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Gold Mining: Will South Africa Nationalize?

The stock market sees nationalization of South Africa's Gold Mining industry as a real threat...

that South African mineral projects will be nationalized stems from Julius Malema, the head of the Youth League of the ANC, reports Julian Phillips in

The idea has been rumbling on for some time now. Mrs Shabangu, the Mines Minister, previously stated that it would not happen in her lifetime. But this was ignored by the Youth League, who held to their position.

At that time it was not on the agenda of the African National Congress (ANC), and was treated with a measure of derision by the senior executive. But then the issue blew up at last month's ANC conference, and the ANC has placed the issue on its agenda for 2012.

As in most countries, internal national issues in South African politics always rise in importance far above international ones. The issue of whether the "previously disadvantaged classes" in South Africa are getting their fair portion of the country's wealth has been a burning issue since 1994 and is unlikely to go away.

"T.I.S." – the quote from the film Blood Diamonds – means "This is Africa," a phrase often used to highlight that thinking is different in Africa to the rest of the world. The developed-world concepts that laws rule government, that good economic sense will prevail, and that education and an understanding of Western capitalism should pervade all walks of economic life, simply do not apply in Africa, as history amply demonstrates.

So, before taking the issue of Gold Mining and other mineral nationalization further, readers must first factor in certain sub-Saharan cultural differences that they may be unaware of.

Glance at the history of sub-Saharan history and you will see an overriding description of rulership by individual tribal leaders. Names like Robert Mugabe, Mobutu Sese-Seko, Dr Banda, Idi Amin and in the past Shaka Zulu spring to mind. How did they get so much power? In that part of the world, an African chief is considered the father of the tribe. He has the right to everything and – as a father – he is expected to look after his children. As such, it is deemed right that he should own everything. His word is law and that law may change from time to time, according to the situation he finds. Any Cabinet he may surround himself with is there to advise him, for he makes the decisions, not the Cabinet or party.

Now, in South Africa and Zambia's case, this outlook has been modified to some extent, for in Zambia the government is a mixture of several tribes, while in South Africa – where the Xhosa tribe is dominant – politics via the Unions has diluted the sole leader's power. Nevertheless, even here, government reflects the pressures of power and sees legislation as subject to those pressures.

Government can of course alter legislation any time in almost one-party nations. It is against this background that mining legislation should be seen.

I myself experienced this attitude first-hand in Mozambique, when I quoted a regulation agreed with the World Bank on debt conversion. I pointed out that particular regulation to officials of Mozambique's central bank, who replied that, "Oh, that's only what's written." The top official in charge of the application made it clear that his opinion at that time would override any such regulations.

In Zimbabwe, as we have all seen repeatedly since Mr. Mugabe took the reins, the desire to control and own the wealth of the own country by the current leaders has been relentless, oblivious to the destruction of their own people's wealth and welfare, and a repeat of what happened in Angola, the Congo and Rwanda.

With this in mind, one looks at South Africa – which to its credit has seen the reins of power held in ANC hands since 1994, rather than falling to a despotic "father" – and the overall shape of the economy is still much the same as it was prior to 1994. In that time there has been the pervasive policy of "Black Empowerment", now applied to all walks of life. To date, however, this has not sprinted to its objectives too quickly, in the hope that the economic engine will run at the same pace it did before the end of apartheid. The intention of the government has been that "the city should come to the village", but slowly we've seen the village come to the city. And it is this process that will dictate the future of South Africa.

In South Africa. the fattest goose has always been the mining sector, and thus the object of avaricious government eyes. But this goose has thinned tremendously in the past decade, as a rising Rand has choked off new growth in the Gold Mining sector and the tonnage produced has fallen from a peak of over 1,000 tonnes of gold to the present around 170 tonnes per year. Shallow mining of platinum is faring much better, but is therefore just as vulnerable.

The underlying belief in the heart of the Unions – that workers should get a bigger share of the profits through wages rising faster than inflation – will only see costs rising at an accelerating pace, making future growth in Gold Mining slow continuously. But is talk of nationalization a Socialist policy or an African one?

Please note that African Communism has little to do with Russian or Chinese Communism. Hence the above question. You have to blend the above attitudes to ownership with the unionism of the largest labor union in South Africa COSATU. The government has to rely to a great extent on COSATU's support to continue to rule unchallenged. There have been signs of deep discord between the two of late, for Black Empowerment appears to follow the traditions of tribal Africa more than it does Socialism, much to the annoyance of the Unions. The number of truly empowered Africans (often related to political leaders) is very few, with the principles of the process broken repeatedly as a small number of nepotistic relations, well connected to the elite, have gained great wealth while the poor majority remain as poor as ever.

There is the tale, for instance, of Wisdom Mbutu and Happy Boy Mtwetwe digging holes in the road. Happy Boy turns to Wisdom and says, "After the revolution the bosses will dig the holes in the road". Ten years later – and after the ANC has been in power for many years – there they are, both still digging the holes. So Wisdom says to Happy Boy, "I thought you said the bosses would be digging the roads after the revolution" to which Happy Boy replies, "We are!"

The driving force behind the discussion on nationalization is the Black Empowerment process. However, as the efficiency of the system declines (you saw that in electricity output in 2008 and 2009, and it's coming in hospitals, water and a host of state run or para-state run enterprises), it is clear to all, including the ANC, that such a step would mean a disaster for production and profits. It would also mean the end of foreign investments in South Africa, but the nation cannot grow without foreign investments in the country.

Despite all this, the issue is now on the agenda. It is the political shape of the country that will dictate whether nationalization will happen. We cannot rule it out as we felt we could a month ago. With BEE already demanding that 26% of South African mining be handed (almost free) to black "investors", there is a distinct possibility that nationalization could happen!

The conclusion of the ANC's discussion may well be two years away still, but the fact that it is on the agenda will delay or deter foreign investment on a broad front in South Africa. Should it become a reality thereafter, you will see South Africa slide down a very steep slope towards the state that Zimbabwe is in now. The lower prices South African shares have relative to their US and Canadian counterparts reflects this possibility.

What will South African Gold Mining companies do about this?

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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