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Weak rand double-edged sword for mining companies in South Africa
March 12, 2015 / 4:06 PM / 2 years ago

Weak rand double-edged sword for mining companies in South Africa

JOHANNESBURG/LONDON March 12 (Reuters) - The sliding rand is a double-edged sword for mining companies in South Africa, with cost inflation, wage claims and potential labour unrest outweighing the gains that exporters traditionally derive from domestic currency weakness.

The drop in the rand , near 13-year lows against the dollar, should benefit diversified mining giants such as Anglo American, BHP Billiton and Glencore as well as domestic companies such as gold producers Gold Fields and Anglo Gold Ashanti.

The rand has lost 7 percent so far in 2015 against the dollar, which has risen against emerging market currencies across the board on expectations of U.S. rate hikes. The flip side of this is that the rand gold price has increased over 4 percent this year even as the spot gold price in dollars has fallen 2.5 percent over the same period.

That's good news for mining companies in the country who benefit from mostly cheaper costs but higher income from sales of their commodities.

However, those gains may evaporate in the face of inflationary pressures which are poised to lift costs longer term and will strengthen the resolve of the South African labour force - no strangers to strikes - to obtain bigger pay rises.

South Africa's National Union of Mineworkers (NUM) said on Thursday it may push for wage hikes of as much as 100 percent for its lowest paid members in forthcoming wage talks in the gold, coal and diamond sectors.

"A weaker rand will help the margins in the short-term but you will have inflationary pressure on the ground," said Markus Bachmann, Johannesburg-based fund manager for Craton Capital.

"WORKER INFLATION"

Headline inflation slowed to 4.4 percent in January from 5.3 percent in December, but that trend may reverse given that the rand's fall this year coincides with a scorching drought that threatens production of the staple maize crop.

The most-traded July contract is up about 25 percent in 2015, which will drive up food prices, creating a perfect inflationary storm just as gold miners' wage talks loom.

South African miners on average have eight dependants, so their disposable income is closely tied to food costs.

"Food prices are going to increase, clearly there is a worker inflation which is different from average inflation," NUM General Secretary Frans Baleni told Reuters.

He said the union's demands in wage talks in the gold, coal and diamond sectors, which should start in April or May, would be "definitely above inflation, we are looking at quite high figures, informed by minimising the level of inequalities."

NUM's arch rival the Association of Mineworkers and Construction Union (AMCU) has not yet signaled what its demands will be, but they will almost certainly also be high.

Gold mining executives have repeatedly said they can ill afford above-inflation increases as they grapple with power constraints and declining grades in an industry that has long been in a state of decline.

But the potential for more revenue-draining strikes is high. AMCU led a five-month strike in the platinum sector last year and its often violent rivalry with NUM will also stoke labour tensions as the unions compete for members: Their turf war has killed dozens since 2012.

Most recently, workers from both unions clashed in February at a mine operated by Sibanye Gold.

Both sides are battling for members from a declining labour force in order to be the main representative of the mostly black workforce as it attempts to get its share of the post-apartheid economic dividend.

Still, some analysts see a silver lining in the higher rand gold prices, especially for companies that get all or most of their production from here.

"A company like Sibanye, which produces everything in South Africa, might start to look like a buying opportunity now," said Daniel Sacks, a portfolio manager at Investec.

Sibanye is trading just over a third below its intrinsic value of 35 rand, according to Thomson Reuters StarMine, based on its likely earnings growth trajectory over five years.

Harmony Gold, which extracts over 90 percent of its output in its domestic base, will also get a boost as it has marginal mines heavily exposed to the rand/gold price.

However both companies also have labour-intensive operations and a have had a history of union conflict, which will put them on the front lines of any labour disputes. (Additional reporting by Peroshni Govender and Tiisetso Motsoeneng; Editing by Sophie Walker)

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