Pay attention to labour in the Frontier


I would like to address the Marikana strikes; the mass protests and wildcat strikes that South Africa experienced in August – September 2012 in its mining sector.  For approximately 1 month, 1/3 of the world’s platinum production ceased as well as 20% of the world’s gold production.  44 people were killed and over 12,000 were fired from Anglo American Platinum.  Investor sentiment has deteriorated in the country and Moody’s downgraded the country one notch to Baa1.   Numerous companies were impacted by these strikes and the effects on the mining sector in South Africa will last a long time.

Mining conditions in South Africa are in many respects, terrible.  Wages were not commensurate with the cost of living in South Africa.  Workers earned approximately $500 USD per month in a country where the average household income per year is $570.  In urban areas however, the average household income is $1,573 .  For comparison, another emerging market where mining is essential to the economy; Chile, has an average mine wage of $2,124 compared to the average household income of $1,600.  This does not address the fact that Chilean miners are principally mining copper whilst South African miners that were involved in the strikes principally mine platinum, gold, and diamonds.  Furthermore, Chile’s safety record for miners is vastly superior to that of Africa’s and has a superb pension system.

In sum, the demands of the South African miners were not unreasonable (higher wages, safer conditions).  There were of course, some unsavoury elements that contributed to the massacre that followed.  However, it should be apparent that all the companies involved, and in particular Lonmin and Anglo-American behaved deplorably.

The reason for discussing this situation is because since the strikes began, Lonmin’s stock is down -19% and Anglo-American’s is down -7% since the strikes began.  During the same period, the FTSE 100 increased +5% and the iShares mining ETF increased +4%.  This demonstrates the danger that poor labour relations pose to you as an investor.  If a company is unable to manage its employees in frontier markets, then the issue can quickly spread into widespread civil disorder, causing issues for the company and potential currency depreciation, both of which would bode ill for your investment.

Treating workers poorly does not come with the territory.  Good companies treat their employees well regardless of the jurisdiction they operate in; it is good business.  This has been demonstrated in developed markets, emerging markets, and frontier markets.
To that end, As an example I give you Dragon Oil .  Dragon Oil is up 23.4% in the last 12 months, and it is up 4,553% in the last 10 years.  Dragon Oil’s principal operations are for natural gas and oil in Turkmenistan.  You may not have heard of them; in natural resources sectors, that is a good thing.  From the moment they entered Turkmenistan they worked actively with the local government and communities to make sure they were welcome.  The paid far above market-averages at the time, and have contributed significantly to the betterment of the communities in the vicinity of their projects.  They have yet to experience any labour issues.  Take a look at their website and see how important it is to them.

In Frontier Markets oftentimes the laws are not developed well enough to address many labour issues.  In such environments, companies can get away with practices that would be illegal in most of the world.  A company that treats it employees poorly bears significantly higher risk for production issues and business continuity.  Particularly in frontier markets this risk is even greater, where employees may take matters into their owns hands in the event that the law will not or can not aid them.

If you are analyzing companies and see companies that have labour issues or potential labour issues (due to safety or wage concerns), assign a higher discount rate for this added risk that you are bearing.  It is likely that with that higher discount rate, the company will not be attractive for investment.

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