Zim on the leeward side of the metal price breeze

Ranganayi Makwata



IN a recent article in The Herald, which on further reading turned out to be an extract from the recent monetary policy statement, the mining sector w

as said to have eclipsed all other sectors in terms of foreign currency generation during the first eight months of 2007. Of the total export receipts for the period amounting to US$1,4 billion, US$550,9 million, up from US$467,4 million achieved in the same period last year, came from mining. The figure could have been higher had “errant” elements in the sector stopped, or at least reduced the quantities of minerals they allegedly smuggled out of the country. Players in the industry have always denied this allegation. Instead they attribute the slow export growth to non-payment of foreign currency with respect to gold deliveries dating back to November last year by the RBZ and interruption of production due to power cuts among other operational problems.


Internationally, metal prices in general, and gold and platinum prices in particular are unrelentingly setting new record highs. The spot price of gold rose as high as US$749,30 a troy ounce recently, its highest since January 1980. And analysts are forecasting it to breach US$800/0z before the end of the year. The price of platinum, a metal used mainly in jewellery and auto production, is also on a steep ascendancy hitting a record US$1 409 per our ounce on the back of increased demand from China, Japan and India. Interestingly, in typical scenario of one class of investors benefiting from another’s woes, the spike in prices of metals is largely due to the meltdown of the US dollar as sub prime mortgage problems which hit the US recently look far from over. Firming international oil prices, brought about by the geopolitical tension in the Middle East also have a fair share of influence on metal prices.


Demand for gold has strengthened further to an extent that central banks such as that in Argentina, which used to sell their gold stocks, are now net buyers amid fears of a recession in the US. Traders of commodity futures are mainly taking long positions in gold and platinum in anticipation of further rises in prices, while mining houses’ thrust of expanding production appear to have been given new impetus by the firming prices. Investors seem to have engaged in an ‘enjoy-it-while-it-lasts’ mode without giving thought to the lesson learnt in the past, from, say, the dotcom era or the sub prime mortgage boom, that what goes up will eventually have to come down, in the process claiming a few casualties.


For a country known to have the second largest platinum reserves in the world after South Africa and an array of exploitable mineral resources, Zimbabwe was well placed to be among the major beneficiaries of the commodity price boom. The pity is that it does not seem that the benefits will accrue soon. Currently, the future of mining houses in the country is under an ominous pall of uncertainty, with the recently passed Indigenous Economic Empowerment Bill, yet to be assented to by the president, further fraying nerves in the sector. Most of these companies have serious expansion plans which will not be implemented because they are unsure of their future in Zimbabwe. Pessimism remains high despite the calls by the governor of the central bank for rational implementation of the empowerment programme to yield a win-win situation. Equally, his recent generosity, culminating in various incentives being availed to the sector, though having been much lauded, is not likely to do much in repairing the damaged confidence.


Notwithstanding the uncertainties in the industry, stock market investors have recently shown increased interest in resource counters. It is not clear, however, whether the excitement was ignited by firming international prices, or the expectation and subsequent announcement of incentives by the central bank, or both. Metal shares typically run ahead of metal prices in a bull market because their earnings leverage off it. What has happened now is that since September 28 the mining index has been racing ahead of the industrial index in terms of point levels, itself a first since the 1967 base year for calculation of ZSE indices.


While industrials lost a massive US$140 million of their market capitalisation between December 31 2006 and October 16, using the Old Mutual Implied rate for the respective dates of $2,401/US$ and $770,369/US$, the mining index, consisting of only five counters namely Bindura, Falgold, Halogen, Hwange Colliery and RioZim, has amassed US$66 million over the same period. It is important to stress at this point that the bigger chunk, if not all of these gains were realised from mid September to date.


What these gains mean is that investors who made a decision to be overweight in mining counters have made a real return (forget about the inflation measure, we are talking about US$) of 31% since the beginning of the year. This is a good return in any language regardless of which part of the world one is domiciled.


First on the podium among the mining counters is gold producer Falgold whose US$ market capitalisation went up a whopping 490% to US$31,7 million from a humble US$6,5 million. Hwange Colliery came a surprising second, gaining 1 771% to US$35,7 million over the same period despite unconvincing interim results to 30 June 2007. These saw profit after tax being booked at a negative $46,6 billion amid concern of aged fleet, and cash flow challenges. However, one would argue that Hwange’s challenges are not peculiar but cut across the entire industry with huge recapitalisation requirements, unfortunately in the elusive hard currency, being needed urgently.


Recently, Lonrho is reported to have acquired 60% of Celsys and 100% of little known Millpal for a whopping US$5,45 million, which would equate to 5% of either Bindura or RioZim, resource companies with more definable assets. No wonder, economist Stigler once said: “Our understanding of economic life will be incomplete if we do not systematically take account of the cold winds of ignorance.”