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Send  Share  RSS  Twitter  11 Nov 2010

MINING: Nationalisation Debate Not a Major Valuation Factor

 





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While negative perceptions of South Africa as a mining investment destination are alive and well, the risk of nationalisation has been largely dismissed by international investors for now. South Africa attracts a relatively high risk premium in comparison to selected other mining jurisdictions around the world; but this has been a reality for some time now and can’t be attributed solely to the nationalisation furore.

BDO Corporate Finance mining valuation experts Andrew Naude and Nick Lazanakis believe that there has not been a marked difference in the pricing of mining assets specifically due to the nationalisation threat and the increased prominence it has been given this year.

The current pricing of mining assets is based on a combination of a variety of issues, not all of them directly under Government’s control, including the appreciation of the Rand against major currencies. It would seem that most analysts and investors have largely dismissed the likelihood of nationalisation occurring on any kind of meaningful scale. Currently the market capitalisation of the mining sector on the JSE is around R1.7 trillion – if negative sentiment as a result of the nationalisation debate has affected valuations at all, clearly there are also a lot of positive factors in place.

However, Naude and Lazanakis confirm it would be naïve to suggest that the international perception of SA as a mining investment destination is overwhelmingly favourable. A survey of mining companies by Canada's Fraser Institute earlier this year showed that SA's global ranking fell to 61 out of 72 countries in the index relating to policy potential; this is from its 49th position held previously.

Additionally the international banking group, Bank of America Merrill Lynch, suggested that Anglo American should separate its SA from its non-South African assets, effectively splitting into two operating entities. The rationale for such a recommendation indicates a negative international perception of the state of the mining industry in South Africa. The report suggested that by separating its SA assets, the rerating of the international assets could result in a value uplift of up to 17% to Anglo American’s total valuation.

This is the second time this year it has been suggested that a major company should split out its South African mining interests, similar suggestions having been made regarding Anglo- Gold Ashanti.

The implication of these recommendations by international bankers is that the international market applies significant risk weightings to South African mining assets, suggesting major concerns about the state of the South African mining industry, which translate into value diminution, along with all the related negative factors usually accompanying such valuation risk weightings, such as higher relative costs of capital, more limited access to funding and crucially lower levels of new investment.

“For us, the biggest risk factors affecting the mining valuations we see are related to the perceived difficulty of doing business in SA as a result of already existent factors such as the 2002 Mining Charter, or BEE requirements which often come at shareholder expense. Additionally, there have been concerns expressed over the recent awarding of new-order mining licences to companies that are perceived to be politically connected “say Naude and Lazanakis.

“From a pure valuation perspective, the nationalisation debate is pretty much dismissed as populist rhetoric for now, although it probably doesn’t help broader investor sentiment much, and the international community is certainly keeping a close eye on developments, conclude Naude and Lazanakis.


 
 
 
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