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July 08, 2006

The Long-term South African Mining Outlook is Getting Brighter
by Clif Droke

After an extremely difficult past couple of years which saw share prices plunge and more political, economic and currency-related turmoil (not to mention personal intrigue) than is found in most novels, the dust is finally clearing in the South African mining sector. With the picture finally starting to come into focus, it's time to take a look ahead into the longer-term prospects for South African mining and economic development, not to mention East/West Africa.

Is the state of mining in South African in dire straights as many analysts would have us believe? Recent developments suggest otherwise. Beneath the veneer of currency risks and socio-political turmoil there are definite signs that the mining sector, and indeed the general economic outlook, is heading out of the storm with better times ahead.

South Africa and other parts of the continent were targeted for massive economic development years ago by the Internationalists (the same ones who are bringing us the global economy). Like it or not, the United States along with all other developed and developing countries are being integrated into this global economy where the countries with the lowest wages and least amount of regulation and unionization get the benefits of industrialization while other, more prosperous countries (such as the U.S.) play the role of consumer/importer/borrower of last resort.

It has been observed that industrial development has taken a westerly path. Since Asia is already in the boom phase of its industrial and economic development that leaves the African continent as the "final frontier" along the western path to global economic development/integration. In the coming years you will hear more and more about the prospects for development among the major African countries, starting with South Africa. Indeed, Africa will be the next China and the mining industry will play a major role in the shaping of the global economic integration process for the African countries.

Before the building up process can begin in many instances there must first be a tearing down process to pave the way for redevelopment. On a smaller scale this can be seen in the phenomenon known as "urban development." This is when a neighborhood or city is targeted for development and is allowed to deteriorate (e.g., crime increases and property values plummet). This is done so that developers can buy up property at distress prices and begin gradually building up the target area once again to a level that suits their interests.

The same tactics that are used in an urban development campaign are also employed in global economic development. It was tempting to look at the horrendous state of South Africa during the last several years and conclude that there was no hope or future for it. But as the old saying goes, "it's always darkest before dawn." South Africa was allowed to crumble socially, economically and politically for the very reason that it had been targeted for massive development by the globalists. This is why chaotic conditions held saw in South Africa for so many years -- the global economic developers were purposely allowing South Africa to sink to her lowest possible level before stepping in and building her back up again according to their specifications. It's a perverse method of operation, yes, but this is how globalism works.

Speaking of urban renewal, according to recent press reports the formerly ramshackle areas of Soweto are now being transformed into middle class neighborhoods and a housing boom has emerged in this Johannesburg market. According to the Financial Times, low interest rates and strong demand from an emerging black middle class are making more real estate projects in townships "bankable." Investors are pouring millions into Soweto, especially in the area of retail store and housing development. Everywhere signs of an improvement in the quality of life are in evidence as the push toward global economic integration gets in full swing in South Africa.

In the coming years South Africa and other African nations will be called upon to participate in the fully integrated global economy. Major military efforts are often initiated by Western nations for the tacit purpose of acquiring strategic mineral "rights." As economist and lecturer Dr. Stuart Crane used to say, "The purpose of war is to create debt and to extract wealth from the slobs who don't know how to use it into the hands of those that do [the Elite]." Africa is a land teeming with minerals that are coveted by the globalist Elites and this in part explains the constant turmoil and fighting in many of those countries (including South Africa, the world's biggest producer of gold and platinum and one of the leading producers of base metals and coal). You can rest assured that whenever there is constant political and/or military strife in a foreign country there is somewhere behind the scenes a Western economic power with designs on getting control on one or more of the warring factions. South Africa has had her share of strife and bloodshed over the years but gradually the dark cloud is lifting from the horizon as the globalists press closer to their goal of integrating South Africa and the other African nations into the global economy. With this globalizing process will come myriad economic opportunities for South Africans and it will (and is) show up in S.A. financial markets, including the stocks of S.A. mining concerns.

Someone recently shared with me some insightful comments concerning S.A. mine DRDGOLD (DROOY, formerly Durban Roodepoort Deep) as pertaining to its fellow S.A. mining companies and the S.A. Rand. He writes, "As a DROOY share owner I have been keeping a close eye on the Rand price of gold and Rand price in dollars. We are getting some very good relative price action with the Rand price of gold in the last two months and especially this week. While gold in US dollar has dropped about 20% from $728 to $580 an ounce, the Rand price per Kilo has only dropped about 5%, from about 143,000 to 136,000, due to weakness in the Rad. I would expect leadership in the gold sector to finally change to South African companies very soon. The price action has been very favorable this week for the South African stocks. Has this price action been figured into stocks like DROOY yet? Do you think this will be the trigger to re-energize DROOY? Shouldn't DROOY be profitable at these prices? And if so isn't the stock fundamentally undervalued?"

Yes, DROOY is fundamentally undervalued and is "getting its legs" underneath it so to speak since the wash-out and restructuring from last year. I believe DROOY to be under long-term accumulation by "smart money" investors who realize the extreme undervaluation of the beaten-down and much maligned African (East/West/South) mining industry. Moreover, the way is being paved for the more developed African countries, South Africa in particular, to become the next destination of an economic super boom (a' la China). The mining industry will no doubt be called upon to contribute its share to this economic growth and DRDGOLD will play a part in this. (According to a recent special report on South African by the Financial Times, investment's share of GDP in South Africa has risen to 17 percent after bottoming out at 14 percent two years ago. Standard Bank forecasts GDP will rise a further to 22 percent by 2010.)

Speaking of China, the Financial Times ran a front page article under the heading "China's quest for commodities leads to Africa" on June 20. In it FT reported that the Chinese have offered technical assistance for African governments in their efforts at expanding their economies, including South Africa, in exchange for mineral supplies. In one example, China is reportedly financing a $600m hydroelectric dam in northern Ghana which could boost the country's gold and iron ore industries, according to FT. South Africa's gold mining industry will no doubt be helped by future assistance from such foreign powers. (The proportion of millionaires among the major countries, on a rate of change basis, is now higher in Africa than in any other region thanks to the growing demand for the major commodities from China, India, et al).

Around the time that DROOY was basing last year after its previous bear market there were numerous suggestions in analysts' research reports that DRDGOLD would shut down all its South African operations and many rumors circulated to the effect that the S.A. gold mining industry was in a "terminal long-term decline." This kind of talk is typical at longer-term bottoming processes where everyone becomes myopic from focusing too much on the current depressed prices and lack the foresight to see the road ahead.

As I concluded in the August commentary, "The exceedingly bearish news and investor sentiment that came out against Durban Deep and the South African gold mining stocks in earlier 2005 was something not seen in probably at least 10-15 years or more and it is this type of negative sentiment that lays the foundation for a strong, healthy 'wall of worry' to begin being erected." This in turn will enable the South African gold industry (including DRDGOLD) to climb it at some point in the not-too-distant future.

I remember from my studies in the mining stock sector from years ago that Richard Russell once commented that the platinum and palladium stocks often lead the gold stocks. I've always taken this observation to heart and have found in my own experience that it tends to be true more times than not. With that in mind, since we're looking for clues on the overall long-term direction of the South African mining outlook, what better place to start than with the white metals sector?

Northam Platinum (NHM:SA) is the leading indicator for the South African mining stock community. The long-pull swings in this stock have historically determined the overall direction the other S.A. stocks (e.g., HMY, AU, DROOY, etc.) will take in the longer-term. The story told by NHM is that even under the current South African mining laws there is hope for the S.A. mining sector, even in the face of seemingly insurmountable social, political, and economic (and currency-related) obstacles.

Most recently, Northam made a new all-time high to send a green light signal for the long-pull outlook for the S.A. mining sector as a whole. When Northam leads, the other South African mining stocks will eventually follow. Keep an eye on this important South African mining stock as it points the way for an improvement in the general mining outlook in this emerging economy.

Clif Droke
ClifDroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com.

Copyright © 2003-2008 Clif Droke

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