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
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.