SA’s public market has a problem – the JSE doesn’t favour junior miners

The JSE owes its existence to the mining industry.  

When it was established in 1887, trade in gold mining share certificates was so energetic that brokers would often spill out of the JSE building at the end of the working day to continue trading between chains stretched across Simmonds Street. 

Gold mining company shares were issued to raise the capital to sink the shafts and acquire the steam engines and stamp mills needed to exploit the deeper gold ore once the easier pickings along the outcrop had been had. 

Fast-forward almost 100 years and, at the height of the gold price boom in 1980, the JSE hosted half of the world’s mining market capitalisation. 

For a century, financial market development and mining industry development had marched in lockstep. 

It is the mining industry that should be thanked for the South African public market that supposedly punches way above its weight – often described as the 20th-ranked stock exchange in a 40th-ranked economy. To this day, the JSE and the mining industry maintain mining company-specific regulations – the Samrec Code and the Samval Code – equivalent to the best in the world.

But after about a century, the South African mining industry and its public market parted company. 

Today there are just 34 mining companies with listed securities on the JSE, of which 15 have their primary listing, and therefore their primary regulator, elsewhere. 

There are still successors to the old mining finance houses listed, albeit largely secondary listings, like Anglo American, BHP, South32, AngloGold Ashanti and Glencore. But these are by no means South African companies, and in some instances, they have no, or negligible, local operations.

And as much as the rump assets of the legacy mining industry are still listed locally, their directors have little appetite to raise or invest growth capital locally. Barring the odd exception, like the listing and capital raising by Copper360 in 2023, the local public market appears to no longer support new investment in the mining industry. 

The cynic would answer that the reasons are blindingly obvious: the Mineral and Petroleum Resources Development Act of 2002 and successive Mining Charters are so investor-unfriendly and the administration of the industry in such disarray that we need not look any further. 

The lack of new mining capital-raising has thus little to do with the JSE or the “world-class” public market ecosystem more generally, and more to do with a government and ruling party actively hostile to mining investors and the capital markets they trade on.

As much as this view may have plenty of truth in it, there is also a counterfactual. The Act broke the stranglehold of the old mining finance houses on private mineral properties and their right to hold them dormant. 

After the implementation of the Act, many new manganese and chrome mining companies were created; manganese and chrome exports more than doubled; and despite relatively static coal production, the number of individual collieries has soared too. 

Tellingly, these new companies have raised capital in every which way except via the JSE. 

The SA public market has largely failed as a source of new capital for mining and exploration both in South Africa and on the rest of the continent. And it is not because the JSE is any more onerous or more expensive than the great junior mining markets of Australia or Canada.

To understand the reasons, we must go back to the time when the mining industry began to separate from the local public markets, which happens to mirror the start of the policy-driven “institutionalisation” of the South African financial sector, starting with the Jacobs Committee report of 1992 and the reforms that flowed from it.

Financial policymakers in the Treasury and the Financial Sector Conduct Authority (FSCA) have presided over the destruction of our public markets as a place where new equity capital can be raised. 

They have seemingly done it blindly as they appear ignorant of the problem. But destroy it they have, with 2023 the worst year on record for new listings and capital raisings by new companies, of any kind, on the JSE.

They have allowed the local market to become so concentrated that 90% of all savings in South Africa are managed by only 10 large institutions, in ever larger funds. 

One way they did this was by designing and implementing a discriminatory tax regime that aims to reward saving by individuals, but in fact enriches rent-seeking institutions at the cost of a functional public market. 

Non-institutional and retail investors have been forced out of personal stockbroking accounts and into saving via institutional collective investment schemes, now the building blocks of most saving products, to access these tax benefits. 

All the while, institutions claw into the tax benefit by charging among the highest retail fund management fees in developed financial markets. 

Even the much-vaunted tax-free savings accounts are a generous unearned gift to institutions, as personal stockbroking accounts are explicitly excluded from the product design.

And the FSCA further contributed to the problem by requiring collective investment schemes to always be long on the market and short their own investors to ensure almost instant, but largely unnecessary, liquidity for long-term savers, making liquidity management a headache for portfolio managers and ensuring a permanent bias towards size and liquidity in underlying investments. This entrenches the size effect, where the larger a fund gets, the more its investable universe shrinks.

There is little chance of a policy change when the Treasury’s response has been “nothing to see here”. 

Without acknowledgement that there is a problem in the way that South Africa’s savings industry is structured, local junior miners will have to continue to raise capital every which way they can, except via the JSE. DM