the coup will be televised: randgold + mali

referred to as a “soldier of democracy” by many mali watchers, the coup against mali’s president, amadou toumani touré, was certainly a surprise, but not inconceivable. the demise of qaddafi, who arguably was as stablizing as he was destabilizing, created a security vacuum across much of the region. the fall of qaddafi meant that many of the separatist movements and insurgencies across the northern sahel no longer had financial support—thousands of tuaregs who served in qaddafi’s military and worked supporting the country’s hydrocarbon industries were suddenly out of work. in the context of mali, many tuaregs joined with the mouvement national de liberation de l’azawad (mnla), a separatist movement committed to carving out a new country in the far north of mali, which is rumored to be uranium rich. the insurgency had been growing in intensity for a few months now much to the disillusionment of the central malian government. and while the highly nimble and agile mnla seemed to had been gaining ground against the malian army, the army had been doing just enough to contain the violence to the far north.

amidst this backdrop, a storm was brewing. the widows of junior and mid-level soldiers had organized protests over the failure of the malian government to sufficiently arm their husbands in battle. one of the leading presidential candidates, ibrahim boubacar keïta, had been rising in popularity due to his hardline stance on the mnla rebellion in the north. the mnla had been winning strategic battles closer to the capital, bamako. and racial tensions were escalating to an alarming high, particularly in bamako, where black malians and lighter-skinned tuaregs were reported to have been violently clashing in certain neighborhoods across the city. these factors, compounded together, were early warning signals to mali’s political fragility.

and then the coup was televised:

investors don’t like uncertainty, and as was pointed out by beyondbrics, there is nothing more uncertain than a coup in a landlocked, relatively remote sub-saharan african country. nevertheless, the market reaction to news of a military coup in mali—africa’s third largest gold producer at 36,344kg—was less surprising than the actual coup itself. suffering the largest blow to its share price since 2008, randgold tanked from the news of the malian coup. despite the fact that randgold came out and said that the coup did not pose a physical security risk to operations, investors did not believe it. while a company’s official statements should always be taken with a grain of salt in times of crisis, rangold’s loulo and morila mines are 350 and 280 km due west of the capital, respectively. so what gives?

equity investors’ reaction to today’s events in mali sheds important insight on how traders respond to political risk, particularly across relatively shallow and unknown african markets. the principal point of reference among market participants was randgold’s experience in ivory coast, when it suspended operations during the dawn of the political standoff between gbagbo and ouattara in 2010/11. in my opinion, the risk perception for randgold was exaggerated today because of the faulty comparison between ivory coast and mali because many saw the two countries’ political economies as similar. in fact, they are different for three reasons.

first, whereas gbagbo and his political allies had spent ten years developing a strong web of patronage in the countries main revenue generating sectors of cocoa and oil, the malian putschists have not developed strong patronage networks around the country’s gold mining sector, and will thus not have access to similar nodes and levels of financing that enabled gbagbo and his allies to hold on to power for so long. second, the structure of cocoa futures contractually bound sellers and buyers to honoring delivery contracts, even when sanctions were slapped on the country. it’s not surprising that in april—right after the march delivery deadline—gbagbo soon collapsed because he was unable to pay the remaining soldiers still loyal to him. in mali, the mutineers don’t have control of the gold mines, and as it stands right now, will have difficulty financing themselves because they can’t manipulate the formal channels of country’s gold industry. finally, gbagbo had the quiet support from some key players in the region, specifically angola and ghana, which enabled him to profit from his supporters’ informal trade of certain commodities, specifically cocoa. the ghanaian government in practice refused to close its border with ivory coast, and as such, cocoa beans were be smuggled across the border, mixed in with the ghanaian crop, and sold on the international market. when ivorian banks shut down because the bceao shut them off in late january, angola provided a safehaven for gbagbo to stash his cocoa revenues. with mali’s borders closed and its neighbors condemning the coup, i see it highly unlikely for the mutineers to access even an illicit source of financing in a manner similar to gbagbo that will enable them to hold on for an extended period of time.

while the situation is fluid on the ground in mali, i do think that in the long-run, mining operations are safe with mali. during the 2010 coup in niger, and the series of coups in guinea following the death of lansana conté, uranium and bauxite production remained relatively constant. scenarios in which (1) the mutineers go away on their own volition in the short-term, (2) president amadou toumani touré (ATT) is forcefully reinstated by regional or international powers, or (3) hawkish politicians like keita and/or top-level officers were to adopt the mutineers cause to advance their own gains—are more likely than the “worse case.” a worse case scenario—similar to guinea— in which the young, inexperienced mutineers run the country and are corrupted by power, would probably see mining operations uninterrupted. while it’s very possible that the putschistes could gain broader public support, their attempts at holding on to power in mali will be short lived because they cannot finance themselves for long, drawn out battle.

my suspicion is that investors reaction to political risk today have caused randgold, and other companies with mali exposure like avion, rockgate capital, iamgold, cluff, and goldfields, have caused share prices to hit rock bottom. for bullish investors with a high-risk tolerance, this could be an interesting opportunity to buy, if you are willing to ride out the political turmoil within the country—but also are willing to bet on the markets’ misunderstanding of malian political economy.