Financial analyst Jayant Bhandari of Anarcho Capital says investing in mining Africa is — as many already know — a risky game.
He did not mince words in his assessment of the continent.
“Virtually nothing in Africa is doing well right now,” he said, blaming global institutions and the media for “romanticizing” the situation in developing countries and painting a picture doesn’t match the scene.
Major companies like Glencore (LSE:GLEN), Ivanhoe Mines (TSX:IVN), Barrick Gold (TSX:ABX,NYSE:ABX) and others have been coming up against crisis after crisis in operations across Sub-Saharan Africa, with copper projects in the Congo threatened by the government, state-owned companies and Israeli investors
Bhandari said investing in African countries is challenging because many do not have solid institutions that protect investment, and are instead governed by administrations that could “steal away” wealth.
“I have to be very careful about those risks inherent in some of these jurisdictions that don’t really understand the concept of the rule of law,” he said.
Watch the interview above for more insight from Bhandari on risky investments. You can also read the transcript below.
INN: Okay, so it’s day two of the conference, how are you finding it so far?
JB: I enjoy all these conferences, I get to know a lot of new people. I meet the companies I know, I meet the people I know and I hear a lot of things about what’s happening in the world and what’s happening in the mining space. So I always enjoy coming to the Cambridge shows both in January and the one in May.
INN: Recently you’ve been talking a lot about risky jurisdictions. Can you just talk about the situation in Africa at the moment?
JB: There is virtually nothing in Africa which is doing well right now. The World Bank, the IMF and the international media will romanticize and glorify Africa. They might come to you telling you that Ethiopia is among the fastest-growing economies in the world. Or they might say that Africa, Sub-Saharan Africa, is growing well.
What they don’t do is they don’t tell you at what low base these countries are starting from — for example, Ethiopia’s GDP per capita is only about $700 per capita, which is an abysmally low GDP per capita. Sub-Saharan Africa is exploding in terms of population growth. So much so that eventually Sub-Saharan Africa will actually have 40 percent of the world’s population by the end of the century. This does not bode well for the future of humanity, tribal warfare [is] increasing across Africa right now, and the only stable major jurisdiction in Africa, which is South Africa, is rapidly moving towards a civil war.
INN: Okay, what would that mean for mining and investment in Africa? Would it be able to survive or [should it] pull out?
JB: Okay. You can always find investment opportunities. What I’m looking for is buying these companies at a price that has already discounted the political and social risks of these jurisdictions. So if I am happy to buy a project for $100 million in Canada, and if I buy a similar project, let’s say in Zimbabwe, for $10 million when I know that I might lose $80 million out of that $100 million value, I still position myself for a higher upside than I would in Canada. So you can still invest, except that you want to adjust your price for the risks you are taking in the jurisdiction that you are investing in.
JB: I don’t really care to invest in South Africa. There’s a massive problem with BEE policy … which is black economic empowerment. And the problem with that policy is that every company has to allocate a certain number of positions to blacks. They have to allocate 26 to 52 percent of the shareholdings to blacks irrespective of whether they are competent to hold those positions and irrespective of whether they are able to pay to contribute to 26 to 52 percent of the shareholdings, which actually they are not. Which means that you have to consistently give away free shares to BEE partners who are often politically connected. And the end result is that if you go to the parking spaces of mining companies in Johannesburg they look like car shows because these well-connected blacks get a lot of money for free, and then they splurge on material staff.
INN: And continuing on risk, can you tell me a little bit about geopolitical risk in general? Can an investor make decisions about investing in a country simply by following the news?
JB: No. You can’t because international news is actually very politically correct. International news does not take into account a lot of problems that are happening in the third world. International news glorifies and romanticizes the events in, let’s say, South Asia. They think Myanmar is now a democratic country. Myanmar is rapidly becoming a broken country, an imploding country. So is most of Africa. So international news ignores a lot of these events. Also, for example, South Africa is going, entering a phase of civil war, in my opinion, and the international media does not want to talk about it because the minorities in this case are white people, and white people are not supposed to be victims according to the international organizations.
INN: And so, moving on. Speakers here at this conference often ask what the top company picks are — what are top picks for jurisdictions for investing it?
JB: I certainly like the developed countries, I like the Scandinavian countries. I like Canada. I like the US, I like Australia. And these are my favorite countries to invest in. What often happens in Africa, and that is to add to what I said earlier about Africa, is that a lot of these countries, when I start making money in my companies, the government actually steals away all the profit I make in those companies. So I have to be very careful about those risks inherent in some of these jurisdictions that don’t really understand the concept of the rule of law.
INN: Okay. And so, just wrapping up, today you’re going to be talking about your approach to investing in junior stocks. Can you just run me through what you’ll be talking about?
JB: What happens is that a lot of people, most people actually, invest in the mining space using some rules of thumb. So, for example, one of the predominant ways people invest in these junior mining companies is that they look at the total resources these companies have in the ground and multiply those ounces in the ground by a certain dollar figure. This is an extremely erroneous approach to valuing these companies and which has resulted in massive wealth destruction in the mining industry. For example, gold has gone up … more than 100 percent in the last 10 years, whereas every mining index has a fallen by 40 percent or more in the last 10 years. This is because a lot of malinvestment has taken place in the mining industry.
INN: Okay. And so, just finishing up, is there anything else that you’d like to add?
JB: I think we have covered a lot of things here. I think I’m increasingly optimistic, at least in the short term, about the US and the US dollar.
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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.