The impact of exchange rate volatility on firm value of South African mining firms listed on the JSE

Abstract

Real and nominal exchange rates have been very volatile after the collapse of the Bretton Woods system of fixed exchange rates. The advocates of managed or fixed exchange rates have referred to this type of volatility as unfavourable due to the contagion effect on the valuation of multinational firms. While the relationship between exchange rates volatility and its impact on firm’s value has been significantly researched, it is noticeable that this relationship has not been subject to much empirical research in the mining industry. This study empirically investigates the impact of exchange rate volatility on the valuation of South African mining firms listed on the Johannesburg Stock Exchange. The study focused on top 10 by value South African mining firms listed only on the Johannesburg Stock Exchange. Secondary data was used for the study, and it was collected from the Johannesburg Stock Exchange, South African Reserve Bank, South Africa’s Department of Trade and Industry and Bloomberg Terminal for the period between January 2000 and December 2016. The generalised autoregressive conditional heteroskedasticity, conditional standard deviation was used to estimate exchange rate volatility from the trade-weighted exchange rate constructed from South Africa’s top nine trading partners. The two-factor model of the Capital Asset Pricing Model was used to estimate the relationships between the mining firm’s share returns firm value and exchange rates volatility. The study’s results revealed that there was an insignificant relationship between the mining firms share returns firm value and exchange rates volatility for eight out of ten selected firms. The two firms, Kumba Iron Ore Ltd KIO and Exxaro Resources Ltd EXX share returns were significantly and positively correlated to exchange rate volatility. All mining firms’ share returns were significantly and positively correlated with the market returns positive betas. Also, the results showed that there was no causal relationship that existed between the exchange rate volatility and mining firms share returns for most of the mining firms. However, a unidirectional causal relationship was noted between exchange rate volatility and Kumba Iron Ore Ltd share returns, and between Northam Platinum Ltd share returns and exchange rates volatility. The regression results from determinants of the exchange rate exposure showed that the significant relationships between KIO and EXX share returns and exchange rates exposure cannot be explained by potential explanatory variables used for regression the foreign sales to total sales ratio, firm value and age of the firm. The results suggest that the study needs to be extended to include more mining companies and other parameters like foreign debts to total debt ratio, as well as mining firms which are listed on other stock markets outside South Africa and hold foreign assets. Keywords, exchange rate volatility, exchange rate exposure and trade-weighted exchange rates