Precious Metals Mining in South Africa - Opportunities Sometimes Emerge During the Worst of Times

Some stalwarts of South Africa's mining sector have fallen on particularly hard times in today's regime of low commodity prices. Nowhere is this better illustrated than in the case of Lonmin Mining.  In essence, existing share owners have been thrown under the bus in Lonmin's recent effort to raise cash through the issuance of new shares.

The company announced the details of its fourth equity raise in seven years on Monday. The company is asking for another R5.7bn ($407m). Consider that Lonmin’s market capitalisation at the time of writing was just R2.2bn and you realise the announcement to raise gross proceeds of $407m by way of a rights offer is not just a little bit to ‘tide them over’.

Value vanished

If you had bought Lonmin shares:	You are down:
3 months ago	52%
6 months ago	85%
One year ago	88%
Three years ago	88%
Five years ago	96%

Readers would be well advised to read the full article:

Lonmin: Thanks, but no thanks

A few supplementary comments about mining in South Africa:

• Corruption is a fact of business life and the political class is not immune to the idea of manipulating legal systems and business practices to its advantage.
• The operating costs of large, old mines are appreciable: efforts to replenish reserves are expensive, many shafts are deep and beset with operating difficulties not experienced by competitors elsewhere, power is sometimes unreliable, and union militancy is always an issue not only in terms of expectations for wage increases at the bottom of the mining cycle, but also for the influence unions exert on politicians intent on maintaining employment for its electorate.  

I have not and will not invest in mines in South Africa for these reasons.  It is a capricious environment in my view, especially when one considers that more attractive prospects exist elsewhere. 

The message of the following article is couched in diplomatic language, but it doesn't take much to ascertain the real import of some major indigenous challenges which miners in South Africa have to consider.  No wonder that limited funds are being directed elsewhere. 

Mining Investment in South Africa 2015

This bleak assessment does not mean that there are not a few opportunities for investors who are willing to tolerate a large amount of risk.  Some companies are pursuing strategies to develop mines with low development and operating costs: exploitation of shallow deposits with the use of mechanized mining techniques. 

South Africa's Platinum Miners Start Over

The other area to investigate is mechanized mining.  It is safer, cheaper, and less prone to disruption as a result of personnel issues. I will be searching for up and coming companies in this sector. It is an area which is applicable to all forms of mining, ranging from self-driving trucks to drilling equipment.  

Here are some of the characteristics I will be looking for in my search:

• Excellent management: entrepreneurial, solid understanding of the mining industry by virtue of practical experience, proven track record and able to raise capital and market product
• Superior technology 
• A solid market for its technology i.e. meets a real need
• Solid contacts within the industry and a stellar reputation for service
• Good balance sheet and access to capital: preferably an income stream to reduce the need for borrowing

Companies which can survive in the current environment should do well once the mining cycle turns ... and it will turn once again just as night turns to day.