[miningmx.com] — ONE of the lesser known aspects of Finance Minister Pravin Gordhan’s budget speech this year was the extension of foreign exchange allowances to the country’s banks.
The text of the speech is somewhat “airy fairy’, according to one prominent attorney to whom I addressed the issue this week, but in essence, government will allow foreign exposure for banks to equal 25% of their total liabilities.
Here’s the statement: “Government has now finalised reporting measures for prudential foreign exposure limits on banks, which will be introduced at 25% of their total liabilities’. Gordhan added that government would be shortly releasing a framework document on reforming excon.
It was initially hoped that banks would be able to borrow against as much as 40% of their total liabilities for offshore, non-African financing, but nonetheless this is an advance. What it means is that South African banks can compete for more business because they can borrow against their South African balance sheets.
In mining finance specifically, South African banks have excelled. The likes of Nedbank, Rand Merchant Bank, and Standard Bank – I’m sure there are others – have ranked among the top 10 to 15 of all banking institutions internationally for mining deals. The finance banking industry is tiny in the big going round of world banking affairs, but nonetheless, there it is.
From a banking perspective, borrowers can now be anywhere in the world which must surely broaden the potential client base. According to one banker, however, it also helps the country’s banks compete more aggressively in Africa where excon had already been liberalised.
That’s because subsidiaries of companies operating in Africa normally have Australian or Canadian parent firms against which South African banks fall foul on excon grounds.
The big kicker, however, is with banking treasuries. These are the divisions within a bank that offer products such as hedging on potential currency losses.
“I’d say we’re reasonably pleased with the excon relaxation, but the treasuries are really excited about it,’ said one banker. One hopes, however, this doesn’t tempt companies into overly exotic hedging strategies. I’m suspicious when commodity companies spend more time engineering their balance sheets than they do on producing metals. It often leads to trouble as Ashanti Goldfields, the former Ghanaian gold mining giant discovered when hedging positions almost sank it.
There are some perennial problems with our mining financing brethren, however. The South African balance sheets are comprised of whatever depositors put into them – ZARs – such as FirstRand in the case of Rand Merchant Bank.
So the cost of offering dollar-denominated debt is still more expensive for a South African bank than it would be for a Canadian bank, for instance, which would have dollar depositors.
AngloGold Ashanti
I suspect the prospect of AngloGold hiving its assets into separately listed, geographically determined companies, to be a slightly overcooked story.
Mark Cutifani, AngloGold’s CEO, has pop star status, however. So when he responds hypothetically to a question, it tends to be taken as a virtuality; afterall, he’s done everything else he’s said he’d do.
Which is not to say AngloGold won’t follow the route of Barrick Gold which in African Barrick has not only created a highly focused vehicle for its African interests, but will also ring-fence the potentially unique and/or troublesome nature of operating in Africa.
AngloGold would no doubt do the same. Its South African assets are high quality but they are assailed; assailed by exogenous factors like bounding electricity costs and helter skelter politics. So when Cutifani said he would fix the South African assets, he’s well within the bounds of reason to talk about separately floating the South African mines.
It’s all very interesting. The South African mines used to be separately floated but it was Cutifani’s predecessor, Bobby Godsell, who consolidated them into the current vehicle which he hoped would compete internationally with the likes of Barrick.
Investors appreciated it too. Or at least, I think they do. AngloGold’s share price averaged R128/share in 2000 soon after the consolidation of its constituent mines compared to R270/share now. But Cutifani nonetheless thinks the parts can be worth far greater than the whole. Some suggest $2bn to $3.5bn in value could be unlocked.
There’s even talk Gold Fields and Harmony Gold would consider similar steps as a means of unlocking value. Were that the case, the South African gold index would be comprised of relatively high quality but almost marginal assets with leverage to conditions such as political statements and currency changes more pronounced than currently.
One final thing. The super-niching of the gold pure play runs counter to the move towards greater scale and consolidation we’ve seen among the mining giants. That’s related to how the metal’s market works. The movement in the gold price is influenced by factors – such as the value of the dollar and geopolitical developments – quite different from say, nickel, where demand plays a much greater role.
