Perth, Australia – With commodity demand soaring, the world’s mining companies are increasingly turning to Africa to deliver resources to growing economies. As the continent is known to harbour vast quantities of natural resources including diamonds, gold, platinum and the all-important coal and iron-ore, refocused investment in the continent comes as little surprise.
Advisory firm Ernst & Young earlier this year reported that foreign direct investment (FDI) into Africa over the last decade had increased by a substantial 87%. In the last ten years, inward FDI had increased from 338 projects on the continent to 633 projects in 2010.
Despite the drop in investment in the past few years, following a peak in 2008, Africa remained an attractive investment destination throughout the global downturn and has managed to maintain its relative share of global investment flows as a result, Ernst & Young reports.
Further, the advisory firm expects strong growth in new projects into the continent, from 2012 onward, with FDI inflows forecast to increase to $150-billion by 2012.
Unsurprisingly, the large majority of the respondents to Ernst & Young’s survey viewed the extractive industry as a major area of investment, perceiving it to be the sector with the highest growth potential over the next few years.
“When it comes to future investment strategies, Africa is high on the agenda of global investors, with 42% of the businesses surveyed considering investing further in the region, and an additional 19% of executives confirming they will maintain their operations on the continent,” says Ernst & Young managing partner for Africa Ajen Sita.
He notes that emerging markets have also taken a growing interest in Africa, with investment from emerging markets increasing rapidly from 100 new projects in 2003 to 240 new projects by 2010. Emerging market investments into Africa now comprise 38% of the total FDI into Africa, up from 30% in 2003.
“This is confirmed by our survey of leading global businesses, with 74% of emerging market investors surveyed showing that Africa has become a more attractive investment destination over the last three years. They are also increasingly positive about Africa’s long-term investment potential,” says Sita.
Analysis of the projects shows that investment success stories are spread across the continent, with ten countries attracting around 70% of the new FDI projects between 2003 and 2010. These include South Africa, Egypt, Morocco, Algeria, Tunisia, Nigeria, Angola, Kenya, Libya and Ghana.
A Changing World
Mark Otty, area managing partner at Ernst & Young for the European, Middle Eastern, Indian and African regions, says that the African growth story over the last decade is underpinned by a longer-term process of economics and regulatory reform that has occurred across much of the continent since the end of the Cold War.
He notes that this period saw inflation being brought under control, foreign debt and budget deficits reduced, State-owned enterprises privatised, regulatory and legal systems strengthened and several African economies opened up to international trade and investment.
Otty’s comments are augmented by Australian African Mining Group interim committee member Bill Repard, who says that increased investment into Africa, specifically by Australian companies, has been driven by African nations that are improving their governance and the legislation covering the mining sector.
“The tide is flowing into Africa, and increasingly more and more companies have been spreading out into Africa,” Repard says. He states that the continent still offers significant opportunities for miners, despite its long history of mining.
“Large parts of the continent remain untouched by modern exploration. They have been picked over since colonial days, and perhaps the eyes have been picked out and the close-to-surface discoveries have been made, especially in West and East Africa, but what you are increasingly seeing is sophisticated techniques being used to uncover new discoveries that are not easily attainable,” Repard adds.
Mining Fund African Lion’s senior mining analyst, Damon Rhodes, says Africa offers one great benefit to explorers: opportunity. “Exploration companies can apply the techniques which have led to Australian discoveries to similar geology over large portions of the African landmass,” Rhodes says.
He adds that the investment firm is specifically focused on countries which it believes are geologically prospective, fiscally responsible, and encouraging of mining developments. These include South Africa, Tanzania, Botswana and Ghana.
Australia’s Foreign Affairs Minister, Kevin Rudd, believes that Australian mining com-panies could offer significant advantages for resources development on the African continent, as the country boasts more than 150 years of dealing with “vast foreign mining companies” on its own soil.
In an address to the African Union earlier this year, Rudd said that Australia was ready to share its expertise in “industries of land”, which included mining and agriculture, and which accounted for more than half of Australia’s export earnings.
“There’s no question that Africa’s economic and political reforms, its agricultural and mineral wealth, and its economic potential have grabbed the world’s attention.
“Africa is now profiting as never before from its natural resource wealth, and this is a key driver of its current success. It has, for example, 30% of the planet’s mineral reserves and exports 12% of the world’s petroleum. It has 60% of the world’s total uncultivated arable land,” Rudd said.
South to South
The Australian Department of Foreign Affairs and Trade (DFAT) has estimated that Australia’s investment into the African resources sector has tripled in size since 2005, and currently stands at around $20- billion.
It is estimated that around 220 Australian mining and oil companies are currently operational on the continent, with some 595 projects across 42 African countries. However, the DFAT states that the number of projects in which Australian companies have an interest could actually be higher, as the structure of multinational companies does not always allow for Australian connections to the projects to be reflected accurately in official statistics.
Further, if all mining services and equipment companies operating in Africa were included, the total number of Australian companies involved in the continent’s resources sector would increase significantly.
It is currently estimated that Africa accounts for the largest share of Australian mining projects overseas, with nearly 40% of all overseas projects of ASX-listed com- panies in Africa.
The DFAT says that the extent of Australian interest in Africa’s resources sector is spread widely across the continent, and includes most African countries of substantial size, with the exceptions being Sudan (and South Sudan), Chad and the Central African Republic, all of which have been affected by conflict and instability in recent years.
The last decade has also seen a number of mines being opened, or placed under construction, in less familiar territories, including the Perkoa zinc mine, in Burkina Faso, the Bonikro gold mine, in Côte d’Ivoire, the Syama gold mine, in Mali, and the Mbalam iron project, in Cameroon and the Republic of Congo.
Gold remains the commodity of choice for Australian miners looking to invest in Africa, with uranium following closely behind. The other most commonly prospected minerals are copper, platinum, diamonds and coal.
The DFAT notes that, while there are only a limited number of iron-ore projects identified on the African continent, the major ones would likely dwarf several other projects in terms of capital investment were they to proceed to construction and mining.
“A small proportion of companies have interests on other continents, and over 20% have projects in more than one African country. However, the majority of exploration companies, nearly all of which are listed on the ASX, are small and focused on one or two African countries,” the DFAT reports.
Further, fewer than 10% of these companies have operations based in Australia.
Repard notes that it is on the back of these major African projects that Australia would likely see the development of the next major resources company.
“I think you will see Australian companies merge and grow and move more into pro- duction. But you will also see companies like Rio Tinto increasing its presence across Africa, as we have seen with the recent takeover of Riversdale Mining, in the coal sector.
“The opportunity for a new Australian major to arise will come from Africa,” says Repard, who predicts that mining majors BHP Billiton and Rio Tinto would “certainly” move into Africa on a more prominent basis during the next decade, probably on the back of existing Australian projects.
Rhodes gives fair warning to potential investors in Africa, saying that exploration and mining are a long-term proposition, adding that, while several African countries maintained stability over this timeframe, many have not.
“There are a multitude of reasons sovereign risk can increase and, as we have seen in North Africa recently, it can increase rapidly. Understanding this and having comfort the people you are backing will (where pos-sible) anticipate and respond appropriately to changes in sovereign risk are crucial to investing successfully in Africa,” he says.