Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
Investment risk grows dramatically in South Africa
Institutional and retail investors are (wisely) avoiding many countries because of political risk - including risk of resource nationalization and heavy-handed taxation. But what happened in Marikana, South Africa this week is an entirely different ball game.
As you likely saw in the media, 34 people were killed when police opened fire on 3000 striking platinum mine workers who failed to leave. Many were carrying machetes or sticks and apparently the police felt threatened. Someone made the decision to open fire with automatic weapons and in doing so, they have potentially created problems for the entire mining industry of Africa.
This may be hard to relate to if you live in the city or have never dealt with the unionized mining industry, but around the world mine workers share a common bond. During the 1990’s, I worked in the Canadian mining industry and even the difference between mountain mine workers and prairie mine workers can be dramatically different. But when the smoke settles, they will fight tooth and nail to support their fellow union workers.
During mine disasters or funerals, mine unions will typically send representatives and this was evident during the highly-televised underground mine disaster in Chile (Aug 2010). Mine workers from around the world flew in to help and lend moral support. It is a common theme amongst miners (the brotherhood) and while Africa tends to be more violent, I suspect the same bond exists within that country.
The relevance to Thursday is that this violence will have far reaching implications across South Africa and possibly the entire region. Many countries within Africa have experienced political instability this past year and because the natural resource sector is critical to their economies, the unions are very important and influential. This extreme violence against fellow union workers in South Africa will not be easily forgotten.
Mines in South Africa (PGM mines in particular) have been under extreme cost pressure during 2011 and 2012. The last thing they need is worsening labour and union problems. From the perspective of an investor in South Africa, a person has to second guess the reason for investing there.
When we know they are running into budget problems, the idea of further strikes and escalating violence is simply piling risk on top of risk.
Even Barrick is hoping to exit Africa as they work to sell African Barrick Gold Plc to China National Gold.
There are many great junior gold exploration companies in Africa but it is the problems in South Africa, the political instability in many other regions, and decisions like the one we’re seeing with Barrick, that are punishing the juniors and has driven their valuations to painful lows this past year.
Eastern Platinum (TSX: T.ELR, Stock Forum; 18 cents) is one such example in South Africa that I have been forced to re-evaluate after the violence on Thursday. This is a company I started coverage of at 17 cents with paid subscribers recently and we had made 20% in fairly short order.
ELR trades near cash value (with approx. $160 million in the bank) and its infrastructure and PGM reserves are essentially valued at nothing by the market – at least while the stock trades near 17 and 18 cents. The hope was that another PGM major would look at an acquisition or takeover if the share price stayed this low for too long. However now I am not so sure.
Its peers are struggling financially, several mines have closed (or are closing) and will mothball PGM reserves, the outlook for platinum prices is poor, and the violence in the region (as I discussed above) means these companies could face all kinds of labour/union problems.
In addition, when ELR released financials this week, it was disclosed that they were “losing” almost $200 for every ounce they produced. Under this scenario, mining companies are faced with the tough decision of preserving economics and cutting production way back or putting the mine on care and maintenance until the commodity price improves. Try telling that to disgruntled union mine workers where the unemployment rate is already 25%.
Some companies will survive because of large cash reserves, but only for so long. And from the perspective of an investor, you have to look at these stocks and wonder if it is worth tying up dead money when so many other alternatives may exist.
This is the scenario faced by someone like ELR trading near cash value. Imagine the outlook for junior exploration companies who have no existing infrastructure and even with resources, must try and finance in this environment – it is isn’t pretty.
Long story short – Pick and choose your battles (investments) wisely in South Africa.
And remember… if companies you own don’t have a very strong balance sheet with little debt, then carefully rethink why you own them. Don’t do it just because they have rock in the ground. Right now there are countless examples where ounces are worth very little – and that applies to many commodities.
Hopefully that starts to change in September once everyone returns from holidays, but if it doesn’t we may not see a shift in sentiment until Q1/13. Hopefully that is not the case.
_______________________________________________________________________
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
https://stockhouse.com/Groups/GroupInfo.aspx?g=50540
https://twitter.com/TSXAlerts
_______________________________________________________________________
Disclosure: Danny Deadlock owns 30,000 shares of Eastern Platinum (TSX: T.ELR).
