South Africa wants a large share of gold mines for its own population

Shares of gold miners in South Africa fell sharply last week after the government announced new plans to take a larger share of the property. To be transferred to the black population.

The South African Ministry of Mines wants at least 30% of all shares in the mining sector to be in the hands of the black population, a limit that was previously set at 26%. For several mines, this measure means that they have to issue new shares, diluting the value for existing shareholders.

South Africa's mining sector has long been under fire because the government believes that too much revenue from mining benefits the white population and foreign investors. By setting a new quota, the government thinks it can put a larger part of the property back in the hands of the black population. 

In addition, the government wants the mining sector to pay part of its income (1% of total turnover) to the local community and for the black community to have more say in new projects. Finally, the government wants to oblige the mining sector to purchase the majority of its goods (80%) and services (70%) from local suppliers.

Mining sector under pressure

"This new charter is significantly worse for the mining sector than the original plan. It is ill-conceived and raises serious questions about the government's commitment to protecting property rights."Peter Leon of law firm Herbert Smith Freehills told Bloomberg.

The big mining companies will challenge the government's new charter in court, arguing that their property rights are not respected and the terms are contrary to the South African constitution. The mines also fear the deterrent effect of such measures on foreign investors. This is also reflected in the share prices of South African mining companies, which reached their lowest price-to-earnings ratio since 2012.

Investors sell shares of South African mining companies (Chart via Zero Hedge)

Risks of gold mining

According to HSBC, it is strongly discouraged to invest in South African mining companies if the plans in this form are actually implemented by the South African government. Not only do investors run the risk of diluting the value of their shares, but it also makes it more difficult to sell shares.

A radical transformation of property from the white to the black population can turn out very badly, as we saw in Zimbabwe at the beginning of this century under the leadership of President Mugabe. He chased away all the white farmers, sending the economy into a major crisis and hyperinflation ensuing.

As an investor, it is important to be aware of the risks associated with the mining sector. Gold mines have different forms of counterparty risk that you can Buy physical gold don't have one. The biggest counterparty risk is the government, which can unilaterally change the rules of the game at any time. Therefore, as an investor in gold mining stocks, it is wise to spread your investments across mining companies in different countries.

South Africa wants a large share of gold mines for its own population