Are African Miners Worth the Risk?

Investing in small-cap natural resource miners in Africa is always risky. But what happened in South Africa yesterday went well beyond what anyone could have expected.

South African police shot and killed several dozen miners working at the Marikana platinum mines run by Lonmin PLC (LMI.L), the world’s third-largest platinum miner. The miners were protesting the low wages they’re being paid when the violence erupted.

According to the Financial Times, Johannesburg police claimed they opened fire only after the striking miners started to attack them. While the violence reportedly reached a fever pitch yesterday, it began a week ago when 10 people were killed in a dispute between rival South African mining unions.

It may seem trivial to talk about the impact such senseless violence could have on your portfolio. But such scrutiny is one of the ways to try and keep ill intending public companies honest.

Naturally, Lonmin’s stock has felt the initial brunt of yesterday’s shootings. Listed on the London exchange, Lonmin shares have fallen 11% since news of the violence spread yesterday afternoon.

However, the long-term, big-picture ramifications for the mining industry as a whole could be even more damaging.

Johannesburg is home to almost half of the 20 largest mining companies in the world. And South Africa holds about two-thirds of the planet’s platinum reserves.

All this violence can’t be good for business. It certainly hasn’t been for Lonmin.

The company claims to have already lost six days of production as a result of the violence, and is now unlikely to meet its production target, the Financial Times reported.

Broader picture, the violence could potentially scare off other mining companies in the region. And given how important South Africa is to the platinum market, it’s sure to at least temporarily slow production of the precious metal.

The shootings may even affect companies mining in other parts of Africa.

Political turmoil is prevalent in several African countries. According to the Africa Sun News, 15 different African nations are currently either at war or experiencing post-war conflict and tensions. And that doesn’t even include the latest tensions in South Africa.

Such grisly conflicts pose great risks to everyone living or working in those countries – including miners. That’s why, when you invest in a mining company that has heavy operations in a warring African nation – or a warring nation on any continent – you take on a tremendous amount of risk.

The upside to investing in African miners is also very high given how flush the continent is with platinum, gold, copper and other metals. In addition to being a platinum hotbed, South Africa is also the fourth-largest gold producer in the world. Ghana, in western African, is the eighth-largest gold producer.

Most investors know that African miners are high-risk, high-reward investments. But ugly incidents like what happened in Johannesburg yesterday make it seem as though the risks outweigh the potential reward.