Investing in resources: still such a good bet?

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 5 January 2009

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South Africa's history is inextricably linked to her mineral wealth, with today's JSE first being established during the goldrush era of the 19th century. Despite the volatility and sensitivity of international and local markets during recent months, the mining and resource sector has remained relatively insulated from the global fallout. Ursula van Eck, auditing director at BDO Spencer Steward, maintains however, that while there are no visible signs of resources falling out of favour with investors, this sector's stability is critically linked to continued demand from China and India. The effects of the global crisis could also make a more significant impact – negatively affecting prospecting and exploration in the years to come.

With South Africa continuing to remain relatively insulated from current global economic instability, we're seeing investors turn to “tried and tested” securities exchange players – in our case, gold. Well-established and diversified, gold and other shares would seem an arguably “safe bet”, with one's investment hedged against foreign currencies. The resources boom we've seen in Africa, however, is linked to almost insatiable demand from China and India. As long as these two nations continue to order and buy the volumes they are currently, we can look forward to having the capital investment required to fuel the industry.

While that would seem to be exceptionally positive for the local and African resources market, one needs to keep the demand from China and India in a global context. As traditional manufacturers and exporters of goods, they too are starting to feel the impact of global economic turmoil on their local production. The “boom” they were experiencing eighteen months to two years ago has been replaced with far more conservative buying. Less exports means less production and, correspondingly, far less demand for energy intensive production plants. As such, they might look to consolidate their diverse resource investments in Africa in the future – based on developments in the months to come.

Another critical – and possibly unforeseen – factor of concern in light of the economic downturn is that of continued investment in prospecting and exploration. Traditionally the realm of junior miners, exploration is a crucial component of the mining lifecycle. These miners could potentially see their sources of funding from the investors in the traditional London AIM, Australian and Toronto Exchanges drying up. This will have a significant impact on the industry in the long-term as a result of long lead times between the identification of successful development of prospecting projects to the bringing into commercial production of mines - this timeline can be up to ten or twelve years later. Consequently, a sudden lack of investment in this type of exploration and prospecting activities could create a gap and lack of new mines in a decade's time.

The volatility in the platinum/ PGM's price in recent weeks will prove to be a resource to watch. The boom in the platinum price over the past two years has fast-tracked investment in this sector of the market significantly. It has however been negatively impacted on by the economic downturn, based on its demand being linked to the market for catalytic converters, with global car production forecast already being cut. Recent statistics show a flight out of platinum stocks back into the historical safe haven of gold.

While mining and resources would still seem to be a fairly safe bet for investors in troubled times, this investment has to be seen in the light of China and India's sustained demand, as well as the impact of reduced prospecting and exploration work the effect of which will only be felt in a decade's time.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 5 January 2009