South Africa is home to the highest-cost gold miners in the world, placing the country's huge gold and platinum mining industries in peril due to persistently low metal prices. The country has been in turmoil in other ways as well, with a floundering South African rand and lack of government stability a common theme.
Free Fall for the Rand
The unpopular and risky decision made by South African President Zuma to dismiss his finance minister (after just 19 months on the job) and replace him with a relative unknown is have reverberations throughout South Africa's economy. Not only do citizens have very low approval ratings of Zuma, but investors are being scared off by the seeming lack of clarity and unknown variables for the country's economic outlook. With investment flowing out of the country and public sentiment within it souring, the South African currency (the rand) has been hit hard.
The rand is now down 25% on the year, overtaking the Brazilian real as the world currency that traders are most bearish on. (Brazil's similar economic downturn during the commodity rout is being exacerbated by political scandal.) The country's banking system took a huge hit as a result, with $11 billion in value erased from South African assets in just 2 days and bond yields spiking. As recently as 2011, the rand (currency symbol ZAR) traded at 6.6 per dollar. Since then, it has consistently weakened, briefly falling as far as 16 per dollar (a new record-low) this week as the situation in South Africa began to look increasingly shaky.
The ZAR fell another 2% on Friday (see chart below), and is around 15.8 per dollar. Moreover, South Africa recently has its debt downgraded to BBB- by Fitch. BBB- is the lowest investment grade above "junk" status, and more credit downgrades from Standards & Poors could be on the way.
Benefiting the Miners?
Even as the country's financial system is in disarray, the sharply devalued rand was cause for renewed investment in the country's mining firms. Even with the downturn, mining still makes up a significant portion of South Africa's economy. Six the world's largest precious metal mining companies—Anglo American Platinum (JSE:AS), AngloGold Ashanti (NYSE:AU; ASX:AGG; JSE:ANG), Gold Fields (NYSE, JSE:GFI), Harmony Gold (NYSE:HMY), and Sibanye Gold (NYSE:SBGL; JSE:SGL)—operate out of South Africa. This is no coincidence, as the region has long been one of the world's richest in precious metal deposits.
Undoubtedly, times have been rough for the South African miners this year. Like the surprise change in finance minister, the president named an inexperienced newcomer as the important Chamber of Mines about 2 months ago.
Update: Just four days after dismissing the country's finance minister, South African President Zuma re-appointed his predecessor rather than go with the aforementioned newcomer.
Many have questioned if we're witnessing the collapse of the entire country's mining industries. The weaker rand, however, was a boon for the miners. Not only does the softer rand help them cover their expenses more easily, it also makes it cheaper for foreign investment. Many saw the plunging rand as a buying opportunity for the South African miners: earlier this week, Harmony surged 25%, AngloGold Ashanti and Gold Fields gained 9% each, and Sibanye added almost 6%. The rally was Harmony's biggest advance in 16 years. Anglo American saw better than 4% gains, while the country's #2 platinum producer, Impala Platinum (JSE:IMP), rallied better than 6%.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.