Despite the imperative for African mining companies to preserve, or consolidate their assets, these companies also need to prime themselves for a new commodity supercycle and potential growth by boosting exploration projects, states multinational services firm EY mining and metals sector leader Wickus Botha.

Mining companies are fighting to preserve operations through cost cutting and optimisation initiatives as several mines face a profitability slump, Botha reiterates, highlighting the emerging consolidations in the local mining industry, with gold majors acquiring platinum assets, while other mining majors are closing or divesting certain operations.

“While mining houses should continue this contingency to survive during current circumstances, this is, however, the time to switch for growth,” Botha stresses, pointing out that, during the past supercycle, Africa did not benefit as much as markets in South America and Australia.

Botha acknowledges that, while commodity prices have not strengthened, nor experienced a significant change in the past six months, he expects underlying market fundamentals to support higher prices from 2017/18.

When a new cycle occurs, he says, the focus will shift from cost mitigation to production and operations ramp-up, which will require a pipeline of available exploration projects or assets.

“In light of this, mining companies now have to strike a balance between optimising the current mines and a focus on looking for opportunities to grow,” Botha says, emphasising the importance of continued exploration expenditure.

He further posits that, exploration projects should be converted and developed into economically viable mining operations.

“This is to ensure that, when the commodity price cycle recovers, the necessary investment capital will be allocated to attractive projects for further development,” Botha says.

He highlights a definite trend of increased exploration spend in Africa prior to the super- correction currently experienced; however, despite the increased spend, this exploration often did not result in mines or projects, owing to a lack of economic viability, exacerbated by infrastructure, labour and regulatory challenges, Botha laments.

Another challenge is access to capital, which EY highlights in its ‘Business Risks Facing Mining And Metals 2015-2016’ report. EY notes that access to capital “remains a survival issue for most juniors and many midtier companies, coming in at number three on the risk list . . . while, for those that can access capital, the risk of accessing capital is around the increasing complexity of the financing models”.

Owing to this “capital austerity”, some companies are self-funding their projects, as opposed to through debt, or a combination of debt and equity, he says. This further prompts the consideration for smaller projects and operations, as well as a delay or longer lead time for these projects.

While Botha acknowledges that an uncontrollable variable remains global pricing volatility, he underscores key focus areas, which are within the continent’s control: the cost of infrastructure, the cost of operations, the stability of the operations environment, as well as labour practices.

To increase the attractiveness of investment into Africa, countries need to manage the drivers underpinning increasing competitiveness, namely upscaling infrastructure investment and development, and creating regulatory stability with regard to legislation and tax laws, as well as ensuring acceptable labour practices, Botha believes.

He cites Zambia and Burkina Faso as representing examples of opposing cases. Where Zambia created regulatory uncertainty and confusion in changing the tax laws several times in the past 18 months, contrastingly, Burkina Faso created “quite an attractive and lucrative” tax regime.

“If there is less volatility and more predictability in these aspects, the risk profile and hurdle rates of mining projects will decrease, thereby increasing market competitiveness,” Botha says.

Nonmainstream Demand
Botha stresses the positive aspects of Africa increasingly supplying rare-earth minerals and other “nonmainstream” minerals on a global scale. These include zinc, copper, graphite, bauxite and molybdenum, as well as platinum.

“The demand for technological innovations is also directing the focus to solar or other renewable energies, as well as energy storage, which requires the use of these nonmainstream commodities,” he suggests.

The drive for metals such as copper and zinc stems from the fact that several mines and large deposits will be depleted in the next four to five years, necessitating the discovery and development of new deposits, such as the Gamsberg zinc mine, in the Northern Cape, and the Kapushi zinc deposit, in the Democratic Republic of Congo, as well as several deposits in the Zambian Copperbelt, Botha says.

Rising interest in using these metals in the healthcare and agriculture sectors will also contribute to demand.

Further, Botha believes demand for platinum will increase as Russia’s deposits wind down, while Japan’s drive for zero combustion engines in the medium term will increase the use of fuel cell technology.

Nevertheless, the market for the supply of bulk minerals such as iron-ore, coal and metallurgical coal still remains robust, as a result of the current and future infrastructure demands in Africa, East Asia, India, South America and other developing regions – similar to those in China, he says.

“All these commodities are on the African continent. The only question that remains is whether they are economically mineable,” Botha concludes.