El Niño return bad news for SA
A report by Macquarie Research recently concluded that in the face of what is believed to be the third-most-potent El Niño weather system in history this summer (or winter, hemisphere depending), some 54% of 100 company shares analysed by the bank would be positively impacted.
Interestingly, some mining companies, such as First Quantum Minerals, could be positively affected as higher than normal rainfall in parts of Zambia, where it operates, could help recharge the Kariba dam, improving the hydro power situation in the country, where electricity shortages have hampered the economy.
Generally speaking, however, El Niño is expected to bring drier conditions to Southern Africa, as well as swathes of Australasia and Southeast Asia. Parts of South America, such as Argentina, are expected to become wetter.
In this context, there are some very specific outcomes. For instance, in Australia, insurance stocks do better owing to the higher likelihood of bush fires, which is the least costly type of insurance event compared to hail or earthquakes. The loss severity is therefore lower.
In SA, however, the threat of dry conditions to business focuses on agriculture and industry, particularly because of the significant amounts of water used by the country’s mining businesses.
Water usage is increasingly becoming a hot potato in places such as the Waterberg in the Limpopo, as well as in the North West, where many of the platinum and chrome mines operate, and the iron ore mines of the Northern Cape.
According to Matthew Burnell, an attorney with Fasken Martineau, there is specific risk to mining companies because – in terms of the National Water Act – the department of water and sanitation (DWS) has the ability to restrict water usage even within the confines of an Integrated Water Use Licence, the permit all mining companies must own in order to mine.
Says Burnell: “In these instances, it is up to the [DWS] to make sure that water resources are not significantly compromised. It can do this by decreasing the water allocation permitted by water users.
“Although a water-use licence permits a water user to consume a certain quantity of water, the licence does not guarantee that that quantity of water will be available and generally permits the [DWS] to reduce the amount of water available to the water user.”
Although this is “a worrying factor” for mining firms, Burnell believes it will encourage mining companies to seek out sustainable water use practices that would exert less strain on the system, lowering consumption costs.