Will nationalizing mines make South African poverty worse?

Here in South Africa there is plenty of talk of nationalizing the nation’s mines, especially the country’s platinum mines. After all, SA is no longer the world leader in gold production, while the country still produces 80% of the world’s platinum. In fact platinum group metals (PGM) account for the bulk of SA’s mineral value.

However, as Nazmeera Moola points out in her “economic viewpoint” column in the February 24th Financial Mail, PGM production has been falling since 2007 at the same time profit margins fell, despite elevated prices. Ms. Moola writes that margins dropped 5-10 percent last year from the previous year, with rising wage and electricity costs to blame.

For the first time in years, the platinum price is lagging the gold price, despite the fall in production. And production will likely be further challenged going forward. Strike violence has not only led to 59 hospitalizations but three deaths, with the latest being a contract worker who was beaten to death. The body was found in Freedom Park near Impala Platinum’s Rustenburg mine.

Impala dismissed 17,000 workers over the labor unrest and 3,000 oz. of production is being lost each day. Through February 14th 60,000 oz. had been lost and the company announced that it would fall 40 percent short of fulfilling its contracted deliveries for April.

After six weeks, about half the the dismissed workers had been replaced, but workers are being prevented from entering the mine by striking workers. Some two dozen workers not wanting to take part in the illegal strike remain in the hospital after being assaulted by strikers.

Platinum mining is dangerous business and the South African government’s Department of Mineral Resources, while aiming for zero mining fatalities on the job, have stepped up the number of safety, or Section 54, stoppages. These DMR stoppages can lead to complete mine shutdowns.

According Ms. Moola, Section 54 stoppages accounted for half the 14% year-over-year drop in production at Aquarius Platinum, while causing Anglo Platinum to lose 101,000 ozs. of production in 2011. Impala’s production at Rustenburg was down in 12% in 2011 due to Section 54 stoppages.

“The combination of deeper mines and the increased focus on safety means mining techniques will need to adjust,” writes Moola. “This means less ore will be extracted and costs will rise.”

Platinum expert Steve Forrest makes the point that in addition to rising safety standards, there has been a lack of capital investment in platinum mining, and he believes PGM production peaked in 2008.

Impala has announced that once the strike is settled at Rustenburg, it will reassess the viability of each mine shaft at the project. At the same time Anglo American CEO Cynthia Carroll is considering either curtailing production at Anglo Platinum or getting rid of the company entirely.

South African’s ANC considers platinum a “sovereign resource.” So talk of nationalization could easily turn into heavy-handed government action. In neighboring Zimbabwe, the ham-handedness has already begun.

Just a week ago Implat’s David Brown received a demand letter from Robert Mugabe’s Zimbabwe government giving him two weeks to hand over the ownership of 29.5 percent of his company’s Zimplats operation to the state-run empowerment fund, threatening unspecified sanctions if it did not comply.

Perhaps Brown knew this was coming, as he had tendered his resignation weeks earlier, effective June 30th, with no replacement named. Brown was hoping to meet with government, attempting to negotiate a smaller taking, pointing out that handing over nearly a third (and eventually 51 percent) of the Zimbabwe operation will stop the company’s growth prospects.

Zimbabwe’s Empowerment Minister Saviour Kasukuwere says he is “sick and tired” of Brown’s delaying tactics regarding the ceding of shares under Zimbabwe’s controversial indigenisation legislation.

“We can only engage him if he comes here to implement the law,” Kasukuwere told Reuters, after stating that: “The problem with Brown is that he talks too much. We are sick and tired of his delaying tactics.”

Kasukuwere was quoted by Associated Press as saying that a proposed visit by Brown would not change the government’s decision. He also said he has no plans to meet Brown.

“I don’t need to meet them over anything. Why are they coming to see me? I’m not a zoo,” Kasukuwere told The AP. “I have nothing to discuss. They must respect the laws of this country.”

Just a day after the Empowerment Minister’s threatening comments, Zimbabwe Prime Minister Morgan Tsvangirai spoke to a trade and investment conference crowd in Johannesburg trying to drum up investment in his country. Using his best salesman spin, Tsvangirai called the indigenisation policy “rhetoric rather than reality.”

Business leaders in South Africa are talking about the opportunity for a “platinum valley,” emulating America’s Silicon Valley.

“Both big business and government are singing from the same hymn sheet of diversifying potential demand for platinum within the huge global energy arena,” writes Martin Creamer for Mining Weekly. “Platinum, clean energy and jobs can go hand in hand with the development of hydrogen fuel cells – zero-emission devices that are able to shrink the world’s carbon footprint.”

All this feel-good, job creating, clean energy rhetoric sounds great for spurring platinum demand and putting people to work. However, the government’s thievery (or threats to) of platinum assets only serve to stifle capital investment, leading to continued lower mine output.

Sadly, in a region with unemployment well over 20 percent and rampant poverty, the abundant precious minerals will stay in the ground, while millions living above ground starve.