Anti-Apartheid Rules May Cast Pall on Gold Market : Mandatory Disinvestment Would Cause Heavy Selloff of South African Shares, Plunge in Stock Prices

U.S. proposals for tough new anti-apartheid sanctions could force a heavy selloff of South African gold shares by American investors and send prices tumbling, mining analysts said Tuesday.

South African gold shares quoted in London are hovering around two-year lows. Further heavy falls are predicted if the United States enacts legislation, due to come before Congress next month, proposing mandatory disinvestment by U.S. corporations and individuals.

One bill, sponsored by Rep. Ron Dellums (D-Calif.) and already passed by the House of Representatives Foreign Relations Committee, would ban all U.S. investment, impose a near-total trade embargo and mandate U.S. government action against firms that continue to do business with South Africa.

The Johannesburg brokerage of Davis, Borkum, Hare & Co. estimates that American investors hold one-seventh of mining shares on the Johannesburg Stock Exchange, valued at last week’s prices at about $5 billion.

Most U.S. holdings are in gold shares, worth about $3.3 billion in total, according to Davis Borkum.

The sanctions proposals have already cast a pall over the Johannesburg market, prompting local and foreign investors to steer clear of gold mining stocks.

This year, South African gold stocks have drifted steadily downward. The Johannesburg Stock Exchange’s all-gold index has dropped more than 500 points from 1,774 at the beginning of this year to around 1,240.

Shares Unloaded

“Undoubtedly, the Johannesburg market could absorb a selloff, but it’s going to be at a price,” said Warren Meyers, chief gold analyst at Merrill Lynch Capital Markets in New York.

“The only thing that could cushion the shock would be the gold price going through the roof,” he said.

U.S. investors, anticipating tougher sanctions, have already started unloading South African local gold shares.

“We haven’t seen everybody rushing for the exit, but there is a steady trickle of selling,” Meyers said.

“There is a certain feeling of inevitability that some form of restrictions will be imposed on American investors holding our gold shares,” Johannesburg Stock Exchange President Tony Norton said.

“We are already seeing net sales by foreigners of about 30 million rand ($10 million) a week,” he said.

Norton believes that the effect of an American selloff will be cushioned by other investors coming into the market. “This would cheapen share prices, and there will certainly be buyers in the Far East, Britain and Europe looking for bargains. That’s what markets are all about,” he added.

‘Mad Scramble’

Stockbrokers agree that cheap South African shares could be snapped up if an American selloff sends prices lower.

“European investors don’t have the same sort of scruples that Americans have about South Africa. They would be looking for bargains,” Meyers said.

South Africans, their funds bottled up inside the country by tough exchange controls, take a rosier view of local gold shares and are likely to turn buyers if U.S. holdings are unloaded at bargain prices.

“Some local institutions are 40% liquid,” said Rene Hochreiter, mining analyst at Anderson, Wilson & Partners.

“When the perception comes that gold share prices have fallen far enough, there will be a mad scramble for stock,” he predicted.

Local analysts argue that South Africa, the world’s biggest gold producer, offers better quality gold shares and better value for money than other producing countries.

Merrill Lynch research shows South African gold stocks yield an average 9.4% on future earnings compared to 7.5% for Australian gold stocks, 6.2% for Canadian shares and 4.9% for U.S. gold producers.