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South African Mine Woes Grow

If you want to keep your country strapped for cash, here’s a simple formula: Debate ad infinitum the possible nationalization of the country’s largest industry.

Discord in South Africa’s ruling African National Congress (ANC) has the party doing just that, resulting in stagnant government revenue and decreased private investor confidence. The industry at issue is South Africa’s stunningly lucrative mining of all sorts of precious metals and gems. The WSJ reports:

The ANC had suspended [its youth leader] Mr. [Julius] Malema for sowing discord in the party and bringing it into disrepute, charges that were related to comments he made last year calling for regime change in Botswana, a democratic and prosperous neighbor. While an ANC appeals committee Saturday found him guilty of those charges, it ruled that he could plead for a lighter sentence than the original five-year suspension.

Spurred by Mr. Malema, the ANC has engaged in a loud and long debate over nationalization, dividing the party and frightening investors.

The government is faced with two options. It could nationalize the entire industry, which involves a lot of investment to complete the process but could bring huge revenue increases — if the government turns out to be able to operate them effectively (a risk, as a lot of loyal party cadres will expect some mine management sinecures even if they are better at party politics than at this whole mining thing). Or it could tax private companies more, a cheaper option that would still bring in modest funds. But doing neither leaves investors in a state of flux, unsure if the government is friendly to their business ventures.

The allegedly corrupt President Zuma emerges the winner in the current power struggle, withstanding Malema’s pushes to oust him from party leadership. But the party nonetheless remains divided and increasingly unstable, a perilous state of affairs and something that investors will surely note.

Worth noting: mining is a business in which foreign investors make very large fixed capital investments in hopes of a long term return.  Political uncertainty affects the prospects for mining investments much more than, say, in tourism, where the upfront investments are lower and the payoff period is shorter. Fooling around with mine policy gets very expensive, very fast.

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  • Eric

    Perhaps the RSA politicians should read this article in The Economist about the actual prosperity in Ulaan Baatar resulting from the mining developments in the south of Mongolia.

    “UB is a boom town on the frontier of global mining. Hotels are bursting; the Irish pubs, of which there are several, are heaving with foreign miners, investment bankers and young local women with very long legs and very short skirts. French bistros serve steaks the size of tabloid newspapers. Dozens of cranes punctuate the skyline. The streets, empty 20 years ago, are now clogged.”

    I can say as an Aussie who is living in a coal mining area that mining is the only thing making us the luckiest of lucky countries in the current global financial gloom.

    At the same time in the UK they are complaining that companies are sitting on a cash pile of £731.4bn. They are doing that because there just aren’t projects which meet their risked hurdle rates of return. One commenter rightly says “You do not invest where you see considerable economic or political risk. You do not invest as an act of charity or with the intention of destroying shareholder value.”

    South Africa take note. You want golden eggs guys? Then keep your geese happy!

  • Gary L

    For more than a decade, the following link has been my primary source for South African news:

    OK, so it’s not exactly Alan Paton, but anyone who follows the comic strip Madam and Eve – SA’s answer to Doonesbury – will have a pretty good grasp of South Africa’s current political and cultural situation. The 2/7/12 strip addresses Melema’s suspension.

  • Toni

    “Worth noting: mining is a business in which foreign investors make very large fixed capital investments in hopes of a long term return.”

    So too is oil and gas. Companies can make multi-billion-dollar investments — in extracting the sludgy oil beneath Venezuela’s Orinoco River basin, say — only to have the ambitious, grasping likes of Hugo Chavez expropriate it. Oh, companies were thrilled to find oil off the coast of West Africa, “off the coast” being a place rebels and politicians have a hard time commandeering.

    Even if South Africa chooses to imitate Ulaan Baatar instead of Venezuela, companies will rightly be leery of investing large sums. The specter of expropriation has been raised and (think the companies) the specter might yet turn into the real thing.

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