The African continent ranks as one of the richest natural resources and mineral- endowed continents with vast opportunities for wealth for mining companies and investors.

Fully exploiting Africa’s minerals continues to be problematic for mining companies, says mining consultancy The MSA Group geology head of department Dr Brendan Clarke.

Hesitancy from investors has continued to hamper mining operations, he states, noting that mining and exploration companies often have to pay more than is affordable to access the limited available financing for projects.

Clarke attributes the decline in funding for mineral exploration projects worldwide to the general risk-averseness of companies during a financial downturn when corporates try to conserve capital.

The risk-averseness of companies to explore Africa’s minerals has resulted in the stagnancy of greenfield projects, as companies focus on expanding on brownfield projects.
These projects have already been de-risked and are available for investment at a fraction of the price of investing in a greenfield project, he explains.

“Returns on exploration expenditure take a very long time to materialise – a typical timeframe from starting exploration to operating a mine is about ten years. Therefore, an exploration project has to have exceptional upside potential to be an attractive investment proposition during these financially restrained times,” he tells Mining Weekly.

In addition, considerable infrastructure challenges on the African continent, coupled with corruption and regulatory uncertainty in certain jurisdictions further stifle the appeal of exploration projects.

Alternatives

However, MSA exploration project manager Graig Blane notes there are alternatives to traditional capital market and debt funding mechanisms that companies can use to raise capital to develop projects in the current climate.

One such alternative is metals stream financing, which involves the selling of future precious metals by-products to a buyer. This benefits the mining company because it receives the capital to develop its operations and, the buyer, in turn, receives metals at below the market prices.

Blane further cites royalty financing, which operates in a similar fashion, and enables a company to raise upfront capital provided by a financer in exchange for a royalty entitlement based on the worth and revenue generated by a mining operation.

Joint venture (JV) agreements involving a junior licence holder and a second party offering their skills and capital, are another option. However, Blane notes that the biggest drawback of such ventures is the loss of operational control over an operation for the junior licence holder.

JV agreements can be implemented at any point of the project, while metals stream financing and royalty financing are restricted to the development stages of a project, he adds.

Looking Forward

Meanwhile, MSA geology operations manager Michael Cronwright notes that specific parts of Africa are still considered attractive when combined with the right commodity, such as graphite in Mozambique.

He further notes that Africa attracted 16% of the $10.7-billion global exploration budget in 2014, compared with the 15% it attracted of the $20-billion budget in 2012, indicating that African exploration still provides good value for money.

Cronwright notes that tough times in the mining industry will still continue in the short term, as the current lack of investments into early-stage exploration projects is resulting in fewer discoveries being made in Africa.

Subsequently, the future project supply pipeline is shrinking and the industry is essentially engineering another bull market, he adds.

However, the next up-cycle for African mining could prove to be a positive period albeit difficult to forecast when that will be, Cronwright concludes.