SA institutions climbing into mining stocks while foreigners dump. Who’s right?

News that R700bn Glencore is working on a secondary listing on the JSE has brought focus onto the issue of pent-up demand for global stocks among South African institutional investors. Because they’re limited by legislation to how much they may invest abroad, there’s billions of investible rand available for stocks like Glencore once they list on the JSE. This creates a marketing opportunity for investment bankers like Nedbank Capital’s Paul Miller. As you’ll see from the interview, he argues that there are also other good reasons for a stock like Glencore to list in Johannesburg. Including that South African investors understand mining well and, indeed, have been buying the mining stocks increasingly offloaded by foreigners. The real question is whether this newfound affection for mining is wise? Are local institutions really smarter than the foreigners dumping the stocks? Only Father Time has those answers. – AH 

Click here to watch the CNBC Power Lunch video interview

Paul Miller
Paul Miller; Mining Resources Investment Banker at Nedbank Capital

ALEC HOGG: Well, let’s get into what’s happening on the Johannesburg Stock Exchange’s Mining Sector. In recent years local ownership of shares in this sector has increased quite sharply. For example Lonmin has grown from 5% in South African shareholding to (according to Nedbank Capital) over 50%. For more on this, Paul Miller, Mining Resources Investment Banker at Nedbank Capital is with us. Before we go into the thrust of your research, does that 51% of Lonmin shareholding include the stake that’s held by Glencore?

PAUL MILLER: Well, it includes all the shares that are in the South African Register and I would anticipate that Glencore’s shares are not on the South African register so those are South African investors buying on the JSE. Remember, it’s the change in the Index rules and the Exchange control rules that has allowed these shares to move from being counted as offshore shares if they are on the offshore register, to be counted as domestic shares if they are on the South African register, and that’s why they’ve been moved.

 ALEC HOGG: That’s a massive change, then.

 PAUL MILLER: It is. South Africans are prepared to pay more for the same share than a foreigner is and that’s a huge change-around. The significance…it’s most dramatic for the Platinum shares; for Aquarius and for Lonmin where we’ve see huge numbers of their shares move from the foreign registers to the South Africans. I think the significance though is in the Anglo-American share.


 PAUL MILLER: Well, there it’s gone from as low as 25% prior to the measurement period before 2009 and of course the argument was always that Anglo-American had to be listed offshore to get a better value on its shares. But when times are bad and you’ve got a large exposure to South African assets and the foreigners apply bigger discount to South African assets than we do, those shares flow back and I see now it’s probably over 50%. The trend was very strong and it hit 49% at the end of August.

ALEC HOGG: Alright. So that we agreed: those are the facts. But the reason why is perhaps somewhere where you and I might have a little disagreement. When Ivan Glasenberg was interviewed by the Financial Times of London, he was asked ‘why is Glencore coming to list on the JSE?’ He said ‘there’s lots of money for my share because of exchange control’. He was quite straight about it. Do you think from your analysis that’s played much of a part?

 PAUL MILLER: Well look, whether you call it exchange control or whether you call it the more palatable version which is prudential limits on institutional funds…

ALEC HOGG: Just explain that.

 PAUL MILLER: If a pension fund’s liabilities are Rand-based pensions to South African residents then it’s fair to expect that the majority of that money should be invested in the local economy – in the Rand currency. So there are many companies that apply prudential limits on pension fund investments. So the exchange control has moved from where there was an absolute ban on investment offshore to where pension funds have to have a prudential limit.

ALEC HOGG: But Paul, come on. That’s nonsense. If you have a look at the top shares in the Johannesburg Stock Exchange a huge amount of their operations are not in South Africa. Richemont, SAB Miller and so on and so forth.


GUGULETHU MFUPHI: So I that’s a little bit of a ridiculous argument.

 PAUL MILLER: Sure, but the idea that the majority of the pension funds’ assets should be listed locally…of course you can skin the apple many ways as to exactly ‘what is a local asset?’ And at the moment the definition is: if it’s listed on the JSE it’s considered a local asset and the shares are on the local register.

ALEC HOGG: But let’s get back to the thrust of this, which is: Glencore says it’s coming to list on the Johannesburg Stock Exchange because it’s got a ready market here. On the one hand exchange controls stops these companies or the asset managers from investing abroad. On the other hand; do we understand mining better than perhaps people in other parts of the world?

 PAUL MILLER: Well, if you look at what Ivan Glasenberg said, he said there was demand for a share in South Africa and they’ve been to see the institutions locally and certainly in the days prior to the merger of Xstrata and Glencore, the local analysts were covering Xstrata and were publishing on Xstrata in order to provide a comparison for people having to make decisions about investing in BHP or in Anglo. So there’s been a lot of pent-up coverage of Xstrata and of course the South African connection is very clear both in Xstrata and in Glencore. Now that Glencore has listed and merged with Xstrata there’s definite interest in that company in South Africa and there is also this angle which provides an added advantage to come to South Africa which is the prudential limit in our institutions.

ALEC HOGG: So if I’m a South African investor with an asset management company and I like Glencore so much because I’ve been analysing it, why don’t I just buy it in London?

 PAUL MILLER: You can, but there’s also so much else you can also buy in London. So if the shares move to South Africa it moves into your 75% allocation instead of your 25%.

ALEC HOGG: You focused on mining but surely the same principle applies across the board. Why shouldn’t Microsoft, which has a big South African operation, also have a secondary listing on the JSE? The South African asset managers could also buy shares in Microsoft and General Motors and many more.

 PAUL MILLER: Sure. And if you apply and get permission, you can list. You can do that. My interest of course is mining companies and there’s the added angle that; why have Lonmin shares moved to South Africa where South Africa is facing regulatory uncertainty? We’ve just had Marikana. The shares moved to South Africa because South Africans are prepared to pay more than the people who are selling it.

ALEC HOGG: Because of artificial limitations?

 PAUL MILLER: No. We’re prepared to pay more because we don’t apply the same discount that foreigners do to South Africa. People living in South Africa are not quite as negative about South Africa as those from outside and it’s perfectly understandable why outsiders would take a more negative view. But the Nett effect of that – and it’s a market and for every buyer there has to be a seller – but the Nett effect of that is: South Africans are the majority owners of Lonmin which I think is the significant outcome.

ALEC HOGG: Interesting. Paul Miller, Mining and Resources Investment Banker with Nedbank Capital. Thanks, Paul.

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