Mining in sub-Saharan Africa (SSA) is most under strain in West Africa, according to research firm BMI Research, a Fitch Group company.

BMI published its ‘Industry Risk/Reward Index (RRI) – SSA Mining: Future Sector Growth to be Hampered by Business Environment’ report on February 22, which highlights that, while South Africa, Ghana and Botswana are the outperformers in its revamped Risk Reward Indices, West African countries in general are the underperformers.

Underperformers, including Sierra Leone, Liberia and Mauritania, do particularly badly in terms of other key business environment-related indicators, dragged down by low electrification rates, government intervention and their high vulnerability to commodity price volatility.

However, SSA is the best-performing region when it comes to vulnerability to commodity prices, which measure the exposure of a region to price volatility in terms of the commodities it produces.

Sierra Leone, Liberia and Mauritania are the bottom three countries on BMI’s index, suffering most from cyclical factors such as vulnerability to changes in commodity prices, with all three scoring below their peers in the region.

Further, the effects of the Ebola crisis in West Africa have severely affected mining and gross domestic product growth prospects, resulting in countries like Liberia posting scores as low as 11.65 for long-term economic risk in BMI’s RRI.

The highest growth countries, such as the Democratic Republic of Congo, in the central-western part of SSA, and Mali, which will both witness an average annual growth rate of 10% in mining industry value (MIV) during 2017 to 2021, will perform below average on BMI’s RRI index.

Unlike in the Americas, results from outperformers and underperformers in BMI’s RRI reinforce the view that MIV growth and size are poor predictors of countries’ overall scores in SSA, explains BMI.

SSA in general, however, outperforms all others in BMI’s MIV growth score, indicating that, despite the high-risk environment, the region’s mining sector is the most dynamic in the world.

“The mining sector in SSA will be the fastest growing in the world in the coming years, driven by a diverse commodity base in metals, such as iron-ore, gold, bauxite and aluminium, that will help miners navigate through future commodity market volatility. Further, the SSA mining sector [ranks] above Asia and the Middle East, and North African regions with regard to our competitive landscape score, reflecting a relatively open and diversified market structure,” notes BMI.

South Africa and Botswana top the overall RRI list, despite posting an average MIV growth of 1.5% and 3.2% respectively, during the next five years.

Both these countries, as well as Ghana, also do particularly well in BMI’s overall scores, owing to their outperformance in key business environment indicators, including labour costs, mining regulation and their mining competitive landscape.

“The importance of business environment indicators in the scores of our RRI naturally favour the relatively established and stable markets of South Africa, Ghana and Botswana. Consequently, these three countries obtain an average score of 53.6 on the RRI, slightly above the Americas region average of 50.5, and are the only countries from SSA to achieve this. This score also reflects miners’ ongoing priorities to tread carefully and avoid overexposure to high-risk countries with higher growth prospects in the coming months,” states BMI.

However, broadly speaking, a weak business environment in SSA is reflected in the low scores in operational, industry and country risk indicators, compared with the global average, which hampers the region’s overall mining RRI scores and suggests these factors are the largest constraint to the further development of Africa’s mining sector.

“There is clear correlation between those countries that score well in business-friendly indicators and our overall RRI. As such, traditionally low-risk countries will outperform in our regional RRI mining scores and will continue to attract investment on the back of more mature labour markets and relatively open economies,” advises BMI.

New RRI Model
BMI has renovated its Mining RRI methodology to more accurately capture the different elements that impact on the overall investment attractiveness of a country’s mining sector.

The organisation says it has increased the number and variety of indicators that make up the final index score and re-assessed the weightings of the reward and risk indicators to ensure the most accurate reflection of the risk/reward environment is reflected through its matrix.

The RRI uses a combination of BMI’s proprietary industry forecasts and analyst assessments of the regulatory climate. As regulations evolve and forecasts change, so the index scores change providing a highly dynamic and forward-looking result, highlights the firm.