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SOVEREIGN MAN

Somebody send this guy a fruit basket!

Gold-Mine

September 13, 2012
Johannesburg, South Africa

The recent troubles in South Africa’s mining sector are unquestionably tragic. People have been shot. Others, jailed. Thousands of people are out of work.

Strikes are snowballing across the entire mining sector, and some companies (like Anglo American Platinum and Great Basin Gold) have even shut down their operations in a pre-emptive move just to avoid the risk of any potential unrest.

As a result, the economy is taking a big hit at a time when the growth is already tepid and the unemployment rate is north of 20%. And there’s still potential for things to get worse.

Most of the mine workers aren’t getting paid right now, and at some point, a few of them will want to return to work. After all, these people have families to feed. But with thousands of protestors camping out at the mine sites, anyone who is caught returning to his job will probably be killed by the mob.

Meanwhile, disgraced former politician Julius Malema, who was cast out of his own party last year, has been using the crisis in a desperate attempt to vainly re-assert his political relevance. Malema has been holding rallies to stir hostilities, and he now claims to have ‘taken over’ leadership of the struggle.

All of these problems are indicative of much wider issues across South Africa– inflation, political corruption, substandard infrastructure, dysfunctional labor laws, etc.

The market is clearly concerned about what’s happening. The South African rand has been weak for months due to the slowdown in China and debacle in Europe; but since the crisis began, it has dropped even more. For investors, this represent significant opportunity.

You probably know the old adage (attributed to banking tycoon Baron Rothschild, ‘the time to buy is when there’s blood in the streets.’ Well, South Africa is getting pretty close to falling in that category.

Real estate is a great example; the market here is already quite soft due to the weakening economy. Prices have fallen hard since the 2008 peak and 2010 recovery. I’ve been looking at a number of deals in the Western Cape where prices are off nearly 70% in terms of local currency from just two years ago.

But when you factor in the weak rand, foreign investors holding US dollars now have an incredible opportunity to scoop up high quality assets on the cheap– something that hasn’t been seen in this country since at least 2002.

Frankly, investors ought to send Malema a giant fruit basket… because every time this guy opens his mouth, the rand drops. That makes South African assets even cheaper for foreign buyers.

Despite all the problems in the near future, South Africa is on solid ground in the long term. The country is still blessed with an abundance of natural resources. Tens of millions of people are being lifted out of poverty and into the middle class. People have disposable income for the first time in their lives. It’s exciting to see.

Moreover, South Africa is the de facto capital of one of the world’s fastest growing regions. 66% of the world’s uncultivated farmland is on this continent, not to mention vastly untapped mineral wealth. As the rest of Africa develops, South Africa will be a substantial
beneficiary.

Simply put, in South Africa I’m finding some of the best deals I’ve seen in years anywhere in the world for top quality assets. There are a lot of ‘quietly’ distressed assets, and banks have a big appetite to write off losses and clean up their balance sheets.

Meanwhile, there are plenty of publicly listed mining companies on the JSE trading with double digit dividend yields and low single digit yields at less than book value. Investors definitely ought to give this country some consideration.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Vinnie

    Interesting observations. Just my 2cents worth having lived in South Africa most my life. You are correct about unemployment being north of 20%, it is actually closer to 35% but kept artificially low as the “informal market” is excluded from the statistics These are fruit sellers on the pavements and chaps selling coat hangers, pirate DVD’s etc at traffic intersections. A difficult number to tabulate but serves the purpose of the Government to reflect reduced unemployment figures. Those “actively seeking work” are also excluded from the unemployed tally.
    Bear in mind that gold production levels are currently lower than they were prior to World War 1. South Africa’s revenue growth has not been due to a expansion but rather due to the weakening rand vs US Dollar. A number of mines have shut over the last couple of years. With the current push for higher wages the production costs will soon put a number of smaller mines out of business, causing a further “Malema dilemma”
    I am currently looking at real estate in central and south America rather than South Africa as I do believe the long term prospects are more favorable there. There is just too much uncertainty in South Africa at the moment. Don’t underestimate Malema. Many think he is a standing joke but don’t forget that he has the following of the masses………and this is Africa.

  • Marc

    I don’t think I would buy farmland in Africa. Africa is covered in what are called “paleosols”, which have lost any fertility ages ago, and persist only because they haven’t been driven back underground by geology yet. The places where Jim Rogers reported “rich, fertile soil” are in countries which get waterlogged badly during a large part of the year, which prevents the organic material from breaking down aerobically and evaporating.

    African soils, with few exceptions, are also chronically low in selenium and other micronutrients. The mutation that created pygmies is an adaptation to the lack of iodine and selenium. Add to that all the world’s most horrible diseases and a good number of deadly poisonous things, and Africa just isn’t that great. South American farmland is infinitely better (except Brazil).

  • philip9876.com

    Whenever a large project is launched, its sure to throw thousands of families out of their houses. Why cant the govt in the first instance talk to these people, the stakeholders, make them understand the work they are doing, find out the people’s grievances and give them alternate solutions? Why try to bulldoze all the opposition. No wonder the fringe elements jump in and try to politicise and criminalise the situation. Tragic.

  • Joel

    I do not agree with this article, SA is going down the drain, and like a snowball it gathers more snow as it getting down. Public education and health system have totally collapsed,about 90% of population is already corrupt,all public services have deteriorated and it takes months if not years to have anything done in any government or municipal office.Eg. people who sold their property wait for up to 3 years to have their overpaid taxes returned ( if at all). Schools have no books to teach children with, hospitals have no linen, medicines and food for patients,electricity breaks down all the time, eg last Friday the C section was performed with the cellphone light as electricity went down during this operation! In a meantime a small group of extremely wealthy people spend money as it was no tomorrow ( it looks as Marie Antoinatte in France just before French revolution)

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