Due to Africa’s exceptional mineral wealth, it has attracted the attention of miners for centuries. However, operating on the continent often comes with specific challenges.
In recent years, resource nationalism has become a growing issue for producers. A number of governments have changed legislation to increase the royalties, taxes or social contributions required from companies in order to operate.
Last year 64.5% of respondents to the annual White & Case mining survey stated that political risk or “the possibility of government interference” is the main obstacle they face in Africa. This has had a dampening effect on investment.
For Nivaash Singh, co-head of mining and resources finance at Nedbank CIB, there is a recognition that any mineral wealth does belong to the people of the host nation. However, there has been “creeping overreach” from some African governments in recent years, often linked to the mining cycle.
“When the commodity cycle turns down, investment flows dry up and governments then scramble around looking for investors, offering all sorts of concessions to mining companies in the form of lower taxes and lower royalties,” Singh says. “However, when it turns into a bull market, and the sector becomes richer in terms of cash flow, then there is an attempt by African governments to renegotiate those royalties and re-look at the fiscal benefits. They do this knowing full well that it is a mineral-rich continent and mining investment will continue to come into Africa, because even though other parts of the world might have friendlier jurisdictions, they have declining grades.”
This creates an environment of uncertainty for miners and those financing them, who want to make long-term decisions.
The impact of the oil price
Recently, the slide in the oil price that began in mid-2014 has also had an impact on how many countries on the continent view their mining sectors.
“When oil prices were high, oil producing countries on the continent were cash flush, and so there was no need to tinker with the mining sector or the processing sector,” says Singh. “They were generating sufficient GDP and government coffers were full. But when oil prices crashed to as low as $27 per barrel there was a scramble from certain governments in Africa to refocus attention away from oil to metals and mining.”
In order to extract more value from this sector a typical approach from governments has been to increase the royalties demanded from mining companies. Nigeria is a good example. As a major oil producer, it had largely neglected the mining industry, until oil prices fell.
“That’s when we saw the government grabbing what was left of a mining industry that was struggling to get onto its feet in the first place,” Singh says. “That has been the response from many countries when there has been a shortage of dollar liquidity.”
In other countries, the approach to the mining sector has changed substantially when new governments have come to power. An example is what has occurred in Tanzania since John Magufuli became president.
“Tanzania has been a highly attractive destination for mining investment, particularly for Australian and Canadian companies,” Singh says. “Since the new president came in, we’ve seen a radical shift in terms of regulating the mining industry, with three new pieces of legislation introduced in 2017.”
In this case, a number of miners reacted by saying they cannot comply with this new legal framework and pulling out of the country. However, Singh argues that often this has been a knee-jerk, emotional decision.
“If mining and exploration companies applied an objective view towards the new legislation and worked with government, they could achieve compliance,” Singh argues. “But because these companies are so heavily invested in their projects, both financially and emotionally, they cannot see the wood for the trees.”
There are, however, other companies that have stayed invested. By being more pragmatic they have found ways to work with government and find solutions.
These challenges are, therefore, not insurmountable. Particularly because Africa offers so much in terms of its mineral wealth, Singh still sees plenty of opportunity for investment.
“As a lender, we do have to be very careful which ones we pick and which ones we classify as not bankable, but there are attractive mining projects in Africa,” he says.
Evaluating which ones Nedbank should finance starts with an analysis of its location, the measures that have been taken to secure the site, and the quality of the consultants and engineers being employed. Critically, it also requires an analysis of the quality of management.
“We ask ourselves whether this management team is capable of executing on a project in a difficult part of the world, in challenging conditions, and do they have the experience and scars needed to execute on a project of this nature,” Singh says.
This always has to be done using a long-term lens.
“You have to have a long-term perspective, because the mineral wealth is there,” Singh argues. “It is under-developed and the potential for success is huge. That is what we are looking at as banks – mining investors who are willing to take a long-term view of the continent, have the tolerance and ability to work with government, and to navigate difficult terrain to achieve a successful investment outcome.”
Brought to you by Nedbank CIB.