The mining industry in Africa - is 2018 the year of opportunity?
Ian Coles, of Mayer Brown, looks back to the recent Mining Indaba in Cape Town to assess both some of the key lessons learned from that event and the state of the industry going forward.
As is customary for the past two decades, those with a hand in the development and financing of the mining industry in Africa descended on Cape Town during the first week of February to attend the Mining Indaba conference. The gathering has matured to such an extent that several other mining-related events are now supported as well as, of course, multiple presentations and social events.
It is the time when participants take stock of the industry in Africa, prognosticate about the outlook for the coming year and, hopefully, make plans for deals to be done in the next 12 months. There is no doubt that the mood at the conference has been dark for much of the past decade. Last year saw some uptick but, at least from this correspondent’s perspective, the ‘vibe’ at the most recent event was better than it has been for many years.
The coverage of the industry in Cape Town is extraordinarily comprehensive. Representatives of mining companies, governments, financiers, suppliers, consultants and others give presentations on countries, commodities, the sources of finance and virtually even, very another topic of relevance to the industry. As a result, there are multiple ways of looking at the risks and rewards facing the industry in Africa in 2018, all of which must be viewed through the macro-economic prism of the global, market for commodities. For the first time in many years, delegates came to Cape Town on the back of an upward trend in the price for many commodities.
Possibly the greatest degree of variance, amongst all the factors affecting the industry is to be found in the challenges presented by investing in specific countries - usually, but not always, as a result of local political considerations.
Those considerations frequently manifest themselves through attempted adjustments to the economic basis on which mining licenses are granted to companies wishing to explore and exploit. Those adjustments are classically implemented through a combination of the free carried interest in a project granted to the state in question as well as moving the levers which govern royalties, taxation and other revenue generators.
The balance to be struck is between the legitimate interests of the relevant country to realize benefits from mining activity and those of the international investor which needs to be persuaded that its investment dollar will produce a competitive return in the future.
SOUTHERN AFRICAN UPDATE
The current situation in South Africa has obviously gained a lot of attention. Opposition to the proposed new mining charter has been well publicised and a court hearing to address arguments against the charter on behalf of a number of industry participants has been set. Late breaking news though suggests that this has now been postponed in anticipation of discussions with the new administration. There is still far to go through.
Political upheaval has also been seen in Zimbabwe, a country with significant potential in the precious metals space but where the Mugabe administration had been making further demands for state participation in mining projects and revenue. Again, comforting statements have been made by the incoming president but real sustaining change in both South Africa and Zimbabwe is going to require root and branch reform which is bound to take time. Revenue expectations are very powerful factors when a government is looking at policy change.
Other challenging jurisdictions include the Democratic Republic of Congo (DRC). Changes to the mining code which would adversely impact investors have been proposed but the real challenge is the increasing political and social instability inherent in that country, as reported by theEconomist, recently. Changes in the mining code in Tanzania, and financial claims being made against mining companies such as Acacia, have attracted criticism but at least these can be viewed in the context of an overall political and economic environment which is generally seen as the positive.
Over the years Zambia has also tried to move the economic needle a, against mining companies but, generally speaking, a mutually acceptable accommodation between state and private sector has been reached.
There are more positive stories. In particular, those countries which have been, or which have hoped to be, reliant on revenue from oil and gas projects have had to adjust expectations as energy prices have declined from historical highs in the face of massively increased shale production. Countries with mining potential, such as Angola and Mozambique, have been moving to diversify into the industry by making encouraging noises to investors.
Sudan might be considered in the same category. Nigeria has also stated an intention to move into mining for much the same reason. Ethiopia, probably the fastest growing economy in Africa, is also seeking to encourage investment in the mining industry, in particular in gold and potash projects. Morocco is continuing to make strides in phosphate and other minerals such as tin.
The differing markets and prospects for various commodities also received much attention in Cape Town. The background of recent rises in the price for several base metals provided a confident springboard into the conference.
Of longer-term interest to investors, particularly in the case of copper, was the perceived dearth of new significant projects coming into production in the near to mid-term future. While other parts of the globe, particularly, in Latin America, might be more prospective for copper there is certainly plenty of potential in Africa. Likewise, the sea, me in true for iron ore where vast projects such as Simandou, in Guinea, remain largely undeveloped. Gold carries the perennial question mark as to its future direction, due to the fact that is closer to being a currency than a commodity.
Nevertheless, exploration activity continues, as does the consolidation of existing activity, particularly among the West African producers. Possibly the greatest amount of discussion though was generated around lithium and cobalt - the two metals which will be required to fuel growth in battery production for electric cars. Cobalt, in particular, might present a challenging supply chain in the future dependent on stability in DRC. The need for enhanced food production, as the world population increases also underscored the need for the development of potash and phosphate projects in connection with the production of fertilizers.
A constant theme over the past ten years has been the source of capital, particularly equity capital for exploration. The opinion here seemed to vary with some being of the view that the market in Toronto, probably the biggest source of equity for exploration, has shown signs of recent activity. The London exchanges were also represented - although recent activity there has been limited. Japan and Australia made appearances to promote their own investment in the African mining industry. Probably the largest investor in that industry though - China - was noticeable by the absence of any high profile appearance. China, of course, has invested heavily over the past 5-10 years and certainly continues to do so.
Debt providers were less visible at the actual conference - although certainly present at various peripheral events and in the corridors and meeting rooms of adjacent hotels. The theme here is the variety of available products. Straight debt financing from commercial banks is now not the only - or possibly preferred - the source of non-equity finance (although for the larger projects - frequently in conjunction with official lenders - they are the only practical source). Investment funds no longer limit themselves to equity. Streaming companies and royalty providers are also increasing their footprint in the industry.
A variety of other issues facing the industry - albeit not exclusive to Africa - were also discussed. Of great significance to Africa, the role of technology and artificial intelligence was the subject of more than one discussion forum. Large projects in Australia already operate driverless trucks and other equipment.
This indirectly leads to the issues of sustainability and the enhancement of local competencies. The old model where mining companies came into a country and developed and operated a project with personnel, equipment, and technology sourced from abroad is no longer acceptable. The majority of mining codes and investment agreements now make the use of local personnel and equipment and the growth of local competencies a mandatory part of any license.
Non-governmental organizations and, increasingly, shareholders and other stakeholders view this aspect of developing mining projects as an important piece of the overall investment programme. A related topic is an engagement with local communities and the need to develop plans for providing enhanced facilities for education, health, and sanitation.
Legal systems received less attention at the conference - although there were certainly phalanxes of lawyers in attendance. The conference is principally focused on trade and investment so this should not necessarily be a surprise.
However, the importance of stable and progressive legislative and legal regimes as a material factor in any investment decision should not be forgotten. They form a very important aspect of the comparative benchmark analysis for attractive investment locations.
As will be evident, this year’s Indaba produced discussion and debate in connection with virtually all issues currently of concern to the mining industry. Delegates were fortunate to approach the conference with some degree of confidence about the forward direction of many commodity prices and the global economy. 2018 will continue to present challenges, particularly in the political arena in many countries, but the sense that opportunity for success is at its highest level for many years is clear.
Ian Coles is head of the global mining group at Mayer Brown.