Owing to the slump in the commodities market, there has been restricted growth in mining worldwide, including Africa, with mines consolidating their existing assets rather than expanding, says multinational services firm EY mining and metals sector leader Wickus Botha.

However, the increased investment in Africa’s infrastructure, consumer market and commercial accommodation, highlighted by EY’s Africa attractiveness survey for 2015, will result in significant gains when the commodities market finally takes off again, he says.

The survey examines the reality and perception of foreign direct investment (FDI) regarding greenfield and expansion projects, as well as their impact on local economies; it also includes the perspectives of executives, government officials and academics.

Botha notes that the survey’s limited reference to mining is quite simply because of the current low capital investment in mining projects, adding that many mines are trying to optimise their portfolio, while others are putting their mines on care and maintenance.

A number of projects in West and Central Africa that were ramping up have been delayed or scaled down to derisk the operations and defer capital spending until a later stage when it is more profitable, he states.

Although mining is experiencing slow growth, the survey, however, suggests that mining and metals have the second-highest growth potential, after agriculture, for Africa over the next two years.

“If the stars align, there is a massive opportunity for mining in Africa,” says Botha.

He stresses that a number of factors must come together for African mining to recognise its potential, particularly regarding infrastructure.

Apart from precious metals, the final product of which can be transported relatively easily, Africa’s key commodities require bulk infrastructure for their transportation.

Botha asserts that a good time to invest in infrastructure is now, as the drops in commodity prices have resulted in the costs of materials and services to construct infrastructure being low.

“Although the drop in commodity prices has really impacted on many governments’ ability to fund big projects, such as the Nigerian government, which earns most of its revenue from oil, Africa has to work through these economic headwinds and continue to invest in infrastructure.”

He notes that, in the attractiveness survey, the African Development Bank calculates that Africa’s infrastructure spending is deficient to the value of $50-billion a year.
Botha cites Mozambique’s coal industry being significantly challenged by a lack of sufficient infrastructure, with Brazil-owned Vale’s Moatize coal mine, and India-based International Coal Ventures Limited’s (ICVL’s) Benga coal mine enduring severe bottlenecks in transporting their coal.

Coal transport costs have, therefore, often exceeded mining costs at times, he says, adding that the lack of rail infrastructure has sometimes led to Vale and ICVL transporting their coal to the Port of Maputo by truck.

Mozambique publication O Pais reported last month that the Sena railway line would triple its carrying capacity from 6.5-million tons to 20-million tons by year-end, thereby significantly addressing the infrastructural bottleneck that is curtailing the development of the coal industry in Mozambique.

Meanwhile, the attractiveness survey has also found that, in addition to the high investment in infrastructure on the continent, Africa also has a booming consumer market, coupled with a boom in the construction of commercial accommodation.

Although these two factors will not impact on mining as directly as increased infrastructure development, both will have positive indirect effects on Africa’s mining, Botha says.

He suggests that the boom in the consumer market will create an embeddedness within African economies that will reduce the cost of doing business in Africa and increase the continent’s ability to attract and retain skills.

For example, a higher demand for bandwidth, as a result of a bigger market for mobile phones, will incentivise putting infrastructure in place in Africa, which will, in turn, increase connectivity and reduce the time and cost at which business is done, says Botha.

Subsequently, such improvements will also lead to a better quality of life, so that skills are more easily attracted and retained.

Similarly, the boom in the construction of commercial accommodation, such as hotels, has the potential to bridge the large gap in quality of life that separates mining towns from cities, thereby making mining environments more attractive for professionals.

One of the main findings of the attractiveness survey was that, although the number of African projects receiving FDI has decreased, the amount of FDI received has increased by 136%. Botha argues that this is because of existing large-scale projects consolidating and gaining serious investor confidence, with less interest in new projects, partly owing to a drop in commodity prices.

The increase in total capital investment and the scale of these investments in Africa indicate that foreign investors perceive Africa as a less risky economic environment and see greater opportunity to get a return on investment, notes Botha.