African mining is growing up. Only a few years ago it was appropriate to distinguish between the continent’s ‘mature’ industries – meaning South Africa especially – and the rest, often called ‘emerging’ jurisdictions.
However, since the end of the Cold War (1990) a few African countries have grown immensely as mining investment destinations. While some factors have been constant – the post-millennium commodity boom and the rise of both Chinese overseas investment and domestic industrial demand – African mining jurisdictions have become increasingly diverse. Nevertheless there are still distinctive aspects of African mining, notably logistical problems and, regrettably, fears of resource nationalism in recent times.
Differentiating their mining jurisdictions from their peers and competitors is a practical matter for African governments. With the global mining industry having been rather static over this last two years, it has become increasingly important for jurisdictions to distinguish themselves from the pack.
Across the world, the industry is cutting back. A 2014 PwC global review noted that the ‘past year delivered a string of serious blows’ to the global mining industry, and that partly as a result of China putting ‘the brakes on its ultra-high growth rates’, the inter-national situation in terms of iron ore and coal ‘threaten[s] to tip into over-supply’.
China’s demand for metallurgical coal dropped 10% in the last quarter of 2013. Even more than these two sectors, gold mining has been under enormous pressure as the price has slipped from its 2011 peak.
PwC concludes that, while commodity prices are generally weaker, mining costs ‘continue to escalate, revenues and profits are falling and debt levels are rising’.
PwC pinpoints governance and political risk as make-or-break issues. Despite the industry’s contraction, ‘many governments are still demanding a growing piece of the pie’.
The top two African mining jurisdictions in the Canadian Fraser Institute’s 2013 Policy Perceptions Index (PPI), published in March 2014, were Botswana and Namibia – as has been the case for several years. Both countries had, however, declined several places in the overall international rankings. Botswana slipped from 17 in 2012 to 25 in 2013, while Namibia dropped from 30 to 34.
These are still good scores and a ranking of 34 (out of 112 jurisdictions) will certainly not put off many potential investors. That said, their downward movement is in contrast to improvements in other countries, notably the third best jurisdiction in Africa, Ghana, which improved from 54 (out of 96) in 2012 to 43 (out of 112) in 2013. Tanzania also improved considerably, from 74 to 62 over the same period.
Some observers are dismissive of rankings of this sort, and it is true that there are some development ‘league tables’ generated on flimsy evidence. But the Fraser Institute’s is a genuine heavyweight and, as such, both a reflection and shaper of opinion. This matters in an industry that is currently looking at all opportunities – not only in Africa – with an increasingly sceptical eye.
Speaking at the Investing in African Mining Indaba in Cape Town in February, Randgold Resources CEO Mark Bristow noted that it
was somewhat disturbing that the Fraser Institute has downgraded Africa’s PPI for the fifth consecutive year.
Bristow was especially concerned about regulatory changes. ‘The mining code reviews of the past couple of years and those currently under way in a number of African countries have undoubtedly aggravated this uncertainty by creating the impression their governments not only want a bigger slice of the pie, they want to take that before the pie is even baked,’ he said.
A recent survey by Grant Thornton identified resource nationalism as the single largest concern (38.7% of respondents)
The term used to describe these acts by African governments is resource nationalism. The phenomenon is not exclusive to Africa. Countries that have changed the rules to grab a larger portion of mining revenue in recent years include Australia, India, Indonesia, Chile and Peru. In Africa the list includes South Africa, the DRC, Ghana, Burkina Faso, Guinea, Mali, Zambia and Zimbabwe.
Actions that are generally considered to constitute resource nationalism include mandatory beneficiation, where companies are required to ‘add value’ to the minerals mined through processing and even manu-facturing (South Africa and Zimbabwe), changes in the tax regime affecting foreign-owned mining companies (Mozambique, Ghana and Senegal) and requirements that part-ownership of the mining company be ceded or sold to either the government or local citizens (Zimbabwe and Namibia, as well as Zambia).
A recent mining survey by international consultancy Grant Thornton identified resource nationalism as the single largest concern (38.7% of respondents), ahead of commodity prices (25.7%) and access to finance (9.9%). So serious are nationalism threats that they have led to EY introducing a quarterly resource nationalism update.
However, the fact is that many resource nationalism threats never come to fruition. In 2012, Zambia threatened to increase the mandatory state ownership of copper mines to 35% but backed down after engagement with the industry.
Burkina Faso, Africa’s fourth biggest gold producer, provides an even more dramatic recent example. The country had been readying itself to introduce a new mining code with higher rates of taxation. But the falling gold price provided mining companies with a strong argument against the initiative – and the government was listening.
‘We withdrew the draft mining code so that we could continue discussion with our partners amid gloom in the mining sector,’ Burkina Faso’s Minister of Mines Salif Kabore told Reuters earlier this year. The government and mining firms appear to be on the same page. He added: ‘It is important that, in terms of taxation, this code is not prohibitive for investors.’
Burkina Faso also expects production to begin at a 100 million ton magnesium mine at Tambao (in the country’s northeast) in 2015.
This is an important step towards reducing the country’s reliance on gold and cotton as its sole export earners. The project may well have failed to go ahead under the original proposals to revise the mining code.
Bristow suggested that co-operation was more common than not. He singled out the company’s experience in Côte d’Ivoire as an example of what could be achieved. The Togon gold mine in the north of the country (55 km from the Mali border) produced four tons of the metal in 2013. It was developed in the aftermath of civil war and commissioned during what Bristow describes as ‘another period of strife’.
More generally, he added: ‘The company worked with the government in its revision of the mining code and this co-operation has resulted in an investor friendly final draft.’
Another of Bristow’s examples illustrated the other side of the coin. Randgold Resources has a mine at Massawa in that country. However the government of Senegal has announced its intention to revise its mining code ‘in order to collect more revenue’. Bristow was concerned that it intended to do so ‘without an open engagement with the industry’.
After a decade of plenty there is now a cut-throat struggle to attract the attention of the major international mining companies
The net result, said Bristow, is that Senegal has not succeeded in attracting any investment into its fledgling mining industry. He added that the Senegalese government should ‘focus on encouraging [mining] investment on the back of the country’s undisputed productivity’.
Some of the general risks of mining in Africa are illustrated by Ghana, one of the Fraser Institutes more recent positive stories.
Political risk in Ghana is considered negligible and the country has a generally sound economic and business environment. It is Africa’s second and the world’s 10th largest gold producer and has also brought significant oil resources on-stream in recent years.
However, Ghana faces economic pressures and these impact on mining. The biggest problem in recent years has been a product of affluence.
As more money has come in, governmental fiscal discipline has slipped. In other words, it has spent more than it has budgeted for. To address a higher than expected deficit in 2012 (11.8% of GDP), Ghana reduced subsidies and increased taxes, raising the cost of doing business.
Value-added tax was raised in 2013 and there has also been talk of introducing a windfall tax. These new burdens, coupled with wage demands from workers who see their purchasing power eroded by inflation, are making the operating environment increasingly difficult for miners. Some mining companies have already had to mothball parts of their operations.
Africa is often presented as a continent with a decisive edge in natural mineral endowments. Although there is no empirical evidence for such a claim, it has stuck. This is probably why the majority of the world was mostly surprised when, in 2007, it discovered that supposedly resource-poor China had become the world’s largest producer of gold.
The truth of the matter is that much of Africa remains unexplored. No one yet knows, for instance, what lies under the soils of South Sudan.
Exploration spending around the world has dropped since the 2008/09 recession. With the softening of commodity prices, there are many known and viable mineral deposits that are not being exploited.
After a decade of plenty there is now a cut-throat struggle to attract the attention of the major international mining companies.
There is no country in Africa that can now afford to offer anything but the most attractive mining jurisdiction.