since Minister Gordhan was recalled from his oversees trip. A 10% weakening of the rand, if continued, will result in inflation going up by about 0.70%.
However, this is still stronger than last year’s average of R14.70/USD with the current levels of about R13.30/USD. Therefore, the current level of rand is not inflationary.
The instability of the Rand is a double-edged sword with some benefitting from the Rand depreciating, however, at the same time the mining industry imports a lot of equipment and resources and when the Rand depreciates, the mining industry then experiences an increase in costs which is not good for profitability and that is a big issue.
The Cost of Capital and the Cost of Investing into the Future
Mining is a long-term game and it takes years to mature, it requires confidence in legal and regulatory requirement and heavy capital as mining goes deeper.
If our sovereign credit rating has been downgraded and costs are rising the next line or parts of the economy which will be hit are the cost of capital and the banks and this can be seen with what happened with the index.
This creates concern that it will increase the cost of capital and the cost of investing into the future of South Africa’s mining industry.
With government borrowing and servicing costs going up the effects will reach almost every citizen and there is a much wider impact than just for mines.
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Risk Management for Mining Projects
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Although risks cannot be ignored, it is possible to plan for them.
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