The series of sectoral analysis on the Zimbabwe Stock Exchange continues. Today's focus shifts to the mining counters. Globally, mines are cutting on production and exploration due to plummeting commodity prices. With the exception of gold and to some extent uranium, the global mining landscape is a sad story. From the miners of rare Tanzanite in Tanzania, to the glitter of diamonds at Debswana in Botswana, the sad news of production cuts and layoffs continue to dominate the landscape. Commodity rich Africa is facing a challenge that is set to slow down and in some instances, reverse the strong growth that had characterized the last five years. Zambia, whose economic prospects swing with in tandem with the international copper prices, has been hit very hard. And since October 20 last year, life has never been the same for Zambian economy.
Copper prices have collapsed by more than 50% from the July 2008 peak of $8940 per tonne. With two thirds of Zambia’s export earnings coming from copper, the exchange rate has responded and collapsed by about 48% to the current $1/KW5592 over the same period. The Lusaka Stock Exchange (LuSE) which had benefited from huge liquidity inflows from largely the exports that sustained a sharply appreciating exchange rate (whilst the local inflation pushed the kwacha share prices upwards) attracted huge attention in 2007 when it bagged a whopping 108% return in US$ terms. It joined the Shanghai Stock Exchange among the league of the best stock markets in 2007. Its a pity today that all who bet on the Kwacha and the LuSE since October 2008 have lost out as the gold train derails. The only benefit coming from the crushing copper prices in Zambia has been less power cuts. The mining sector that used to consume about 49% of the internal generation is cooling off, leaving enough capacity in the national grid to feed other industries and users that would ordinarily suffer when the copper fundamentals are solid. At least Zambia can afford to export to Zimbabwe, thanks to the global crisis.
Angola, whose GDP growth rate rocketed past the 15% mark in 2007 and 2008, joins its league of oil and diamond commodity-rich African countries that have seen fortunes getting darker by the day. It would have to painfully scale down ambitious infrastructure and other social programs as the major sources of revenue have hit a bad patch. Having promised many deliverables in the run-up to the elections, the President of Angola sees the need to kick start an awareness program to educate the citizens of ‘the seriousness of the situation’, of course to manage expectations. Its preparation to host the 2010 Africa Cup of Nations soccer tournament has not come at the right time in its history. There is however a silver lining. Due to the shallow financial markets and the absence of mortgage financing, the property market in Angola, just like the Tanzanian one, has kept its glitter.
Zimbabwe mines missed the global commodity rally of the last five years because of administrative pricing and implicit taxation on the back of many schemes by policy makers that negatively exploited the sector. With that, they missed the biggest opportunity in a century to beef up the physical capital and strengthen their financial reserves. The threat and confusion regarding indigenization scared off potential exploration in other areas, whilst power challenges and the associated illogically exchange rate regime left big scars on the mining landscapes that are much more visible than the dump sites the mines created! Today the exchange rate issue could be over, but without a sustainable price and with no capital to de-water and retool, many of the mines will remain closed. The Mhangura and Inyati copper mines missed a lifetime opportunity when copper prices buoyed exploration and production in Zambia’s copper belt and the rest of the world. Zimbabwe’s copper production has sustained a sharp decrease from as high as 27 000 tonnes in 1980 to as low as 2500 tonnes in 2005, and sadly it will not recover now the prices have slumped and the lines of credit have dried.
For its huge coal reserves, massive operational infrastructure, coking ovens and thermal electricity generation coal in the face of the regional power shortages, Hwange continues to fail to impress investors on the Zimbabwe Stock Exchange and has traded around $25 million market cap for some time. But it’s definitely a good buying opportunity.
The glitter of Rio Zim remains to shine only on Renco mine as Murowa Diamonds stares into the eyes of waning global affection for diamonds. The dollarisation and subsequent policy changes that saw the abolition of the RBZ surrender requirements will put RioZim gold production in favorable light, but its nickel and diamond fundamentals remain challenged. The overall future for the company is much better notwithstanding the challenges. The portfolio comprising coal, metals, gold and diamonds is diversified enough to allow RioZim to inject more capital into higher yielding activities and create value for shareholders in the long term. The sentiment driven gold price, which continues to be buoyed by negative global prospects, will put RioZim gold mining activities in better shape. And should it meet at least its 2007 gold production of about 645kgs, RionZim would be a step stronger in turning strong positive cash flows at a time the banks are not easily loosening the funding towards working capital and other capital projects in the mining sector. Whatever prospects of gold and coal one can look at with the current market cap of Rio Zim around $24 million, it doesn’t need much analysis to see the value that many will scramble for sooner. The fortunes of Falgold follow more or less the same trends.
