Emerging risk

11th September 2012

As we noted in Platinum is losing its shine, however, all but one of the South African mines have had to be mothballed because they are unprofitable at today's platinum price.

Even so, while the platinum price may have declined slightly this year, it is still approximately double what it was in 2009. This increase encouraged the South African miners to seek pay rises Aquarius was unwilling to pay, resulting in the events described in one of the more striking paragraphs you are likely to read in any company's results and which is worth quoting in full.

"On 1 August 2012 a very serious security incident occurred at Kwezi shaft, a production unit at the Kroondal PSA near Rustenburg in the North West Province. A gathering of approximately 200 people, some of whom were armed, forced their way onto the mine property. Members of the private security company under contract to the mine attempted to disperse this unruly crowd as the actions of the group, which included the throwing of petrol bombs, threatened both mine employee lives and property.  A total of 450 employees were on the shaft and underground at the time of this invasion. Six people died and at least 20 others were injured in this incident. The people are understood to be former employees of the mine's mining contractor, who were dismissed following illegal strike action in June 2012."

As it turns out, this was only a precursor to the tragic events of 16 August when South African police opened fire on striking miners at a nearby mine, killing 34 people. That mine, which is owned by commodities giant Lonmin, has effectively since shut down, with fewer than 7% of staff reporting for duty and violence continuing between duelling mine unions who are fighting each other at the same time as picketing in pursuit of a tripling of pay from the mine operators.

This sad series of events highlights two issues facing companies and investors in emerging markets, the first of which is that, no matter the potential rewards, there are risks associated with any involvement in countries where legal processes and business practices may be more extreme. This consideration is also affecting Aquarius in Zimbabwe, where it is in negotiations to sell half of its other open mine to the Zimbabwean government. It seems improbable the final price will favour Aquarius.

It also illustrates how (and why) average wages in emerging markets have been rising steadily in recent years. They will not go back to prior levels – that genie is never going back in its bottle – and this means the costbase of Aquarius and numerous other businesses has been altered for ever. Attempts at curbing salary increases thankfully do not often end in mobs, petrol bombs and shootings but they are never popular.

Continue reading…

 

More from the Value Perspective:

The only way to make sense of the US market now is to consider valuation

Investors should continually challenge their perception of a business

Investors need to remain wary of involving themselves in IPOs

To receive our free daily newsletter sign up here

The Financialist

Leave a Reply

Your email address will not be published. Required fields are marked *