South African changes could tap capital from North America

The improved fortunes in gold prices since late 1989 combined with the rapidly improving political situation in South Africa — the world’s largest gold producer — is boding well for that country’s gold mining industry. In 1989, South African gold mining share prices have improved by 54%, compared with about 30% with North American gold stocks and 8% for Australian shares. “The performance of South African gold stocks has been phenomenal,” a Toronto-based mining analyst told The Northern Miner. “The money is pouring in.”

All that positive talk about South Africa could have some negative implications for the North American and Australian gold sectors by leading to a reduction in the amount of money which would normally have been earmarked for non-South African investments.

The barometer of investor confidence in South Africa has been the financial rand’s discount relative to the commercial rand. This discount between the two South African currencies has narrowed to about 23% from a high of 40% at the beginning of 1989, James Chapel, a London-based brokerage firm, wrote last month.

Growing investor confidence in the country has accelerated on the heels of a major shift in government policy toward the African National Congress (ANC) and apartheid in general. This shift came to pass earlier this month when president F.W. de Klerk announced the lifting of a ban on the ANC and hinted at the possible release from prison of Nelson Mandela, ANC founder.

Combined with a healthy gold rally, investors are back looking for value in South African gold mining shares. According to James Chapel, there is plenty of value to be had. The gold index on the Johannesburg Stock Exchange trades at price earnings multiple of little better than 11 times. This, Chapel says, “is very cheap by world standards.” In Toronto for example, the TSE gold and silver index is trading around 30 times 1989 earnings with companies such as American Barrick Resources hovering near 60 times earnings.

Despite the bullish sentiment on South Africa, some analysts remain cautious about the country’s future. “Traditionally, investors have always wanted a high yield (on South African stocks) to compensate for the political risk,” an analyst commented. Yields after 15% withholding tax average 4%-5% — high by North American standards. He added that the reforms in South Africa leading to the banning of apartheid and the establishment of an equal black vote could lead to even more political violence, not only between extremist white nationalist groups and blacks, but among blacks themselves.

Eight black ethnic groups and more than 150 political organizations, representing widely varying interests and political agendas, exist in the country.