Voice of the silent killer

South Africa’s mining industry is rapidly becoming a leading authority in medicine, which had little to do with mining until HIV/Aids become an unavoidable part of doing business in South Africa. Faced with scary statistics like the fact that about 20 percent of its workers are HIV positive, the mining industry – a vital foreign exchange earner for South Africa – has recently been coming up with some hard numbers on the impact of the epidemic, something it was reluctant to do in the past. Indeed the stigma around the social and human tragedy of HIV/Aids has spilled over into business in many ways.

In 2001, BusinessMap Foundation, a think tank looking at South Africa’s economic transformation, revealed in a regional investor survey entitled Leaders in denial over HIV/Aids that past denial by government leaders and business leaders about the impact of the disease had ‘hardened investor sentiments’. And, as a result, investors have ‘failed to take cognizance of remedial measures that a number of companies are successfully implementing.’

Some companies have extensive programs and strategies to deal with the human, economic and social cost of the epidemic; some are doing less, and some absolutely nothing.

‘Some companies are in denial, as are some governments and many people,’ observes Kate Taylor, associate director of the Global Health Initiative (GHI), a public/private sector body fighting the scourge of HIV/Aids. ‘But many are also very proactive in educating their employees, conducting voluntary testing and providing medication. The problem is that some companies are very uncomfortable with the disease as it comes with a stigma, and they don’t see how business has a role to play.’ Taylor acknowledges that HIV/Aids poses an ‘unprecedented challenge’ and that it is ‘quite understandable that CEOs don’t know what to do.’

It doesn’t help that the major costs of the disease are often delayed for years after initial infections and are hitting different sectors of the economy in varying degrees. Sectors such as mining, transport and construction are the hardest hit so far, largely because they are labor-intensive and depend heavily on migrant workers who frequently spend long periods away from home and their families.

Therefore, out of necessity, many of the larger companies within the mining industry are leading the charge in education programs, medical care and research.

Aids & IR

AngloGold revealed in April that the disease is costing its South African operations $4-$6 per ounce of gold mined, and that 25-30 percent of its 44,000 workers are infected. Gold Fields, which listed on the NYSE in May, has estimated that HIV/Aids will increase its operational cost by an extra $10 per ounce of gold based on current assumptions about the costs of medical treatment, training, loss of productivity and absenteeism. And Impala Platinum (Implats) predicts it will incur extra costs of R24 mn ($2.4 mn) in 2011, which is predicted to be the peak of the epidemic.

In the face of such numbers, how do South African companies attract investment? Long-term investors will not invest in countries with declining economies, and the health of a country’s economy is inextricably linked to the health of its citizens. A declining standard of health impedes the education and prospects of the young. It affects the operation of the labor market by lowering productivity while increasing staff turnover as well as training and recruitment costs. It reallocates and reduces the availability of capital as ethical investors seek approved companies and country risk increases.

The World Health Organization estimates that when 20 percent or more of the adult population in a country is infected with HIV, this translates into an annual reduction of up to 2 percent of GDP. In South Africa, it is estimated that 19.94 percent of adults are already infected and the infection rate is among the world’s fastest growing. By 2010, it is estimated that GDP will have decreased by 17 percent. About half that decline would be attributable to an increase in current government spending to pay for healthcare associated with HIV/Aids; another third is attributable to lower productivity.

Future shock

So if HIV/Aids is fundamentally affecting the performance and profitability of companies, how do companies communicate to investors – particularly international investors – the effect of HIV/Aids on future investment returns?

‘We were not initially proactive in communicating our activities to the market,’ admits Peta Baldwin, investor relations manager for AngloGold. ‘Our view was that we should ensure we had workable processes and solutions with measurable outcomes in place first.’

‘About 18 months ago, the sell side came to see Colin [Eisenstein, managing director of AngloGold Health Service and medical consultant to AngloGold] for a roundtable discussion and they wanted hard numbers,’ Baldwin continues. ‘At that stage we weren’t prepared to do that.’ Baldwin says that North American investors were especially interested in this area, and when AngloGold was confident that costs attributable to HIV/Aids were credible and based on actuarial analysis, ‘we were ready to start talking.’

In the last twelve months, the mining company has put together a report that seeks to communicate its strategies and policies to the market along with a realistic assessment of the disease’s financial impact on the company. An interactive CD version of the report is aimed at investors and media based outside of South Africa.

‘We also rely on the close relationship we have with the unions,’ explains Baldwin. ‘We have been giving them presentations on Aids and the company and we look to do the same for other stakeholders.’ In April 2002, a special site visit was arranged for the media along with several analysts and fund managers. They visited hospitals, spoke to medical staff and miners and viewed some educational tools used, such as theatrical plays. And the reaction? ‘They were pleasantly surprised. Before, they thought we were just providing a community service; it is much more than that,’ Baldwin states.

Implats, the world’s second largest platinum producer, has an ‘extensive yet low-key’ investor relations program. It’s aimed primarily at international investors who make up the majority of the company’s owners apart from one major corporate holder. ‘Implats has for some time supplied information on HIV/Aids prevention and management programs, prevalence levels (as far as these are available) and, more recently, the financial impact of the epidemic,’ says Cathie Markus, director of corporate affairs for Implats. ‘This is provided in the annual report, the web site, as a standalone leaflet in the Implats corporate folder (which is sent to media and international investors), and in results, roadshows and other investor presentations.’

The company also has, on two occasions, participated in brokerage-sponsored Aids conferences on the nature and the impact of the epidemic. Similar to AngloGold, Implats also runs HIV/Aids programs with its unions and the head of Implats’ medical services, who also regularly presents in ‘IR lunches’ with securities analysts.

‘The company’s strategies and programs to deal with the epidemic are extensive and are delivering significant changes in behavior and in expected levels of HIV prevalence,’ says Markus. Implats estimates that through its program, the economic impact on the company could be halved to R24 mn ($2.4 mn) or an extra $1 to $4 per ounce.

Show me the money

‘It is important that companies are tackling the problem,’ observes one gold analyst based in Johannesburg, ‘but we are purely interested in the hard numbers. The only benefit I want to see is how gold mining companies are reducing costs and enhancing returns in the long run.’

He praises companies like AngloGold for taking the initiative but says he doesn’t discount them or put a premium on them because of their Aids policies. ‘What companies like AngloGold are doing is spending a lot of money and laying the groundwork, and that is why smaller companies are getting away with doing nothing. They benefit from the advances that AngloGold makes. But if no-one was taking the initiative, the whole industry would suffer. The initiatives that leaders in the industry take satisfy overseas investors’ perceptions of the industry as a whole.’ This analyst believes companies like AngloGold deserve more credit for their efforts in this area: ‘We are quick to criticize but not to give praise.’ It does seem that the investment community is happy to give those companies that are tackling the issue a pat on the head but not a bone.

‘The interest and reaction from buy and sell-side analysts have been focused on the social and operational impact of the disease on the company, but also on the financial impact,’ observes Implats’ Markus. ‘The main concern of investors has been the desire for information, particularly of a financial nature, and a need to be reassured that the company is managing the potential impact from both an operational and financial point of view.’

South Africa’s Old Mutual provides a host of financial services, including insurance and asset management in South Africa. The company employs around 13,000 people in South Africa and has committed R10 mn ($1 mn) to various programs to tackle the epidemic. But it would seem the warmth stops there.

‘From an IR point of view, we have a fairly cold way of making judgments,’ says James Poole, director of investor relations at Old Mutual. ‘Aids is only one of the factors we have to consider.’

‘We are very anxious not to demonize Aids and certainly would argue that its effect is likely to be to reduce GNP growth rates by about 0.5 percent per year by the end of the decade,’ Poole continues. ‘Nonetheless, over the past ten years South Africa has been the fourth fastest growing emerging market in the world. Currently South Africa is one of the best performing stock markets in the world and the proportion of foreign buying on a daily basis has risen from 30 to 40 percent. Foreign portfolio investors are taking a very positive view because they can see that the negative growth factors – including Aids – are manageable.’

As for the impact of the epidemic on Old Mutual in South Africa (the company has its primary listing on the London Stock Exchange), Poole has this to say: ‘Aids is good for our insurance business. We are making money. Investors buy our shares because we are good – we measure and price our risk right.’

Paul Marriage, head of media relations for Standard Chartered Bank, which has key operations in sub-Saharan Africa, says the company includes the topic of HIV/Aids in presentations to the media and investors and in annual results, but it does not make presentations solely about the problem. And so far, it seems investors have been nonplussed. Aman Narain, investor relations manager for the bank, says investors have been more focused on Standard Chartered’s main money earner, Asia. ‘We’ve had some investors ask questions about Aids as a staffing issue. We have found that even ethical funds have been targeting political and geographical issues rather than health issues,’ he explains.

Times are changing though, says Taylor from the GHI. She says more funds and companies are starting to link health issues to corporate social responsibility, which has also gained momentum and interest among investors. ‘This is an opportunity for global investors to make an impact. Investors must encourage or even make companies do their part. Outspoken investors can make a huge impact.’