Impact of strikes on investors' confidence in the South African mining sector
Chabalala, Cicilia Mpentjane
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The impact of strikes in the South African mining industry has created a controversy, nationally and internationally by affecting investors’ confidence. Shares in the platinum mines were sold and were disinvested from South African platinum mines to offshore countries. The situation has tarnished the reputation of South Africa, which is known as a supplier of 80% of the world’s platinum. Platinum has massively transformed the economy of South Africa through exports, high employment and infrastructure development. The present study intends to investigate the impact of strikes on investors’ confidence in the South African mining industry. The primary objective has been achieved by primarily focusing on share price volatility and the profitability ratios of platinum mines, using a sample period from 2008 until 25 July 2014. Mining employees strike for several reasons: low wages, poor living conditions, sanitation and disagreements with management. The literature indicated that strikes are routine in the South African mining industry. It is recommended that investors approach the impact of strikes from a global point of view and not only within the South African context. The broader perspective regarding the impact of strikes in South Africa is that it can lead to a recession. However, the South African mining industry is not alone in experiencing strikes. Other resource-rich countries face the same challenges. The study was analysed using event study methodology, developed by Ball and Brown in 1968. The share price volatility of each platinum company was investigated and analysed according to market capitalisation. The empirical findings indicated that the share price reacts on the day of the announcement of the strike and becomes very volatile during certain periods of the strikes. The share price volatility also increased in line with the duration of a strike. Profitability ratios recorded during the period of a major strike are negative. A negative ratio indicates poor performance which, in turn, affects investors’ confidence, because investors prefer to invest in highly profitable mines. The profitability ratios of Anglo American, Impala Platinum, Lonmin, Northam Platinum and Aquarius declined significantly from 2012. This is the year that the platinum sector started experiencing major strikes compared to other years. As a result of declining profits, Anglo American Platinum, Impala Platinum and Lonmin have issued force majeure to the suppliers because companies were not able to fulfill contractual obligations. Another challenge facing the platinum sector is that companies sold assets due to the impact of the strike on operations and unprofitable mines were closed. The structure of the platinum companies would possibly change as the platinum companies merge with other companies. This would change the capital structure of the companies. Based on the literature study and the empirical research performed and the results obtained, it can be concluded that this study complied with its primary and secondary objectives.