After the Bell: South Africa’s R1.2-trillion investment problem
South Africa’s fifth and final investment conference takes place on Thursday, 13 April. Don’t be surprised if it’s not, at least in public, a grand celebration. The target that was set five years ago was to raise R1.2-trillion. Technically, the investment drive is less than R100-billion short, and since R360-billion was raised last year, it seems likely that the target will be reached. Hooray! Victory!
Er, not so fast. There is a slight problem with, you know, the actual maths.
The first and main problem is that an undertaking is just a little bit different from a contract. One of the characteristics of promises is that they are almost always made most convincingly by liars. And we, the beneficiaries of these pledges, too often forget the ones we should remember and remember the ones we should forget.
But, the organisers will tell you, of the 360-odd pledges, 160 are under construction, 45 projects have already been completed, and R450-billion has already been spent. Was it a worthwhile effort? Absolutely. Did it move the needle? Well, notwithstanding my colleague Ed Stoddard’s scepticism here, my guess is that it probably did a bit. But it’s hard to argue with Stoddard’s observation that, just for example, SA last year accounted for less than 1% of global mining exploration expenditure, compared with more than 5% back in 2004.
And, of course, there have been some spectacular disasters. The most prominent is Rio Tinto’s Zulti South titanium mining project, which was the star of the first investment conference. Rio promised to invest $463-million in the extension of its existing project Zulti North.
The project is still on hold five years later after violent extortion campaigns, which included assassinations by local gangs of the company’s staff, made it difficult to operate in the area. So, that’s $8.5-billion of investment pledged but never delivered. In general, it’s hard to square the notion that SA got R1.2-trillion in investments with the country’s lacklustre GDP growth numbers.
On a related topic, what do investors really think about South Africa? Strip away the handshakes and the podiums and television cameras and what do they observe? It just so happens that I was chatting to a UK-based investor in emerging markets this past weekend, who had just taken an extended and in-depth look at South Africa; his observations were revealing.
The first thing is that foreign investors in really big investment funds are interested in SA. Great! Fabulous! Well, er, not so fast. The reason they are interested is not necessarily because they think South Africa is on its way to emerging market brilliance and outperformance, but because serious fund managers are all about value. Sometimes that means looking for undervalued areas of the world that might turn around and getting in early.
Hence, SA is not interesting because it’s succeeding, but because it’s failing, which means there is a chance of a turnaround. This particular fund manager, whom I won’t name, said he once had about 10% of his global fund invested in SA. It currently sits at about 2%.
It’s easy to see this at work on global stock markets. Gold stocks are a good test case because they produce a standard product that is market-priced. SA’s two big gold companies, Gold Fields and AngloGold Ashanti, have a market capitalisation of $13-billion and $11-billion, respectively. The world’s largest gold companies are Newmont and Barrick, which have market caps of $39-billion and $34-billion, respectively.
However, production figures reveal that the value trap becomes just eye-popping. Barrick, for example, produced 4.14 million ounces of gold in 2022 while AngloGold produced 2.75 million ounces at all their mines. In other words, AngloGold produced more than half the gold produced by Barrick but is valued on the market at just less than a third of Barrick’s value.
How does that kind of weird value differential happen? Aren’t markets supposed to be efficient? All kinds of reasons are given for the disproportion: the size difference (bigger is often better); the relative risk level in the different jurisdictions in which the countries mine (Africa is generally much riskier); the average cash costs of the different operations, etc.
For years, investors said the problem for AngloGold was its expensive, deep, risky South African operations. But now the company that once dominated the local industry has not a single mine, zero, left in SA and yet, the value difference hasn’t shifted much.
Which brings me to the second interesting point made by my unnamed investor. When foreign investors look at SA and countries with high risk, they tend to look top-down. When they are looking at less risky countries, the perspective is more bottom-up; in other words, they tend to look at the prospects of individual companies’ potential. So, in Europe, they would look at, say, internet food delivery services, rather than whether France, as a market, is an investment opportunity or not. With SA, it’s the other way around.
It’s kinda obvious. When you have macro risk, that becomes the main issue and overrides everything else. And it slightly helps to understand why South Africa-listed AngloGold is so badly rated compared with Canada-listed Barrick even though AngloGold doesn’t have any mines in SA.
It also helps to understand why the investment conference, though well-intentioned, doesn’t quite cut the cake. The SA government, like all governments around the world, wants projects that are specific and concrete that people can see and touch, and that “provide jobs”. But in fact, this is somewhat misplaced. There are plenty of local companies to provide jobs. But the problem is that macro issues are hindering investment.
The message should be this: fix the macro, and the micro will look after itself, even, as it happens, when the “micro” is denominated in trillions. DM/BM