STOCK TAKE | Reserve Bank walks the hawk talk and Harmony re-emerges down under

OPINION

Reserve Bank walks, squawks like a hawk

But is it a dove?

Central banks around the world are in a race to increase their rates amid an inflation crisis. While the SA Reserve Bank started hiking before many others, the pressure is on not to fall behind.

South Africa’s rates must remain high compared to others to ensure that the rand and local assets like bonds don’t lose their appeal to foreign investors, who are on the hunt for juicy interest. Foreign inflows are crucial to keep the rand stable, and a stable rand is key to inflation, as South Africa imports almost all its oil, which is priced in dollars.

This week, Australia's dollar plunged after its central bank opted for a smaller-than-expected quarter-point hike. The rand – already bleeding at almost R18/$ – can’t afford such a surprise.

So, the Reserve Bank is doing its best to send tough-guy signals to the market. In its monetary policy review, released this week, it warned of more rate hikes – even though it has already added 275 basis points since November.

Arguably the monetary policy committee’s most hawkish move to date was when two out of five members voted for a 100-basis-point hike at its last meeting.

Now, a cynic may wonder whether that may have been a bit of grandstanding, designed to show the market it’s not scared to make a big, painful move – without actually having to make such a big, painful move.

That same cynic may point to the fact that at the same meeting, the Reserve Bank published a more optimistic forecast for 2023 inflation: 5.3%. In July, when it still expected 5.7%, only one committee member wanted 100 points. More optimistic about inflation, but more aggressive on rates? Doesn’t compute.

There are signs that the market is not totally buying into the Reserve Bank’s hawkish stance, with Bloomberg reporting this week that traders are rapidly scaling down the rate hikes they expect from South Africa. Forward-rates agreements are now pricing in rate increases of around 183 basis points of rate increases over the next 12 months, compared to 250 basis points less than two weeks ago.

The central bank is in a very tough spot. Hiking rates much further will hammer an economy shredded by load shedding. But any sign of hesitation will slaughter the rand, adding inflation pressure and volatility. For now, it’s keeping to the first rule of swimming with sharks: don’t bleed.

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Harmony's copper ambitions emerge

De-risking down under

Harmony Gold, which has mines in South Africa and Papua New Guinea, is back in Australia after a more than decade-long hiatus, inking a $230 million (~R4.1 billion) deal that it says "transforms" it, although it isn’t referring to previously stated ambitions to be an emerging market copper-gold specialist.

Like the UK, Australia isn’t emerging, but the electric vehicle industry is. Harmony, along with other notable miners, is looking to bring forward a copper revenue stream, eyeing a steady increase in demand for the versatile metal, whose conductivity and malleability means it is widely used in green technology, among many, many, other things.

Harmony had sold its last Australian asset in 2010, Mount Magnet, looking to channel about R250 million funds to Papua New Guinea, where it owns the Hidden Valley gold mine, and has a stake in the Wafi-Golpu copper-gold project.

The latter project hasn’t been completely smooth sailing, however, with the miner facing some delays in getting a special mining license. Judicial review proceedings, initiated by the governor of Morobe Province (yes where the project is), were dismissed in January 2020, but talks did not resume until July 2021, when the state negotiation team tabled a significantly revised terms sheet for the mining development contract, the firm’s 2021 annual report reads.

Harmony said on Thursday its acquisition of Eva Copper is low risk, and mining leases and an environmental authority has been granted, while an amendment, reflecting updates to the project configuration, is well advanced.

The project also ticks a lot of other boxes for Harmony. The project will have a short construction period of two to three years, ramp up to full production will be quick due to the shallowness of the ore body, while supporting infrastructure already is in place, further reducing execution risk.

Harmony’s offer is made up of $170 million in cash, with $60 million in contingent payments – related to potential revenue targets and finding new deposits (the currently expected digging part comes with exploration areas attached). 

Estimates are that $597 million (~R10.6 billion) will be needed to build Eva Copper, with expected production of 1.6 billion ounces of copper a year (worth R6.1 billion at current prices) and 14 000 ounces of gold (R429 million). Harmony produced about 1.5 million ounces in its 2021 year, up over a quarter, while its revenue jumped 43% to R41.7 billion.

Harmony can be easily forgiven for paring back on part of its strategy somewhat and derisking its portfolio (it’s share was up about 2% on Thursday, a doing somewhat better than peers) especially since copper is often seen as a bellwether for the global economy, given its extensive uses.

The firm didn't dwell on the threats of nuclear war, or another financial crisis, but that doesn't mean it didn't provide plenty of other details. Total copper consumption is expected to grow about 2.1% per annum to 2040, the firm says.

Electric vehicles forecast to become about 70% of total annual auto sales by 2040 and represent an incremental 4.8 million tonnes of copper consumption over 2020, representing about a 15% jolt.

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