Although heightened policy uncertainty has dampened the effects of the commodity price recovery on industry sentiment, investors appear to already be expecting improved performance from the mining sector. At the time of writing in mid-August, three of the top 10 best performing shares on the JSE this year where mining companies, with several mining shares posting double digit climbs since the beginning of the year.
Kumba and Exxaro’s share prices both climbed by nearly 20% as did the prices of GoldFields and mining giants Anglo American and Glencore. The latter received a strong boost from the upsurge in the price of zinc, thanks to shortages of the metal in China. The top performing share on the JSE, Tawana Resources, also climbed by over 130% since the start of 2017.
The increased earnings this surge in share prices implies was validated by recent company updates. Even as several companies have announced cost-cutting programmes, others reported strong improvements. Kumba Iron Ore saw a 53% jump in its mid-year earnings and announced it would resume dividend payments. Exxaro Resources said its profits for the first half of the year have more than doubled thanks to growth in its coal business.
The improved outlook has also allowed South African mining companies to look beyond local uncertainty to continue to expand far beyond the country’s borders. Earlier in the year Sibanye Gold received overwhelming support for its US$1 billion (R13 billion) rights offer to partly refinance a US$2.65 billion bridge loan facility to acquire the Stillwater Mining Company.
Stillwater is the only US miner of platinum group metals (PGMs) and the largest primary producer of PGMs outside of South Africa and the Russian Federation. Northam Platinum is also looking to acquire assets in the US platinum group metal industry, investing $10.7 million cash to acquire recycling group A-1 Specialised Services.
A strong and established community of analysts who understands the technical and business aspects of the mining sector and can adjust their expectations accordingly is one of the factors which make listing on the JSE an attractive option for miners seeking to raise capital. South Africa is also currently ranked 1st in the world for raising capital through the local equity market according to the latest World Economic Forum’s Global Competitiveness Report.
The JSE balanced mix of debt and equity funding the JSE offers can help companies to raise capital through mechanisms that is versatile enough to be adjusted as sentiment improves. In keeping with the need for versatility, the exchange has seen an increase in interest in the listing of permanent capital vehicles like investment holding companies and Special Purpose acquisition companies (SPACs).
A SPAC is a publicly traded cash shell that has a specific mandate to acquire or merge with other companies or assets within a defined period of 24 months. The JSE saw two new SPACs list this year and the opportunity remains to use this vehicle to create a SPAC focussed on the acquisition of mining assets. Such a specialised mining fund could be used to create a portfolio of diversified mining assets and possibly address some of the reluctance among investors to put money into junior miners which hold limited assets on their own. There were two notable transactions in SA’s mining sector this year that showcase the versatility of convertible bonds as a capital raising instrument. Royal Bafokeng Platinum issued R1.2 billion of unsecured, convertible bonds due in 2022 to finance the its plans to increase production at its Styldrift I mine.
Impala platinum came to market in May 2017, with a dual tranche offering of R3,25 billion and US$250 million unsecured convertible bonds due in June 2022. Implats used the new bond offering to refinance its existing convertible bonds maturing next year. The transaction helped to significantly enhance Implats’ short-to-medium term liquidity.
The primary benefit of using bonds as a funding mechanism is that can raise sizable amounts of capital at relatively low cash cost of interest. These bond offerings enabled both companies to optimise their cost of funding and raise sizable amounts of funding by tapping a more diversified, deeper pool of liquidity. A bonds’ coupon also allows the company to raise long-term, fixed-rate funding that is tax deductible.
The JSE also offers an accelerated secondary listing process for companies which have been listed on the London Stock Exchange, The Australian Stock Exchange, the New York Stock Exchange and the Toronto Stock Exchange for a period of at least 18 months and therefore meets all of the listing requirements of these exchanges already.
The fast track listing process eliminates the need to produce a prelisting statement and companies are only required to release a prelisting announcement, which greatly reduces the time and costs associated with listing.
Patryjca Kula-Verster, JSE
