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South Africa Stocks Downgraded as Mining Troubles Spread

Matt Clinch, special to CNBC.com
Monday, 8 Oct 2012 | 11:15 AM ET

With tensions once again rising in South Africa’s mining sector, investment bank Merrill Lynch has cut its weighting to the country’s stock market and mining sector.

Striking mine workers demonstrate outside the Anglo American Mine in Rustenburg. South African.
Striking mine workers demonstrate outside the Anglo American Mine in Rustenburg. South African.

The firm downgraded the country’s resources sector from neutral to underperform. “Net-net, we’re now underweight the country,” it said in a research note published on Monday.

On Friday, Anglo American Platinum fired 12,000 workers after they went on an illegal strike. The move came a day after a company employee was shot dead near Rustenburg following clashes between police and striking workers.

In August clashes at the Lonmin mine in South Africa left 44 people dead and that unrest has now spread to other companies across the area as workers seek higher wages.

Stocks in firms exposed to South African mining were trading firmly in the red on Monday. London-listed shares of Lonmin were trading over 4 percent lower, while shares of Anglo American , which holds a majority stake in Anglo Platinum, and Aquarius also fell.

“If the end result of the strikes is just higher wages, then that means we have plenty of strikes ahead of us as contagion will keep spreading,” Merrill Lynch said.

“In the best case scenario of government support for industry in its battle to restrain cost pressures (both at a micro and macro level), then it seems we still will have a bit more confrontation ahead of us.”

South Africa had been seen as something of a safe haven for investors in recent years with share prices hitting record highs but Merrill Lynch said that their optimism is waning.

“With the current greater appetite for risk globally and the strain of South Africa’s heavy strike disturbances, we’re finding a considerably less receptive audience to our thesis that the well owned South Africa consumer is a major beneficiary of lower for longer global rates.”

“Ultimately we expect to again push this theme with passion. But in the short window to year end, it seems difficult to defend an overweight. We downgrade (South Africa) consumer to neutral.”

However, the investment bank did note that once the wage spike had been dealt with, it would have a longer-term positive effect.

“If the end result is a clear message to unions that the days of freebie inflationary wage hikes are over, this just may be the period when South Africa finally introduced some economic sanity to its labor policies,” it said.

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