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Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Experts: Expect A Wipeout For South African Miners

Lots of updates this week to recent stories. With Glencore upping a bid for Rio Tinto’s Australia coal assets, and Tanzanian police arresting dozens after villagers stormed gold mines belonging to troubled producer Acacia Mining.

But the biggest story going in mining continues to be South Africa. With credit experts Moody’s this week weighing in with a dire warning on the country’s new mining charter.

Moody’s said this past week that enhanced financial burdens under the new code will have a devastating impact on miners. With the ratings agency saying that increased taxes and local ownership requirements will almost certainly lead to a credit downgrade for a slew of South Africa’s biggest miners.

That reportedly includes South32, AngloGold Ashanti, Anglo American, Gold Fields and Sibanye Gold. And a credit cut for these firms couldn’t be coming at a worse time — with most of the firms already hovering at low credit ratings, after years of financial difficulty in the general sector, and specifically in South Africa.

In fact, a credit downgrade of even one notch would lower nearly all of these firms to junk status. With South32 likely to be the only investment-grade South Africa miner left — and that company is just barely hanging on, at one notch above junk.

Moody’s observed that the financial onslaught has already started for these firms — with $2.5 billion in equity value having been wiped out for the group of companies since the new charter was unveiled.

And it’s not just cash flow where Moody’s says miners will suffer.

Under the new charter, development of greenfields resources will require miners to give away a steep 51 percent of project ownership to black empowerment groups. A move that Moody’s estimates will make development of many near-mine reserves unprofitable. Related: Underperforming Energy Sector May Soon See M&A Wave

That in turn will force miners to downgrade those in-ground minerals from “reserves” to “resources”. Lowering mineable inventories, and reducing net present values of many mines and development projects.

All of which equals more awful news for South Africa’s mining sector. Watch for a coming battle in the courts, with the local chamber of mines proceeding with legal action to stop the new code. If that effort fails, we could see South Africa production — and financials for miners — take a quick and steep tumble.

Here’s to a storm coming.

By Dave Forest

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