Wed, Mar 1, 2017

Africa Mining Indaba Reveals Cautious Optimism

There was an air of cautious optimism at the 2017 Africa Mining Indaba in Cape Town. The relative positivity was a relief after the two grim years of 2015 and 2016 when rock bottom commodity prices, falling share prices and failed projects reduced Indaba’s legendary bustle to a murmur. Close to 6000 delegates descend on Cape Town every February for Africa’s largest mining conference. The attendee list is broad and varied. Delegates include the top executives of the world’s major mining companies as well as representatives of mid-tier and junior firms with mining prospects and projects from Mauritania to Madagascar. Indaba is an opportunity for representatives of African countries to promote the attractiveness of their resource endowments and the competitiveness of their investment climates. Indaba is also the temporary home for an army of consultants, lawyers, bankers and mining equipment sales teams looking to work with the mining firms. This year, participants seemed to be beginning to see the light at the end of the tunnel.

Positive signs, but uncertainty remains

Commodity prices have picked up and share prices have risen, breathing a little bit of life into the investment strategies and risk appetites of mining executives. Once again, Africa’s vast and largely under exploited mineral resources is starting to come back into focus and, here at Kroll, we are seeing an increased interest in our services that support transactions across the continent. Whilst there is a sense of measured optimism, caution rather than bullishness is the order of the day. The trauma of a period of sustained low prices will not pass quickly and there is recognition that a relentlessly cyclical industry risks getting ahead of itself and investing on sentiment rather than hard realities. To quote one mining executive, the “known knowns are also somewhat limited”. Seasoned mining executives questioned the drivers of a recent uptick in prices. Have prices improved on the back of a fundamental shift in supply and demand, or is the upturn the product of sentiment based volatility? Will Chinese consumption continue to increase and will the US really embark on a costly infrastructure investment spending spree? Uncertainty remains.

Appetite for capital intensive green field projects in Africa also looks set to remain muted. Mining industry executives responsible for identifying and securing investment opportunities on the Africa continent explained that, rather than accessing new pools of capital for investment, they will be required to off-load existing assets to free up capital for re-investment. We know from our own work here at Kroll that Boards will also need reassurance on country and reputational risks to get comfortable with frontier markets. They will also need to know that the all-important access to infrastructure will not be a bottle neck to the mines performance. No easy task.

South Africa’s mining industry continues to struggle

Whilst executives seemed relatively positive about prospects for investment across the continent, there was little optimism about South Africa’s mining industry. South Africa hosts approximately 50% of all of Africa’s mining operations and the world’s biggest platinum reserves and significant gold, iron ore and coal reserves. Investor sentiment and relations between operators and the Government have worsened and mining executives have been frustrated by what they perceive as damaging steps to reduce the competitiveness of the sector. Mosebenzi Zwane, South African’s mineral resources minister and the administration of President Zuma are the focus of the industries ire. The process of agreeing a new mining charter that sets out the regulatory environment for the industry has been delayed and fraught with disagreements. The Minister, speaking at Indaba, said that a revised Charter would be released in March 2017 and that it would include “a tool for transforming the mining industry”. Recent proposed changes to the mining code, particularly the way in which Black Economic Empowerment (BEE) provisions are managed, have raised concerns for operators in the industry. The most recent proposal from the South African Government would require companies to maintain the level of BEE equity ownership at 26 per cent, even if existing BEE partners decide to sell their shares and exit projects. The industry has rejected the proposal and is resolute in defending what they call the “once empowered, always empowered” principle of black ownership.

As South Africa’s mining industry continues to struggle, the prospects for other countries on the continent that host attractive mineral deposits look brighter. Their ability to provide a stable investment environment and the conditions to get a project off the ground and operating effectively will continue to be critical. The last three years have proven how fickle the world’s miners can be.

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