first majestic silver

The Effects of the new S. African Mining Law

June 27, 2002

We've received several e-mails expressing concern over the passage of a new law in South Africa that aims at transforming the country's mining industry by giving the government control of mineral rights.

The following letter from one of our subscribers aptly sums up the recent concern among investors in the South African mining share market: "I just read that there is a new law just passed that socializes the mining industry in South Africa. Previously mineral rights were privately owned, now they will be owned by the government, licenses will have to be obtained. South Africa's Mineral and Energy Minister said the law was aimed at allowing good quality ore currently in the hands of big mining houses to pass into black hands. How will this affect the ownership of these South African mining stocks in your opinion?"

First, a little background on this important issue is necessary. Under the new legislation that was passed on Tuesday, June 25, by South Africa's parliament, mining companies will be able to dig only under government license. The legislation brings South Africa's mining industry in line with the laws of other major mining nations such as Australia and Canada, and therefore is not the big earth-shattering developing that some investors think it is.

Another point worth considering is that the South African gold share market in general has already taken this into account and knows in advance what the outcome will be! This is because the "insiders" always know the inside score on important issues like this well in advance of the public. Rest assured that the South African government will not take liberties with the country's largest gold, platinum and chromium producers without consulting with its bread-and-butter in the form of companies like Durban Deep, Harmony, and Gold Fields.

If anything, this new law merely strengthens the monopoly of a few mining concerns and keeps out unwanted competition in the form of start-up ventures since prospective mining companies must now seek government permission to mine in South Africa. Perhaps we are being cynical, but we can't help believing that whatever happens will come out to the advantage of DROOY the company and not to the South African people who supposedly would benefit by such a change. All we can really do is watch the tape and chart and let them guide us through. If something drastically terrible were going to happen to the South African gold mining stocks it would have already manifested itself in the charts.

A case could easily be made that the new S.A. mineral nationalization law could actually work to the benefit of gold stock prices since investors are deeply concerned over this issue, which is to say that the S.A. mining share market will be climbing the proverbial "wall of worry" in upcoming months. And we all know that the "worry wall" is typically a bullish one.

Confirming this viewpoint, Charles de Vaulx, co-manager of First Eagle SoGen Gold Fund, also doesn't believe the new law will affect the prices of South African mining stocks to any noticeable extent. His fund is up 88% over the 15 months ending in March.

Currently, de Vaulx favors the large South African mining companies. Concerns about political risk and the new mining law have driven shares lower. So he's buying. He adds that large producers, such as Gold Fields Limited and Harmony Gold, benefit from the rand, South Africa's weak currency.

Another point worth considering is that the charts of the leading South African gold mines tell a tell of a continued upward trend since the uptrend line that exist in most of these leading golds since January is still intact. Stocks like Gold Fields, Harmony, Rand Gold, Anglo Gold, ASA, and Golden Star all share this common outlook of having unbroken interim uptrends. The passage of the landmark legislation has done nothing to change this, and remember, the insiders ALWAYS know in advance what the outcome will be. That's why charts have predictive power and can be used to forecast price trends since the chart is nothing more than a distillation of ALL known fundamentals as well as future expectations. And the charts for the S.A. golds do not expect devastation of their industries anytime soon as is evident in the charts.

The bottom line is that the passage of the mineral rights bill is nothing for investors in S.A. gold mining shares to be alarmed over. If it were, the market would have blown the whistle long before its passage.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.


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