Mining charter is ‘a scary thing’

The release of the Mining Charter sent resource shares into a tailspin, wiping off in excess of R50 billion from the market cap of JSE-listed mining companies in the immediate aftermath, but some fund managers say that doesn’t necessarily mean that mining stocks with local exposure should be avoided at all cost.

The Chamber of Mines on Monday applied to the High Court for an urgent interdict to prevent the implementation of the reviewed Mining Charter, arguing that it would destroy the sector. The new charter raised the minimum threshold for black ownership from 26% to 30%.

Nick Kirrage, co-manager of the Schroder ISF Global Recovery Fund, says investors are “extremely scared” about some of the provisions in the charter and as a result, the risks around the mining charter are mispriced. As a value investor – a manager buying stocks that trade at a significant discount to their intrinsic value – he argues that there is still an investment case for certain mining stocks provided the valuation compensates the investor for the risks.

“We are not looking to avoid the risk. We want to take as much risk as possible where we think it is totally mispriced by the market.”

Anglo American and South32 are among the fund’s top 20 holdings with the portfolio weighting of both companies at 2.7%. It also has exposure to ArcelorMittal South Africa, Impala Platinum and Lonmin, albeit smaller holdings.

Kirrage says in cases like this, considering the “inside” and “outside view” can provide some perspective. The inside view considers the current environment, people’s opinion about it and how likely it feels to transpire. The outside view weighs how often such an event occurs in the long run.

The long-term probability of a terrifying event actually occurring is significantly less, he argues.

Kirrage says it is very unlikely that the Mining Charter will be implemented in its current form – the mining industry is a significant employer, one of the biggest areas for outside investment and one of South Africa’s most important sectors. If implemented, a lot of investors won’t be able to make a return and will pull out.

He acknowledges however that there is still a possibility that it can be implemented – political drivers are not always sensible.

But even though implementation in its current form is unlikely, in many instances the shares already discount that a bad scenario can play out.

“If the shares already discount a bad outcome and it comes, well then the shares already discount a bad outcome, but if it doesn’t come you make money. That’s a great investment.”

Patrick Mathidi, portfolio manager at Aluwani Capital Partners, says the firm has marginal overweight positions in miners across its equity funds, skewed towards global diversified miners like BHP Billiton and Glencor with underweight to zero positions in local single commodity producers.

It has maintained this exposure preference for the likes of BHP – primarily due to the valuation and better risk diversification that comes with exposure to multiple underlying commodities and jurisdictions.

Mathidi says while the firm is happy with its current positioning – all things considered – its views on the charter are influenced by the much disputed legal status of most of the pronouncements contained in the charter, its overall constitutionality and the fact that it will be a long drawn out legal process before there is clarity.

“In the meantime, we are concerned that the lack of clarity will most likely render some of the domestic mining companies uninvestable. Some of them are offering value on pure fundamentals, however the risk is that the value remains trapped and unrealisable pending clarity,” he says.

Gary Booysen, portfolio manager at Rand Swiss, holds a different view.

He says its investment methodology has left the firm underweight resources for well over half a decade. Although it does hold Sasol, which operates a few coal mines that supply feed stock to some of their coal-to-liquid operations, it doesn’t have any direct mining exposure in its local portfolios.

“Offshore we hold mining stocks on behalf of clients but these companies have very limited exposure to the local mining industry.”

Booysen says the mining charter certainly does complicate matters for those looking to invest in local resource companies.

“The uncertainty around implementation of BEE programmes makes it more difficult to value projects and will no doubt make forward planning for management almost impossible.”

He says the mining industry is beset by unpredictable and increasing costs due to higher power prices, labour unrest, skills shortages and a volatile local currency, while also having to contend with a negative macro-economic supply and demand picture across most mineral groups.

“The new Mining Charter takes an industry that was previously difficult to invest in and makes it close to impossible for anyone but the most speculative optimist.”

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