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African mining retains positive outlook

6th November 2015

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

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Africa is awaiting a “gold rush”, similar to the mineral revolution and birth of Johannesburg at the end of the nineteenth century, international law firm Hogan Lovells partner, mining head and regional head Warren Beech states.

He reaffirms to Mining Weekly that the exploitation of the minerals and natural resources on the continent will be a driver for further African economic development, highlighting the abundance of mineral and natural reserves across the continent.

Following his attendance last month at the Financial Times Africa Summit, in London, which assessed the state of the continent, the current pitfalls and future opportunities, Beech emphasises the renewed positive outlook for the African mining industry, reiterating that Africa remains one of the biggest untapped markets worldwide, boosted by an emerging middle class.

“Africa is where the money flows to and should flow to, notwithstanding that mining does not contribute 70% or 80% to most [African] countries’ gross domestic product (GDP),” he points out, emphasising that the return on investment in Africa currently remains “superb”, compared with other countries.

He agrees with the comment that was made at the event, that “if investors are not investing in Nigeria, they were not serious about investing in Africa”. His view is that the same applies to South Africa. He suggests that Nigeria and South Africa, as the two major economic powerhouses in Africa, will subsequently drive the rest of the African economies in regional infrastructure and service developments.

According to statistics from the World Bank, South Africa remains the second-largest economy in Africa, with an estimated GDP of $324-billion, and is the top destination for foreign direct investment (FDI).

Investor Interest
While the traditional perception was that countries, such as China and India, seemed to be the major investors in Africa, FDI figures indicate otherwise, Beech highlights.

“Its an eye-opener to realise the amount of investment from other countries, particularly France and Belgium, which spent the most in Africa from 2013 to 2014,” he says, noting that investment areas comprise mining, natural resources, infrastructure and tele- communications.

Citing the 2015 Africa Investment Report, Beech says France was the top FDI source country for investment in Africa at $18.3-billion for 2014, with Belgium’s FDI into Africa increasing the most in 2014 .

Nevertheless, Beech believes that the market is opening up, with increasing investor interest from the US, Japan and Korea, and with large investments focusing on primary metals. Key commodities include ferrochrome, which is blended into most steels and metals for additional strength, as well as platinum-group metals (PGMs).

Navigating Challenges
Beech says there are five recurring, almost universal, challenges in Africa over and above commodity prices – regulatory uncertainty, infrastructure challenges and development, workforce challenges, the demand for community activism, or involvement, as well as issues regarding health, safety and environmental laws.

He suggests that, while regulatory certainty remains a sought-after goal, he notes that this is simply not reality, and some investors are understanding this situation.

Beech says, although there is some acceptable infrastructure, the demand for infrastructure is being addressed by the South African government, through programmes such as the National Development Plan, with other countries, such as Mozambique and Zambia, driving similar infrastructure developments.

He admits that the strikes in the local mining industry in the past year and the high cost of employment “has not done South Africa any favours”, but that the cost of employment in the African mining industry is often lower, contributing to opportunities in this sector, underscoring the good access to skilled and semiskilled labour.

Moreover, Beech states that, by 2035, Africa will effectively have the largest population that is of work-going age worldwide with half the population currently under the age of 20.

African Performance
Beech categorises several performers and strugglers in the African mining environment, highlighting that Zambia is in trouble amid the free fall of copper prices, while countries, such as the Democratic Republic of Congo and Sierra Leone, which face regulatory instability, are creating concerns for investors.

“However, Namibia and Botswana, with their relatively stable economies, regulatory and investor-friendly environments, are key industry performers – and are doing well.”

There is a strong focus on West Africa and East Africa, with the latter displaying emerging competitors, such as Kenya, in the mining, natural resources and manufacturing sectors, Beech notes.
Moreover, there is vast future potential for Zimbabwe, owing to its abundance of natural resources and its future global contribution of PGMs, Beech believes, stressing that the country is a key industry player in the medium to long term.

Mozambique also displays significant potential, with particular emphasis on its coal reserves in the northern provinces. This potential is boosted by investment in the rail programmes being progressed through public–private participation programmes, he adds.

However, Africa is in a phase of preserving assets, supporting the notion that commodity prices will not rapidly improve within the next year, but possibly only within the next 18 to 24 months, Beech suggests.

However, while several operations are being placed on care and maintenance to preserve assets, with about 20% of distressed assets across the continent being sold or divested, Beech notes a “fighting approach” forming part of the “African optimism”.

“Companies are preserving assets, with the expectation that the environment will improve in the long term,” he avers, but adds that some mining companies and investors are investing without the expectation of another commodity supercycle.

“These investors are accepting that the margins are going to be less . . . they are working and planning their operations and projects with this in mind,” Beech concludes.

Edited by Leandi Kolver
Creamer Media Deputy Editor

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