Turmoil in South Africa’s mining industry.
The most immediate and obvious impact will be on global supply of the platinum group of metals. But since the big mining companies involved produce copper, gold, and other metals in their mining of platinum and palladium, the global market for those commodities will get tighter too.
At issue are laws designed to redress the inequalities of apartheid. The laws stipulate targets for black ownership, the employment of black mangers and women, and the economic development of communities near the mines. One goal of the legislation is to make up for the use of cheap black labor in the mines during white rule. Mining companies must sell a minimum 26% stake to black South Africans by 2014.
Mining industry leaders Anglo American (AAUKY.PK) and Lonmin (LNMIY.PK) say that the government has deprived them of mining rights. And that this threatens overseas investment (and therefore jobs—the two companies employ 100,000 in South Africa) in the country’s mining industry. (The industry as a whole accounts for almost 500,000 jobs in the country and for a little more than 5% of South Africa’s GDP.) With mine nationalization on the agenda of a September meeting of the ruling African National Congress, the disagreement seems headed to crisis.
The ore hit the fan in March when the national Department of Mineral Resources awarded a fifth of the prospecting rights in Anglo American’s Sishen iron ore mine to Imperial Crown Trading. Anglo American subsidiary Kumba Iron Ore filed suit to reverse the award.
The award to Imperial Crown Trading is the mining industry’s worst nightmare come true. The industry fears that mining rights will go to politically connected individuals and companies instead of to longtime players in the country’s industry. Jagdish Parekh, Imperial Crown Trading’s biggest shareholder, has been involved in contract mining and investment with Duduzane Zuma, a son of South African president Jacob Zuma. Imperial Trading’s other five shareholders include ANC members and a former party employee.
Anglo American, of course, isn’t exactly a disinterested party but the company isn’t alone in its criticism—and the Imperial Trading deal seems part of a pattern. In August global steel giant ArcelorMittal (MT) sold a 26% stake in its business to black investors including Duduzane Zuma for $1.2 billion. At the same time ArcelorMittal bought the disputed stake in the Sishen iron ore mine from its new partners. The National Union of Metalworkers of South Africa, the biggest labor union at ArcelorMittal South Africa, has demanded that the government cancel the deals. The union has pointed out that Imperial Crown Trading has no experience in operating a mine. And Johannesburg’s Business Day, the country’s biggest business newspaper, has called the deal “the most cynical empowerment deal ever constructed.”
In May, Lonmin lost some mining rights to a company led to a former director general of the public Enterprises Ministry and an official in South Africa’s Security Ministry. Lonmin was also temporarily banned from selling byproducts from all of its platinum mines after the government said it missed a deadline to renew some of its mining rights.
I think this contest is going to get even nastier. The groups that most strongly supported Jacob Zuma in his election last year, the ANC’s youth and labor divisions, are strongly in favor of a wider program of nationalization that would give more of the country’s mineral wealth to the country’s citizens.
The winners in any confrontation will be mining companies with little or no exposure to South Africa such as Freeport McMoRan Copper & Gold (FCX) or Southern Copper (SCCO).