Communist Politicians
have dominated South African politics since the 1994 election of Communist
Nelson Mandela who rebranded Communism as the National African Congress Party
that still dominates South Africa and has presided over its decline.
Portuguese Explorers
discovered South Africa in 1488. The Dutch East India Company established a
trading post in 1652 and Dutch Settlers began to arrive and establish farms and
businesses. South Africa became a British Colony after 1815. Gold was
discovered in 1886. The British departed in 1994 and Communists took over.
Since then, capital investment in South Africa has been declining.
Doug Casey and Rick Rule on South Africa and
Platinum, Part II, Doug
Casey, 1/30/19.
Justin’s note: Today, we’re sharing part II
of Crisis
Investing chief
analyst Nick Giambruno’s recent interview with resource legends Doug Casey and
Rick Rule. If you missed part I, make sure to catch up here.
Below, the guys take a closer
look at the current crisis in South Africa, and what it could mean for platinum
in the near future…
Nick Giambruno: Rick, given what we’ve been
discussing, do you think there’s a potential for supply disruptions soon from
South Africa?
Rick Rule: I think that it is in fact a
probability rather than a possibility. The industry has not made sufficient
sustaining-capital investments for 10 or 12 years. The industry has been
required politically – sometimes with state assistance – to keep uneconomic shafts
open.
And you have a circumstance
now where the lack of sustaining capital means that literally billions of
dollars must be put in place to rehabilitate these old shafts so that they can
continue to produce. At the same time, workers’ wages must increase.
These two circumstances are
confronting an industry that loses more than a billion dollars a year.
The money has to come from
somewhere, and there is nowhere for it to come from.
The second circumstance that
this discussion needs to include is the fact that although South Africa has
abundant resources, including human resources, the government mismanagement has
been so incredible.
For example, while South
Africa is an exporter of coal and uranium, the domestic power supplier in South
Africa, Eskom, can’t pay its bills or meet demand for electricity.
The mining industry in South
Africa is extremely power-intensive. But Eskom is run more politically. So
ironically, the part of South Africa that pays its power bills – which is the
mining industry – experiences rolling brownouts. Eskom needs to invest more
money – money that it doesn’t have – in power generation and distribution.
This again augurs very
dramatically for supply disruptions.
For example, if there were
an extended brownout, it could cause the pumps for water evacuations in the
deep shafts to go down for very short periods of time, I’m talking about a week
or so. That would cause material destruction to the ventilation and
electrification of these deep shafts. My suspicion is over two or three years,
that’s a probability as opposed to a possibility, too.
Doug Casey: I agree with Rick. Because mining, especially in
South Africa – where mines go a mile or even two miles deep – is both a
high-technology and extremely capital-intensive business.
Today’s South Africa
isn’t generating any new technology; the money is all going into politics, not
science and engineering. Nobody wants to invest in a place where property
rights are ceasing to exist. As Rick emphasized, nobody is going to put any
significant capital in there, and they’re not generating any domestic capital.
I just don’t see how the
mining industry can continue there. It’s a far cry from the 1960s when these
mines were making enough money to pay, on average, 10% dividends with gold at
only $35 an ounce.
Nick Giambruno: You mentioned the disregard for private property
rights, Doug. It appears South Africa is about to embark on a massive private
property confiscation scheme. We’ve seen this before in places like Zimbabwe,
Cuba, and Venezuela. It usually coincides with economic collapse and an exodus
of skilled workers. Could that happen in South Africa, and what are the
implications for the mining industry in particular?
Doug Casey: It’s not just the countries you mentioned. The
Soviet Union and pre-Deng China collapsed because of socialism. Now, as far as
the economic future in South Africa, it’s going to be grim. Why should it be
different from every other experiment in social engineering?
South Africa’s current
culture doesn’t value the mainsprings of progress, which is to say free speech,
free markets, individualism, a sound currency, and a work ethic, among other
things. South Africa is basically a tribal society, and their values are
communal. They’ve also been infected by every stupid idea that’s come down the
pipe from Europe.
The black government is
terminally incompetent and corrupt, and unlikely to get better. They see the
mines, in particular, as cash cows to be milked to the greatest degree
possible.
The whole economy of
Africa is based on primary production, mining, and agriculture. South Africa
has some industry, but it won’t be maintained, or kept up to date. It all
doesn’t bode well for the place.
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Nick Giambruno: South Africa has gone
through numerous episodes of turmoil. A lot of people thought it would collapse
amid bloody riots in the mid-1970s, but it didn’t. Doug, what makes this time
potentially different?
Doug Casey: That’s the $64,000 question.
Let me give you a few thoughts.
In those days, the whites
were relatively more numerous, but South Africa has been suffering white
emigration for a couple of decades now, while the black population has doubled.
The whites used to control the police and the military; that absolutely ended.
The only thing the whites control is the finances of the country, and the
blacks resent that. So, they’re going to lose that as well.
Skilled white South Africans
will continue to make the “chicken run” in accelerating numbers, if they can. I
have relatives and friends in South Africa, and they’re all looking at the
door. Even though the standard of living is still very high. But it’s dangerous
out on the farms and becoming more dangerous. The white exodus is going to turn
into a flood over the next decade.
Nick Giambruno: Rick, what’s your outlook on
the price of platinum going forward?
Rick Rule: My track record in terms of
price forecasting is almost unblemished by success. So, I’m old enough now at
age 65 to sort of resist questions like that.
I can only say that you
wouldn’t significantly reduce platinum demand even if the price were to double
or triple. One of the things that I really like about the platinum business is
it takes about $120 or $130 worth of platinum to make a catalytic convertor
that enables the sale of a $40,000 car. That means the cost of the platinum is
irrelevant in terms of the cost of the vehicle.
I love circumstances where,
1) the price of something must go up because it’s being produced at less than
the cost of production and, 2) the price can go up because the utility that the
commodity delivers is so spectacular relative to its unit cost. Platinum
exhibits both of those characteristics.
In other words, the industry
pricing is unsustainable relative to the cost to produce platinum. The utility
of platinum is so extraordinary in every application that it’s used for that my
belief is you have a circumstance where the price can go up and must go up. So,
it will go up. I’m just unwilling to tell you how high, because I don’t know.
Nick Giambruno: Any final thoughts?
Doug Casey: Again, I agree with Rick.
I would just add, the big
danger in the commodity business is a continuing collapse in commodity prices.
That is the absolute longest trend in world history; it’s been going on for
10,000 years, and it’s a good thing – great cause for optimism. It used to be
that a little bit of metal was extremely valuable thousands of years ago; now
it’s worth almost nothing. That trend is going to accelerate with the
development of both nanotech and biotech, as well as better and cheaper power
sources. Extraction and processing costs are going to drop radically – at least
in countries that aren’t political basket cases. All commodities are inevitably
headed towards zero over the long run. Unless the whole world starts acting
like today’s South Africa.
But from a current income
statement point of view, I realize that’s just academically interesting. Not
terribly relevant to the next quarter. But it’s good to keep these thoughts in
the back of your mind when you get overenthusiastic about any commodities.
Rick Rule: Doug is correct. Commodity
prices in real terms have been falling at about 1% compounded for a very long
time. That notwithstanding, focusing on commodity-based investments has made me
rich.
The way that I’ve done it is
by concentrating on materials that other people weren’t concentrating on where
the cost of producing those materials was higher than the median selling price
of the material.
In other words, while over
20 or 30 years the real price of a material may fall, if you are able to buy that
material over a period of time when the price has to rise in the near-term, you
can do very well.
But I also want to pause at
a more optimistic viewpoint on Africa than Doug left you with. It’s a topic I
am familiar with, because I correspond with and in fact attempt to mentor a
great number of African people under the age of 40, most of them under the age
of 30. And I can tell you that large, innovative, and rapidly growing companies
are emerging all over the African continent that are staffed by, cater to, and
financed by indigenous African people.
I am much less concerned
about the white flight in South Africa, looking as an example at the competency
of the indigenous staff at companies like Ivanhoe Mines or Rand Gold.
What I’m more concerned
about is the fondness of the indigenous political classes for the worst
legacies of colonialism, which are in fact government and socialism. So, while
in the near term I don’t argue with Doug’s pessimism, in the five- to 10-year
timeframe I personally am an unalloyed bull on Africa.
Norb Leahy, Dunwoody
GA Tea Party Leader
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