How To Profit from the Power Crisis in South Africa

A power outage killed Stephen Diza...

On February 3, a man stabbed 22-year-old Stephen Diza in the stomach with a knife. At the hospital, doctors found a foot of intestines hanging from Diza's wound. They sped him to the operating room. When they got there, they discovered it had no power...

Had there been electricity, doctors could have saved Diza's life in less than an hour. Without power, the doctors were unable to operate, and Diza died in their care.

Diza lived in a town called Mokopane in the Limpopo Province of South Africa. Government is the problem. It controls South Africa's electricity sector through a state-owned utility called Eskom. Regulators kept the price of power too low for too long, and Eskom never invested in new capacity. Meanwhile, with the run-up in commodity prices, South Africa is enjoying a mining boom. Mining uses huge quantities of electricity...

The shortage is so acute, this year Eskom has started using rolling blackouts to manage power. Stephen Diza's neighborhood suffered a blackout the night he went to the hospital...

Blackouts in South Africa are epidemic, and they are crippling the country. In January, blackouts shut down the entire South African mining industry for a week. South Africa accounts for nearly 90% of the platinum metals on Earth, 80% of the manganese, 73% of the chrome, 45% of the vanadium, and 41% of the gold. It is the world's largest producer of platinum, rhodium, vanadium, chromium, and manganese. And it's the world's second-largest producer of gold and palladium.

Without guaranteed electricity, you can't send workers underground. It's too dangerous. So the mines closed down.

In the 28 days following this mining shutdown, platinum rose 41%, palladium rose 32%, rhodium rose 29%, vanadium rose 112%, chromium rose 5%, manganese rose 26%, and gold rose 6%.

The South African newspapers predict anywhere from 13,000 to 20,000 gold miners will lose their jobs in South Africa as a result of this power crisis...

"The damage is huge, we are talking millions, possibly billions, of dollars," says the Times of London.

The gravity of the situation hasn't been lost on the shareholders of South African gold-mining stocks.

Gold Fields' stock price has fallen 29% since January 14, while the gold price has stayed flat. Harmony's stock price is down 11%, and DRD Gold's stock price has fallen 22%.

Here's the thing: This power shortage is a temporary situation. But investors haven't figured this out yet... and they're still punishing the South African gold-mining stocks as if these problems are going to last forever.

South Africa will host the soccer World Cup in 2010. The World Cup has the second-highest television audience of any sporting event... after the Olympics. The 2006 World Cup final attracted 715 million viewers. If you add up all the games in the tournament, the World Cup had a cumulative television audience of 26.29 billion people.

It will be the first time an African country hosts the World Cup. Can you imagine how eager South Africa will be to impress the world?

There's an opportunity here: Take advantage of worried investors and buy South African gold-mining stocks. As the power crisis subsides, these stocks will soar...South Africa has the fifth-largest coal deposits in the world and is the third-largest exporter of coal. So there's no shortage of energy. It's just a problem of investment. As soon as Eskom builds new infrastructure and new power plants, the problem will disappear. Besides, Eskom has three mothballed power stations. It can bring these power plants online in the next year.

Good investing,

Tom