Africa Could Mine Its Way to Prosperity if It Addressed Instability by Frank Holmes
This past week I attended the Investing in African Mining Indaba in Cape Town, South Africa, as both a presenter and a student seeking opportunities. One of the highlights of the conference was former Prime Minister Tony Blair’s keynote address, during which he offered some crucial advice to African governments: To attract and foster a robust mining sector, a commitment to fiscal stability must be made.
Since 2009, Blair has run the Africa Governance Initiative, which counsels leaders in countries such as Rwanda, Sierra Leone, Liberia, Guinea and others.
Simply put, without fiscal stability and predictability in taxation, capital will be unwilling to flow into any country—African or otherwise—for exploration and production. If a government changes its tax policy every three years or so, that instability discourages the inflow of financing. This is bad for Africa.
“The mining sector remains absolutely vital for Africa’s future,” Blair said, “and even with the sharp declines in [commodity] prices, there are tremendous opportunities and there will be, no doubt, an adjustment and reshaping of the face of mining within Africa over these next few years.”
I shared the following map last week, but it’s worth showing again, as it supports Blair’s point. Central and Southern Africa, especially, are extremely commodity-rich and maintain a large global share of important metals and minerals such as platinum, diamonds and gold.
I shared the following map last week, but it’s worth showing again, as it supports Blair’s point. Central and Southern Africa, especially, are extremely commodity-rich and maintain a large global share of important metals and minerals such as platinum, diamonds and gold.
Fiscal instability is also bad for investors in Africa. If foreign investment is not respected by a government, if it is punitively taxed or arbitrarily confiscated, further investment will not flow into that country Politically, African nations need to recognize that seemingly faceless investment institutions represent real people’s hard earned dollars.
In Zambia, for example, a huge 12 percent of the country’s GDP comes from mining, an industry that employs 10 percent of all Zambians. Yet its government has increased, rather than cut or at least eased, restrictive royalty taxes on mines. In the case of open pit mines, royalties were raised from 6 percent to a crippling 20 percent.
Speaking to Reuters, a mining industry spokesperson speculated: “Mining companies are not going to put another dollar in [Zambia]” if the government continues to be unreliable.
Less Friction, Fewer Disruptions
This is proof positive of what I frequently say: Government policy is a precursor to change. In the example above, the tax policy is leading to change that could very well hurt Zambia’s economy. With mining being such a strong contributor to its GDP, it seems the government would want to make it easier, not more challenging and costly, for international producers to conduct business there.
The less friction and fewer disruptions there are, the easier it is for money to flow.
But Zambia’s isn’t the only African government that’s placing roadblocks in front of miners. The Democratic Republic of Congo is in the early stages of hiking royalties on mines and revising its mining code. And in his recent State of the Nation Address, South African President Jacob Zuma announced that foreigners could no longer own land in the country, which raises the question of what implications, if any, this might have on U.S. and Canadian companies that own and operate South African mines. Zuma’s announcement comes at a time when persistent electricity shortages have stymied mining activity and rumblings of a miners’ strike similar to the one last year that brought platinum and palladium production to a five-month halt are intensifying.
At the same time, many governments in Africa are waking up to see that they’re going to have to provide the sort of stability and consistency Prime Minister Blair outlined if they hope to attract the capital necessary to fund and develop their mining opportunities.
Miners Giving Back
A strong mining sector doesn’t just benefit the native country, either. It’s a global good that benefits all. In another presentation at the African Mining Indaba, Terry Heymann of the World Gold Council convincingly showed that the economic output of the global gold mining sector far exceeds the collective aid budget of world governments. Gold mining, he said, created and moved as much as $47.3 billion to suppliers, businesses and communities in 2013, compared to governments’ $37.4 billion.
Many gold mining companies take a more direct approach to helping the communities in the countries they operate in, including Randgold Resources, which works primarily in Mali. In an interview during the African Mining Indaba, CEO Mark Bristow detailed his company’s involvement in the fight against Ebola and other epidemics that have hit the West African country:
Our doctors, the Randgold doctors, run a technical committee meeting every day where we coordinate with the [Malian] health authorities, and we help manage the deployment of energy. Now that we’ve eradicated the second [Ebola] outbreak, our big focus is on prevention and education.
Bristow explained that the company had sponsored the development of an educational film about Ebola, before highlighting other company achievements:
We were part of the Neglected Tropical Disease Initiative rollout… We’re very big on the AIDS programs around the country. We brought the malaria incident rate around our mines down by more than four times.
Because Randgold is the largest employer in Mali, Bristow suggested, he feels a moral obligation to partner with his host country and make it a healthier, safer place to live and work.
During the same interview, he insisted that Randgold, which we hold in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), has a “solid five years ahead of us,” citing the fact that the company holds no debt and managed to replace all the ounces it mined in 2014 at $1,000 long-term gold price. It also increased its dividend 20 percent.
Despite bullion’s price hovering just above the relatively low $1,230 range, Randgold has delivered 16 percent year-to-date.
This is in line with gold mining stocks in both the NYSE Arca Gold Miners Index and FTSE Gold Mines Index, which are outperforming the return on bullion.
As I mentioned back in July, when mining stocks do well, bullion has tended to follow suit. This also shows that producers are successfully adjusting to a $1,200-per-ounce environment by scaling back on capital spending, selling off assets, putting exploration on hold and engaging in mergers and acquisitions—which in the past has signaled that a bottom in spot prices might be reached. B2Gold Corp. closed on its deal to buy Papillon Resources in October; we learned in November that Osisko Gold Royalties is taking over Virginia Mines; and last month it was announced that Goldcorp would be purchasing Probe Mines.
Weak Currencies, Low Fuel Prices
Speaking with Kitco News’s Daniela Cambone during this Monday’s Gold Game Film, I commented on some of the macro events aiding gold mining companies such as Randgold:
Mark Bristow has just hit the ball out of the park. He benefits from a weak Mali currency and he benefits from a weak euro because everything is priced in euros. He’s also benefited from weak oil prices.
Indeed, many miners not operating in the U.S. are the beneficiaries of a weak local currency. The West African CFA franc, Mali’s currency, is off 20 percent; the South African rand, 40 percent; the Canadian dollar, 15 percent.
Low energy prices are also helping gold producers, just as they’re helping companies in other industries, airlines especially. In most cases, fuel accounts for between 20 and 30 percent of gold miners’ total operating costs. Because Brent oil is currently priced around $60 per barrel, gold producers are seeing significant savings.
The Gold Demand
Next Thursday marks the Chinese New Year, a traditional occasion for gold gift-giving. Chinese demand for the yellow metal was strong in 2014, as 800 tonnes flowed into the country. Over half of the global gold demand, in fact, was driven by the world’s two largest markets, China and India.
Historically low real interest rates are also driving investors into gold and gold stocks. As I told Daniela:
When you look at real interest rates out of the G7 and G10 countries, the only one with a modest increase is the U.S. dollar. Any time you get this negative real interest rate scenario, gold starts to rally in those countries’ currencies. Now what’s really dynamite is the gold mining companies like Goldcorp, which pays a dividend higher than a 5-year government bond.
Emerging Markets Webcast
Make sure to join us during our webcast next Wednesday, February 18. USGI Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing reflationary measures in China and emerging Europe. Don’t miss it!
- The major market indices finished higher this week. The Dow Jones Industrial Average rose 1.09 percent. The S&P 500 Stock Index rose 2.02 percent, while the Nasdaq Composite rose 3.15 percent. The Russell 2000 small capitalization index rose 1.50 percent this week.
- The Hang Seng Composite rose 0.43 percent; Taiwan rose 0.78 percent while the KOSPI advanced 0.10 percent.
- The 10-year Treasury bond yield rose 8 basis points to 2.04 percent.
Domestic Equity Market
The S&P 500 hit a new high this week as the markets embraced the de-escalation of political events in both Greece and Ukraine, along with better economic data out of Europe. Returns were positive for all sectors except utilities for the second week in a row, with long-term yields continuing to move higher. Beaten up areas such as energy and materials made significant positive strides again this week as value investors stepped in.
- The technology sector was the best performer this week. Large-cap, household names were among the best performers including Apple, Cisco Systems and Qualcomm. Apple was a steady gainer all week and even moved to all-time highs. Cisco reported earnings that beat street estimates and the company also raised its dividend. Qualcomm rose as the company settled a Chinese regulator’s probe into monopoly practices.
- The materials sector had a nice comeback this week with broad-based participation. Standout performers included the construction materials companies Martin Marietta Materials and Vulcan Materials. Martin Marietta Materials rose by more than 23 percent as the company reported fourth-quarter results which beat expectations. The positive performance is also attributable to a massive 20-million share buyback authorization, which is 30 percent of the company’s outstanding shares. Packaging and container stocks also posted strong gains this week, including names like Sealed Air and MeadWestvaco.
- TripAdvisor was the best performer in the S&P 500 this week, rising by 23.67 percent. The company reported earnings but was primarily buoyed by Expedia’s takeover of Orbitz; TripAdvisor is viewed as a possible takeout candidate in this consolidating industry.
- The utilities sector was the worst performer this week on improving investor sentiment, particularly in regards to global growth prospects leading defensive areas to underperform. Along with better growth prospects, high long-term yields also pressured the group, likely leading to the poor performance.
- In an otherwise strong week, we still witnessed pockets of weaknesses. This included brewers, aluminum producers and airlines.
- AGL Resources was the worst performing company in the S&P 500 this week, falling 8.58 percent. The stock declined primarily due to 2015 guidance that was below consensus expectations.
- Cyclicals have outperformed so far in February with improving global growth prospects providing a lift.
- A strong dollar continues to benefit domestic consumers, maintaining an advantage for certain U.S.-focused retailers and consumer products.
- The energy sector could very well be readying its comeback as global growth concerns begin to ease and supply conditions begin to tighten.
- Consumer sentiment indicators out this week are already showing some retracement. The low oil price, or gasoline “tax cut,” looks like it may be short lived in this regard.
- An improving global economy along with U.S. economic data that supports an improving job market could be enough to allow the Federal Reserve to raise rates as soon as June.
- Defensive plays should be monitored closely now that yields have turned the corner and investor sentiment is more positive.
The Economy and Bond Market
U.S. Treasury bond yields moved higher this week on mixed data out of the U.S. and improving data out of Europe. Fourth-quarter German GDP growth was better than expected at 0.7 percent quarter-over-quarter, helping to lift the eurozone’s growth overall. Expectations for European growth were modest but recent data points show improving performance. This gives the Federal Reserve more ammunition to move forward with a rate increase later this year. The job market in the U.S. continues to show improvement. Last week’s unemployment report was strong and this week we see job openings at the highest level since 2001, having improved significantly in the past year.
- Eurozone GDP rose 0.3 percent in the fourth quarter, paced by German growth of 0.7 percent. Economic prospects are looking up in Europe due to weaker currency, lower oil prices and stimulative European Central Bank (ECB) action.
- Job openings hit a 14-year high in December, a strong sign that the economy and job prospects are improving.
- Home prices increased in 86 percent of U.S. metro areas year-over-year for the fourth quarter. This was significantly better than the third quarter and is one more sign of an improving economy.
- Chinese imports sank nearly 20 percent in December, which raises a significant question mark on global growth prospects.
- Consumer sentiment indicators are already rolling over as gasoline prices pick up.
- Retail sales data is reflecting the poor consumer sentiment as sales fell 0.8 percent in January. Even excluding autos and gasoline, retail sales only saw a modest improvement. The big gasoline “tax cut” has been a disappointment to retailers, as it appears people are saving a lot of this windfall instead of spending it.
- The International Monetary Fund (IMF) stated it was perhaps, “a bit pessimistic” in lowering its global growth forecast since European data is already improving.
- China inflation hit a five-year low and the central bank recently lowered the reserve requirement for banks (easing policy). The bank is expected to do more in the near future as inflation remains muted.
- India’s GDP grew much faster than expected at 7.5 percent. This is yet another tailwind for global growth.
- While inflation expectations over the next five years have bounced off the lows, a longer-term view of inflation is more dismal. The five-year, five-year-forward breakeven rate (an inflation proxy for the five-year period, five years from now) continues to dwell near its recent lows. The weaker long-term inflation expectations are an important sign of investors’ persistent concern over global growth.
- The wave of monetary stimulus coming back over the global economy, while positive for economic growth, could have unintended consequences in the form of currency wars.
- This week Federal Reserve officials continued to talk about raising interest rates as early as this summer.
For the week, spot gold closed at $1,229.53 down $4.39 per ounce, or 0.36 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 0.89 percent. The U.S. Trade-Weighted Dollar Index slipped 0.61 percent for the week.
|Jan-12||German CPI YoY||-0.30%||-0.40%||-0.30%|
|Jan-12||U.S. Initial Jobless Claims||287K||304K||278K|
|Jan-12||German ZEW Survey Current Situation||30||—||22.4|
|Jan-12||German ZEW Survey Expectations||55||—||48.4|
|Jan-12||U.S. Housing Starts||1070K||—||1089K|
|Jan-12||U.S. PPI Final Demand YoY||0.40%||—||1.10%|
|Jan-12||U.S. Initial Jobless Claims||290K||—||304K|
- The market for gold coins and bars in Europe is now twice as large as that of the United States, and similarly on par with those of China and India. In addition, the India Trade Ministry is said to be seeking to cut the gold import tax from 10 percent to 2 percent.
- With new global mined gold supply averaging around 258 tonnes per month, and with 255 tonnes of gold withdrawals from the Shanghai Gold Exchange in January, China is effectively consuming all of the world’s new mined supply.
- In 2014 governments added 477.2 metric tonnes to their reserves, the second-biggest increase in 50 years and 17 percent more than the previous year. Furthermore, central banks have added to gold reserves for the past five years, representing a reversal from two decades of selling. For investors considering adding bullion to their portfolio, gold just triggered this long-term buy signal (only the fourth one to show up in the past 10 years as illustrated by the technical chart shown below). The prior signals have come in 2005, 2007 and 2009, and each time gold rallied thereafter.
- Gold traders are bearish for the first time in three months on concerns about a stronger dollar and weakening demand from China’s slowing economy.
- Two people remained missing after Mexican police freed 10 others who were kidnapped last Friday. The incident happened in the same southern region where the disappearance and murder of 43 students in September ignited protests throughout the country. One of the people missing is a worker from Torex Gold Resources. B2Gold Corp announced the overnight shooting death on Wednesday of two security guards at the Masbate Gold Mine operating in the Philippines.
- Greece’s new left-wing government announced it will legally oppose a Canadian-run gold mine in northern Greece belonging to Eldorado Gold Corp. on the grounds of worker protections.
- The merger and acquisition (M&A) space seems to be heating up in the gold mining industry. Tahoe Resources announced on Monday it will acquire Rio Alto Mining for $1.1 billion. Mark Bristow, CEO of Randgold Resources, said the company has been “flat-out besieged with offers to buy assets.” Acacia Mining said it’s looking to do a transformational deal this year. Lastly, AngloGold Ashanti’s CEO said he is looking to sell assets or form joint ventures to reduce debt.
- There is growing consensus in the market that an unspoken currency war has broken out. This is a result of many countries facing zero interest rates and binding fiscal constraints. With such constraints, the only policy tool at their disposal to stimulate growth is targeting a weaker exchange rate. While a weak currency might provide a short-term boost to the countries engaging in currency devaluation, the fact that so many countries are concurrently engaging in these tactics will likely mean we may end up with higher foreign-exchange volatility. In such a scenario, gold is increasingly looked upon as the currency of choice.
- U.S. retail sales tumbled 0.8 percent in January despite the “great” jobs report and sharply lower gasoline prices. Furthermore, U.S. corporate profits and sales are crumbling with companies in sectors such as technology, telecommunications, consumer discretionary and staples all seeing sharp earnings per share (EPS) slowdowns as a result of the strong dollar. Lastly, Credit Suisse recommended underweighting U.S. equities as they have slipped on both economic and earnings-momentum scorecards. A weakening of the U.S. market would provide a catalyst for gold.
- In its 2015 outlook report, JPMorgan Chase said that a strengthening U.S. dollar, weaker energy prices and low inflation will dampen gold demand.
- President Zuma of South Africa announced in his State of the Nation address that foreign nationals will be barred from owning land in the country, only allowing them to enter into long-term lease contracts. Furthermore, last month Zuma referred the Mineral and Petroleum Resources Development Act Amendment Bill back to parliament for reconsideration.
- South Africa’s mining industry remains a highly complex space where aligning competing interests has proved difficult. Mining companies, labor and government seem to have very different opinions on how things should be done, leading to instability. Justin Froneman, director of equity research at Credit Suisse, said that international investors want active leadership at both the corporate and country level in order to reduce uncertainty.
Energy and Natural Resources Market
- Construction materials stocks outperformed this week as recent data revealed a pickup in the U.S. housing market. Furthermore, positive earnings reports are boosting certain constituents within the index. The S&P Supercomposite Construction and Materials Sub Industry Index rose 11.26 percent this week, while Martin Marietta Materials Inc. closed up 23.11 percent.
- Paper and forest stocks rallied on a stronger U.S. housing market as well. The S&P Supercomposite Paper & Forest Products Index rose 5.21 percent. International Paper Co. rose 5.19 percent.
- Dry ships stocks bounced back this week due to the extent of their oversold condition. Breaking a four week streak of negative returns, the Bloomberg Dry Ships Index closed up 5.15 percent.
- Utilities stocks underperformed this week as the yield on 10-year U.S. government bonds broke above 2 percent. The S&P 500 Utilities Index fell 3.32 percent.
- Master limited partnership (MLP) stocks, another bond proxy, fell this week as interest rates increased. The Alerian MLP Index closed down 0.93 percent.
- Gold stocks declined this week as the recent resurgence in risk on sentiment persisted. The NYSE Arca Gold Miners Index fell 0.92 percent this week.
- China’s money supply growth came in weaker than expected this week. Consequentially, the Chinese government may enact more easing policies to boost economic growth, which would be positive for commodities.
- German GDP grew at 0.7 percent in the fourth quarter of 2014 from the prior quarter, which was much higher than expected by analysts. The strong GDP growth data highlights strength in the struggling eurozone, which is a significant importer.
- Despite Brent crude rising above $60 a barrel this week, the recent oil price rally may be premature given that oil market fundamentals are not expected to improve until the second half of the year. According to industry analysts, inventories are expected to increase well into the second quarter of 2015.
- Copper traders are remaining bullish on copper due to speculation that purchases from China will slow during the Chinese Lunar New Year next week.
- Greek markets posted another massive gain this week after the newly-elected government reiterated its hard commitment to reaching a deal with its European counterparts. The European Central Bank (ECB) also extended 5 billion euros in emergency loans to Greek banks in order to guard against potentially severe and sudden withdrawals. The Athens Stock Exchange General Index jumped 11.28 percent this week.
- The Ukraine market rebounded this week after a ceasefire agreement was signed between the country and the separatist rebels. The Ukraine PFTS Index rose 11.12 percent this week.
- Russian equities continued their sharp rally this week. Most of this increase comes from a rebound in Brent crude oil prices as well as the ceasefire signed between Ukraine and rebel forces. The MICEX Index rose 4.71 percent this week.
- Egyptian stocks declined this week, giving back more than the gains it saw in the prior week. The IMF released a statement commenting on the benefits the Egyptian economy could see due to the devaluation of the pound. The Egyptian Exchange EGX 30 Price Index fell 2.19 percent this week.
- Colombian equities did not get a bounce along with crude oil prices this week, and the Indice General de la Bolsa de Valores de Colombia fell 3.15 percent.
- The Brazilian real fell for the third straight week as investors remain uncertain on whether Rousseff’s government can reignite growth in the struggling economy. The real has fallen roughly 20 percent over the past six months, falling 2.14 percent this week.
- China’s worse-than-expected January economic data including imports, inflation and money supply, may reinforce investors’ interpretation of “bad news is good news” due to the rising urgency of policy assistance. Indeed, Chinese equity fund flows registered the largest influx since August 2014 in the past week, ended Wednesday. Chinese financials and property stocks remain the most sensitive to lower interest rates and benefit the most from any further policy easing in China.
- Hungarian equities have broken out since the ECB announced its 1.3 trillion euro stimulus plan on January 22. Hungary had previously been dragged down by deflationary pressures spreading through the eurozone, as seen by its movement alongside the German 5-year breakeven rate. With the ECB’s announcement however, and the consequential uptick in inflation expectations, Hungarian equities have been a significant outperformer in the region.
- Certain economic indicators pertaining to the eurozone have started to yield positive results. Specifically, the Sentix Investors sentiment in the euro-area jumped to 12.37 for the month of February. Clearly, the ECB’s stimulus plans are being received positively by investors in the eurozone.
- While Russian stocks and the ruble have seen significant gains in the past few weeks, it is worth explaining the fundamental drivers behind this to see if the moves are persistent and legitimate. The ruble’s very recent turnaround appears to be directly related to the price of Brent crude oil. This means the currency’s rebound is at the mercy of a continued rise in energy prices, which is far from a guaranteed occurrence moving forward.
- Furthermore, Russian stocks have had an almost inexplicable rally since the beginning of the year, despite escalating tensions with Ukraine, rapidly rising inflation and high borrowing costs. Russia is expecting a sharp contraction in economic growth this year, primarily induced by tumbling credit markets. Thus, Russia’s money supply growth on a year-over-year basis is at its lowest point since 2009. Despite the recent rally, Russia remains an investment to consider with extreme caution.
- Related to this recent rally in Russia, the decline in Turkish equities as well as the Turkish lira is becoming more material. It appears that the large inflows Turkey experienced when Russia started to concern investors early last year are now finding their way back to Moscow. Russian equities as well as the Russian ruble are now overtaking Turkish stocks and the lira.
- Hong Kong’s first annual decline of retail sales in 11 years, paired with its decline in per-capita spending by overnight visitors in 10 years, should alert investors about the diminishing attractiveness of the city for mainland Chinese. Chinese outbound tourists traveling farther away from the country may continue to weigh on Hong Kong’s retail sector.
Leaders and Laggards
The tables show the weekly, monthly and quarterly performance statistics of major equity and commodity market benchmarks of our family of funds.
|S&P Basic Materials||322.63||+9.42||+3.01%|
|Hang Seng Composite Index||3,364.11||+14.55||+0.43%|
|Korean KOSPI Index||1,957.50||+1.98||+0.10%|
|S&P/TSX Canadian Gold Index||180.35||-1.99||-1.09%|
|Natural Gas Futures||2.80||+0.22||+8.38%|
|10-Yr Treasury Bond||2.04||+0.08||+4.09%|
|S&P Basic Materials||322.63||+26.58||+8.98%|
|Hang Seng Composite Index||3,364.11||-332.01||-14.83%|
|Korean KOSPI Index||1,957.50||+43.84||+2.29%|
|S&P/TSX Canadian Gold Index||180.35||+17.24||+10.57%|
|Natural Gas Futures||2.80||-0.44||-13.55%|
|10-Yr Treasury Bond||2.04||+0.18||+9.81%|
|S&P Basic Materials||322.63||+13.20||+4.27%|
|Hang Seng Composite Index||3,364.11||+54.36||+1.64%|
|Korean KOSPI Index||1,957.50||+12.36||+0.64%|
|S&P/TSX Canadian Gold Index||180.35||+32.61||+22.07%|
|Natural Gas Futures||2.80||-1.23||-30.47%|
|10-Yr Treasury Bond||2.04||-0.28||-12.19%|
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.