South African companies are hoarding near-record amounts of cash, hurting returns with interest rates at 30-year lows, as concern that President Jacob Zuma’s ruling party could push through policies that will cut profit hold back investments from miners like Gold Fields Ltd. (GFI)
The African National Congress, facing protests over a 25.2 percent unemployment rate, starts a four-day policy conference on June 26 that will debate proposals to nationalize mines, banks and telecommunications companies, seize land without compensation and raise mine taxes. Europe’s credit crisis, slowing economic growth in China, local factories operating at below capacity and inadequate port, rail and road infrastructure are also forcing companies to sit back.
“Investors are going to be taking a wait-and-see attitude,” Nic Borain, a Cape Town-based political analyst at BNP Paribas Cadiz Securities said in a June 20 interview. “The policy documents going into the ANC conference indicate a more thorough attempt to share the spoils of the South African economy between those who controlled the old South Africa and those who control the politics in the new.”
Cash belonging to companies sitting on deposit with banks increased 11 percent to 522 billion rand ($63 billion) at the end of April from a year earlier, after reaching a record 540 billion rand in December, according to the latest available data from the Pretoria-based South African Reserve Bank.
Sitting on cash is costing companies. The average return on equity for the 162 stocks on the FTSE/JSE Africa All Share Index (JALSH) last month declined below 22 percent for the first time since the end of 2010, according to data compiled by Bloomberg.
Policy uncertainty “doesn’t mean they have to hold the cash,” said Neville Chester, who helps oversee 296 billion rand at Coronation Fund Managers Ltd. (CML) in Cape Town. “The cash needs to get returned to shareholders and allocated to other investments” if it’s not going to be spent, he said.
The central bank has kept its repurchase rate at a 30-year low of 5.5 percent since November 2010 to offset effects from Europe’s debt crisis on growth, which it estimates may slow to 2.9 percent this year from 3.1 percent in 2011.
Zuma, 70, is being pushed by some members of the ANC, its youth wing, the South African Communist Party and the Congress of South African Trade Unions to use the country’s mineral wealth to improve the lives of black South Africans, many of whom live in poverty 18 years after apartheid ended.
Next week’s ANC conference will be followed by another in December, when decisions will be ratified and leaders for the 100-year-old organization elected.
“While there is need for change we’re not looking at a counter-productive platform of policies,” ANC spokesman Keith Khoza said by phone yesterday. The ANC will “adopt what is responsible and that will help the economy grow” and boost job creation, he said.
While an ANC-commissioned study released in February found that seizing mines would be an “unmitigated economic disaster,” it recommended imposing a 50 percent tax on the profits of mining companies earning returns in excess of 15 percent, levies on the sale of prospecting rights and more taxes on companies based in offshore tax havens.
“One of the concerns investors have is what is going to happen here; the sooner we can get clarity, the better,” Nick Holland, chief executive officer of Gold Fields, South Africa’s second-largest producer of the metal, told reporters in Johannesburg on May 17. “That’s what investors want and that’s what we want as well as a company that is investing heavily.”
Gold Fields, which is digging the world’s deepest mine in South Africa, has 5.2 billion rand in cash on its balance sheet after reaching 6.1 billion rand in December, the most since at least 1998. The company is studying opportunities in Finland, the Philippines, Peru and Mali to reduce the proportion of its gold that it mines in South Africa, where output has declined since 2009, to 40 percent of total production by 2015 from 62 percent in 2008.
South Africa has the biggest platinum, chrome and manganese reserves. Metals account for 64 percent of exports in the $388 billion economy. Labor and power costs have increased faster than inflation for each of the past three years.
The FTSE/JSE Africa Mining Index (JMNNG) declined 2.2 percent to 30,771.82 by the close in Johannesburg, taking losses in dollar terms over the past 12 months to 28 percent, compared with a 6.3 percent slide in the MSCI Emerging Markets Metals & Mining Index.
“What is not happening, is there is no expansion being put in place on a forward looking basis,” Kevin Lings, who helps manage 353 billion rand at Stanlib Asset Management Ltd. in Johannesburg. “The horizon has shortened and the immediate focus has become shorter; companies are not really looking far beyond that because there are too many unknowns to effectively plan into that environment.”
The National Union of Metalworkers of South Africa, a unit of Cosatu with 300,000 members, called for the nationalization of banks, mines, telecommunications and energy companies. The National Union of Mineworkers, the largest union within Cosatu, doesn’t support nationalization and instead encourages greater local processing of minerals. The ANC Youth League has said it wants Zuma replaced by his deputy, Kgalema Motlanthe.
“We have meetings with big listed companies that are saying if there is policy uncertainty about nationalization of mines, why am I going to make long-term capital investments?” Nicky Newton-King, chief executive officer of JSE Ltd. (JSE), operator of South Africa’s stock and bond exchange, said in an interview yesterday.
Mergers and acquisitions, which should be boosted by the cash holdings, are being stalled by the political and global economic environment, Mike Brown, chief executive officer of Nedbank Group Ltd. (NED), South Africa’s fourth-largest bank, said in a May 18 interview. Deals dropped 18 percent to 54.2 billion rand in the first half compared with a year earlier, according to data compiled by Bloomberg.
The policies up for debate “present a whole range of threats that could be keeping those companies from spending their money,” BNP Paribas’ Borain said. “They are also an attempt to make South Africa more sustainable in the long term and make the South African story a more enduring one.”
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