Your Portfolio’s Better Off Without African Mining Stocks

Like many of you, I was shocked and saddened by the bloodshed at Lonmin’s Marikana platinum mine in Rustenburg, South Africa last week. Violence following a wildcat strike over miners’ wages left over 40 people dead.

Lonmin (LON:SJ) pays its platinum miners approximately $1200 per month to do the dangerous work of extracting the precious metal from the earth. In contrast, Lonmin’s CEO, Ian Farmer, received approximately $1.9 million in salary and benefits during the 2011 fiscal year — over 130x more.

Inequality like this and the violence that it frequently ignites are two reasons that I hate mining stocks.

But in the perception of many global investors, mining is where African investment begins and ends. And it’s not difficult to see why. Much of the media coverage of African business pertains to the extraction of minerals or other resources.

Photo by Liane Greeff

Unearth Profits Without Mining Stocks

Fortunately, mining stocks represent less than half of all listed African firms. So, it’s quite possible to build an African stock portfolio without them.

Shunning mining stocks might be in the best interest of your wallet, too. Take a look at the five-year performance of the FTSE/JSE Africa Mining Index (JMNNG:IND) compared to the performance of the Johannesburg Stock Exchange as a whole.

IndexReturn (August 2007-2012)
FTSE/JSE Africa Mining Index-9.0%
FTSE/JSE Africa All Share Index30.1%

The market clearly crushed mining stocks. Now, check out how an investor may have fared if they intentionally avoided the mining sector. The chart below shows the mining index’s performance versus that of other key sector indices.

IndexReturn (August 2007-2012)
FTSE/JSE Africa Mining Index-9.0%
FTSE/JSE Africa Banks Index33.6%
FTSE/JSE Africa Consumer Services Index123.3%
FTSE/JSE Africa Consumer Goods Index120.8%
FTSE/JSE Africa Industrials Index18.2%
FTSE/JSE Africa Listed Property Index36.0%

Still not convinced that African mining stocks can turn your portfolio to rubble? Let’s go back a bit further.

The MSCI South Africa Index Fund ETF (EZA:US) is comprised of 50 of the Johannesburg Stock Exchange’s largest listings. Since its launch in May 2003, it has returned 338%. How did that stack up against South Africa’s largest miners over the same time period?

StockReturn (May 2003 - August 2012)
MSCI Africa Index Fund338.1%
Anglogold Ashanti32.0%
Gold Fields Ltd42.5%
Impala Platinum207.6%
Harmony Gold Mining-26.4%

So, if investing in mining stocks makes you queasy like it does me. Rest assured that you’re not missing out on much by passing them by.

What Do You Think?

Should socially responsible investors avoid African mining stocks? Why or why not? Let us know your take in the comments!

Further Reading

3 Reasons Mining Stocks Are the Pits

Comments

  1. South African mines are a time-bomb waiting to explode. Lonmin is just a tip of the iceberg. Add that to lackadaisical reforms by ANC and you get a tinderbox…..just looking for a spark to explode. The largely unemployed blacks are just what is needed to ignite that tinderbox. SA gvt had better attend to this ASAP……or there will be more deaths and little to salvage!

  2. Hi Ryan

    I think this is a terrible article to be honest. If you expect mine workers to earn more, where do you think the money is going to come from? Most platinum companis are already below breakeven and you want all mine workers to earn more? based on what?

    Secondly , if you think its a bad idea to invest in mining stocks, it sounds like you might be thinking its a good idea for most mine’s to close and half of South Africans sit without a job?

    This is a really bad bad article

    • I appreciate your feedback, AB, and I see your argument.

      This is clearly a complex issue, but, in my view, if an industry’s workforce is willing to kill and be killed in order for their grievances to be addressed, it indicates an exploitative relationship. If a mine’s profits are dependent on the exploitation of its workers, then that operation must be restructured. The externalization of social (and environmental) costs ultimately harms the common good.

      The long-term solution is for South Africa to lessen its dependence on the mining industry and create jobs in other sectors.

  3. These extractive industries are always going to be unstable; all involved (workers, unions, management, owners, investors, governments) hope to ride commodity price upswings. Opportunities are viewed as short-lived, so grab-while-you-can mentalities prevail.

    It’s a brutal industry no matter how you slice it and it is not going to disappear. Activist shareholders of more enlightened operators (not every mine operator murders its employees) might promote further change. The completely uninvolved will have no voice. I’d say it is a personal choice as to which is the more ethical route.

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