08/04/2010 - 00:00

African investments a ‘trading opportunity’

08/04/2010 - 00:00


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The expression ‘with great risk comes great reward’ does not always hold true.

TWO years ago the R-word was code for 'recession', with politicians and investment bankers careful to avoid its use in case it upset voters and investors. Later the R-word morphed into 'recovery'. Today, if you look closely, the R-word is 'risk'.

The trip from recession to risk is a natural one, with recovery encouraging investors to take greater risks with their money as they pursue another R-word, 'return'.

Cash is being retrieved from low-interest, but secure, bank accounts and recycled into the stock market and property, pushing prices higher.

These events are a natural part of the business cycle, though there are signs that Australian investors are becoming overconfident in the hope that recovery will be rapid - yet another R-word, which could prove to be the undoing of the careless.

Two related events sent Bystander on this economic R-word trip. They were comments about sovereign risk in Australia by Mark Cutifani, the boss of the big South African miner, AngloGold Ashanti, combined with the exodus of Australian goldminers to West African countries such as Ghana, Mali and Burkina Faso.

Though very mining linked, they are examples of the perception of risk being downgraded as recovery takes hold, a potentially fatal mistake at this stage of the cycle.

Mr Cutifani's beef was summed up in this reported quote about Australia: "I would see more sovereign risk here than in South Africa, quite frankly".

He's wrong, of course, though his remark does raise a number of questions, such as whether he was speaking to please his South African masters on the AngloGold board, or whether he simply misunderstands the meaning of sovereign risk.

The kindest interpretation is that Mr Cutifani, a former senior executive of a number of mining companies, including Normandy Mining and Sons of Gwalia, fails to grasp the concept of sovereign risk, and perhaps the wider question of risk. (And if the man in charge of a major company doesn't get it, what chance the average investor?)

What he meant to say was that the cost of doing business in Australia is higher than in South Africa. Why? Because Australia has strict rules when it comes to protecting the environment, employment conditions, the welfare of workers, and the payment of fair taxes and royalties.

Sovereign risk, according to any economic handbook, relates to governments cancelling contracts, changing foreign exchange rules or, as the ANZ Bank says in its notes on sovereign risk, the possibility that conditions will develop in a country such as a declaration of war.

Risk v reward

BECAUSE he works for a South African company, Mr Cutifani must be seen to wave a flag for that country, and the wider continent of Africa, which has become a favoured investment destination for Australian miners.

Recent news reports have listed dozens of Australian miners exploring, and producing, in remote locations such as Burkina Faso, Mali, Ivory Coast, Guinea, and Mauritania.

No-one doubts the mineral wealth of those countries. It's been known about for thousands of years, especially the gold and, more recently, the iron ore.

The problem, and it's the same one which dogged European investors for the past 400 years, is that no sooner is a viable business created than the country slides into a process of corruption-fuelled self-destruction, or tribal warfare.

Australian investors who fail to study the history of the region, and believe comments such as those from Mr Cutifani about Australian being a country with a high sovereign risk ranking, are in for an expensive surprise if they hang on for too long and don't treat all African investments as trading opportunities, a financial markets variation on the loot and pillage approach of the early Europeans.

The evidence of African instability, and its risk to your financial health, is compelling. Consider some recent examples.

- Rio Tinto sinks $400 million into the Simandou iron ore project in Guinea, only to lose half to Chinese friends of the government of Guinea.

- Mauritania switches back to a military dictatorship as it struggles with Islamic tensions.

- Ivory Coast postpones an election and relies on French and United Nations troops to keep the peace.

- Nigeria struggles through ethnic violence and striking workers close South African gold and platinum mines; and that's before we get to Hiv-Aids infection rates, unsolved murders, and the most dangerous roads in the world.

Bystander can't be bothered writing to Mr Cutifani explaining the difference between the threat of tax increases and being shot on the way to work, but that's the real distinction between rising costs and sovereign risk.

Layer upon layer

IMPROVING conditions on financial markets is the best sign that recovery is taking hold around the world; quickly in Australia, slowly in other places, such as Europe and the US.

Where Australia faces its next challenge is finding a way to drag government into the 21st century, because most of the problems we seem to be facing today are government-linked, or caused.

The public health system is the hot topic, replacing the public education system last month, public roads, rail and port systems before that, and public water and power supply as a crisis that comes and goes.

But the government disaster that most amuses Bystander is the so-called "land shortage", which is a classic case of civil servant double-speak because what the chaps in grey cardigans are really trying to say is "excess government".

There is no shortage of land in Australia, that is something on which we can all agree. There is, however, a chronic over-supply of government rules at all levels. Local government has multiple layers of planning regulations. State government has environmental and another layer of planning rules, and the federal government has banking rules that limit the flexibility of banks to lend to property developers.

The solution to this mess is to overhaul government, not create more rules and additional layers of government when it is so obviously not working.


"Look for the ridiculous in everything and you will find it."

Jules Renard



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