Local mines mines should be proactive in preparing for future industry shocks in the form of a stabilisation fund, an industry expert, Dr Adrian Saville, Chief Strategist at Citadel Investment Services, has suggested in an article.
This call has been made in the wake of the recent pact that government, trade unions and mining houses made as part of the measure to avert destabilising retrenchment. Mines have caught between a hard place and a rock of sorts –retrenchment would mean government possible revocation of operating licences, while holding on to bloated employee complement would put them in a financial squeeze.
Sceptics have questioned the basis of the tripartite agreement wondering where the funds would come from. That’s why Saville believes a Stabilisation Fund would sustain the tripartite agreement.
In his piece, Saville argues: “I recently proposed that government look at introducing a stabilisation fund into the platinum industry and I believe that this could readily be extended beyond platinum to other parts of the resources sector. Not only that, a stabilisation fund would strengthen and enhance the agreement reached on Monday between the mining industry, unions and government to stem a wave of job losses.
“A stabilisation fund, which is a mechanism aimed at providing a degree of protection to producers from volatile resource prices, could be an option to contemplate. By stabilising prices, such funds dampen the wild swings in revenue that characterise most parts of the resources industry.”
A stabilisation fund is a mechanism aimed at providing a degree of protection to producers from volatile resource prices. By stabilising prices, such funds dampen the wild swings in revenue that characterise most parts of the resources industry.
“The way in which the mechanisms work is relatively straight forward. An “industry effective” price is determined, which is a price level that corresponds with a healthy return on shareholder capital, fair tax revenue, reinvestment of profits and rising employment of all factors of production. If the platinum (or other resource) price rises above this predetermined level, all “surpluses” are paid into a side pocket. If the price falls below the agreed level, funds are withdrawn from the side pocket to stabilise revenue,” Saville explains.
