Mining Stocks: Which Ones Should You Avoid?

PUBLISHED: Tue, 18 Sep 2012 14:37:04 GMT

Mining shares looked like those most precious of commodities last week, with the FTSE mining index jumping 18 percent in the week to Friday.

But ongoing labor woes in South Africa, a key production center for many London-listed miners, have reminded investors of the risks of doing business in a region beset by political uncertainty. 

Mining shares are down by more than two percent on Tuesday, and few analysts see much scope of a near-term recovery, particularly for firms most exposed to South Africa.

That heaps even more pressure on Lonmin.  The firm’s revenues are driven by platinum production at its Marikana mine, the site of the greatest social strife in the post-Apartheid era.  Despite hints of constructive negotiations between managers and disgruntled workers today, most analysts see little upside for the battered mining company.

“The problem is that Marikana has always been a terrible, terrible mine,” said Ian Armstrong, an analyst at Brewin Dolphin, citing recurring safety issues at the site.  “Lonmin has never really invested in it.”Anglo American, which holds a majority stake in Anglo Platinum, and Aquarius are also likely to lag the wider market. Striking workers have brought a halt to production at assets owned by both miners over the past several weeks.

Petra Diamonds relies wholly on South African extraction, but could escape the wrath of investors, as its highly mechanized operations require comparatively little human capital, said Alison Turner, mining analyst at Panmure Gordon.

The larger, more diversified mining companies Xstrata, BHP Billiton , Rio Tinto , and ENRC are more easily able to counter South African production disruption, and are unlikely to remain under pressure, analysts said.

But that’s assuming demand for commodities doesn’t fall off a cliff, they warned, citing concern over the larger-than-expected slowdown in the formerly resource-starved Chinese economy.  It was the plunge in platinum prices, coupled with increased wage demands from Lonmin employees, that led to violence at the Marikana mine.

Despite plunging automobile sales — European registrations fell by nearly eight percent in August — some analysts believe that platinum prices may have bottomed. Platinum is a key component in catalytic converters. 

“Europe is difficult [for car sales],” said Ian Armstrong, analyst at Brewin Dolphin. “But in the U.S. we have QE3, which could possibly help demand, and we’re waiting for stimulus in China.”  Growth in car sales in China has slipped to an annual rate of just three percent, he added, from a rate of over 20 percent in 2010/2011.

The reduced supply of platinum in the wake of production halts in South Africa should also put a floor under the price of the precious metal. “Suddenly people have said, ‘We can’t be short’ [of platinum] because we don’t know what’s going on with supply,” said Turner at Panmure Gordon, one of the few analysts who remains positive on Lonmin.

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