The election of Cyril Ramaphosa as the President of the ANC suggests that the country may be taking a positive step forwards. Under Jacob Zuma South Africa has become riddled with corruption and “state capture” where assets are sold off to favoured parties. Whether Cyril Ramaphosa can become President of the country in due course remains to be seen but it is worth looking at his background.
He has a legal qualification and became a trade union activist. After being active in politics, including helping to develop the “Black Economic Empowerment” policy that affects any company operating in the country, he became a businessman. Indeed he was for a time Chairman of gold miner Pan African Resources (PAF) which I held shares in for a while. This is a company registered in the UK and they hold their AGMs in London, although I don’t recall Mr Ramaphosa ever turning up for one. But with this and his other business interests he should have learned something about business to offset his left-wing sympathies.
There are of course other businesses operating in South Africa that are registered in the UK and the risk of political interference is always at the back of investors minds. One I currently hold is Mondi which is actually dual-listed on both the London and Johannesburg stock exchanges. This means it is subject to regulation in both the UK and South Africa (the South African financial regulations are actually very good), but one disadvantage is that a withholding tax is payable on dividends. It holds its AGMs in London.
Mondi (MNDI) is a paper and packaging producer with interests in many countries. Its share price does seem to be affected to some extent by political events in South Africa and one gets the impression that the valuation if slightly lower than other packaging companies for that reason (e.g. a somewhat lower prospective p/e than D.S. Smith). Goldman Sachs recently upgraded Mondi to a “buy” with a 2200 price target.
So apart from wishing Mr Ramaphosa well, investors do need to take into account the political risks of investing in South Africa. But my experience has been positive to date with the ANC seeming to take care not to damage large businesses overtly. However, the general economic trends in South Africa under Zuma have not been good even though the per capita wealth of the country at $11,300 is still the highest in Africa (excepting Mauritius).
A sound economy, rational economic policies and the rule of law are the key to generating wealth. Compare the wealth of South Africans with that of Zimbabwe where it is estimated to be as little as $200!
Perhaps the moral is that politics does matter!
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Hi Roger,
I remain a shareholder in Pan African and was please to receive their chunky annual dividend today (albeit reduced annoyingly by the withholding tax that you mention).
Ramaphosa’s appointment has a number of important and positive implications for Pan African. First of all, the current minerals minister, a Zuma appointee, has proposed a new and damaging Mining Charter, which is currently being challenged in the courts. Given Ramaphosa’s understanding of the economics of mining industry, I anticipate that the new Charter will be withdrawn in short order. That removes a threat over the whole South African mining industry.
The overhang of this political uncertainty has, naturally, caused investors to be cautious about investing in South Africa. Pan African has a very promising expansion project, Rolspruit, in its programme. Wisely, the board has decided that this project is too big for Pan African to undertake alone and is therefore seeking a partner to share the capital cost of developing it. I very much hope that the removal of political uncertainty will attract much more interest in such projects and enable it to proceed.
An interesting fact about Pan African is that it has proven and probable mineral reserves of 11.2Moz of gold, yet it only produces around 200koz p.a. Gold miners usually like to have reserves of around 5-10 years of production, so this imbalance between reserves and production implies that there is considerable scope to increase production, subject to financing expansion projects in a manner that does not stretch the balance sheet.
Another factor that investors in Pan African need to consider is that the improved political environment has led to a significant strengthening of the Rand. That will impact profits negatively in the short term, as costs are largely in Rand but revenues are US$.
Roger also correctly points out that we have yet to see whether Ramaphosa can succeed (and how quickly) in pushing Zuma and his cronies out. That remains an uncertainty.
Best,
Mark Bentley