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Fri Oct 24 19:59:26 SAST 2014

Moody's gloomy on mines

Sapa | 21 September, 2012 00:01
Striking miners dance and cheer after they were informed of a 22 percent wage increase offer outside Lonmin's Marikana mine, 100 km (60 miles) northwest of Johannesburg.
Image by: SIPHIWE SIBEKO / REUTERS

Moody's ratings agency has warned that more aggressive wage negotiations in South Africa in the wake of the Lonmin agreement could have "negative impacts" on rated mining companies in the sector.

Lonmin's deal with workers at its platinum mine in Marikana following a violent strike resulted in wage increases of up to 22% effective on October 1, and a signing on bonus of R2000.

"If the agreement were to spur calls for similar wage hikes at other mines, it would be credit-negative for rated miners with exposure to South Africa, that are facing other event risks, including potential increased taxes as an alternative political response to calls for nationalisation and ongoing exposure to lawsuits arising from medical claims," Moody's said.

A credit rating downgrade would increase the cost of borrowing for those companies.

Local mining companies were "particularly vulnerable" to wage increases because wage costs represented more than 50% of their total costs in domestic operations, Moody's noted.

"Furthermore, prolonged strikes due to labour disputes, if they were to occur, could lead to reduced production and lower cash generation, which, without equivalent reductions in costs, would exert pressure on the operating margins and other credit metrics of rated mining companies with the greatest exposure to South Africa," Moody's said.

"Moody's will continue to closely monitor the situation in the mining industry, especially with reference to labour unrest."

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