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Opportunities persist in sub-Saharan Africa, despite unfavourable mining sector

10th November 2017

     

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Opportunities remain in sub-Saharan Africa (SSA), despite a spate of regulatory changes and policy uncertainty across major mining countries in the region eroding investor sentiment, highlighting the region’s mining sector as the riskiest in the world, according to Fitch-affiliated BMI.

The research firm’s Industry Risk/Reward Index for Sub-Saharan African Mining, published in September, notes that SSA remains challenged by underdeveloped infrastructure and small mining sectors, affirming Sierra Leone, Liberia and Mauritania as regional laggards.

Nevertheless, the broader region will remain attractive to investors, as a result of low labour costs, strong mining sector value growth and a solid competitive landscape. Botswana will be the region’s best-performing country, owing to a strong industry risk profile, which surpasses the European average.

Overall, SSA is placed behind all other regions on BMI’s Mining Risk/Reward Index (RRI), scoring 39.3 points out of 100, owing to low scores in the country risk and reward indicators.

Policy uncertainty, in particular, will hamper growth opportunities in SSA in the coming years as major mining markets in the region make changes to their regulatory frameworks. Despite this, the region scores highly in BMI’s mining industry value (MIV) growth sub-indicator, suggesting a dynamic sector, despite the high-risk environment.

Botswana improved its score from 54.3 in the previous quarter to 57.7 currently, overtaking Ghana as the highest regional scorer. The country’s top score is driven by low country risk and industry risk, as well as good business environment results.

Underperformers, including Sierra Leone, Liberia and Mauritania, are dragged down by infrastructure deficits, which remain prevalent throughout the continent, as well as undeveloped mining industries.

The Hindrance of Policy Uncertainty

A key feature of SSA’s mining sector will be the ongoing regulatory changes being implemented or proposed across several countries’ mining codes, which will increase policy uncertainty in the region. For example, during 2017, South Africa and Tanzania embarked on numerous important regulatory changes to their respective mining codes, which has significantly downgraded their regulatory scores.

The third iteration of South Africa’s Mining Charter, currently suspended pending a legal review, raises black ownership percentage requirements and royalty rates for mining companies, while reforms in Tanzania look to ban ore exports and raise government ownership and royalties in mining projects.

As a result, both South Africa and Tanzania’s mining regulation scores on BMI’s regional RRI have dropped significantly from 54.1 to 36.1 and 26.2 to 18.9 respectively, between the fourth quarter of 2017 and the first quarter of 2018. This has subsequently impacted on both countries’ overall RRI score, with Tanzania dropping from 8 to 9 regionally and South Africa losing second position to Ghana.

Other countries are in the process of proposing similar policy changes. The Namibia government intends to increase the share of black ownership in companies (including mining companies) to 25%, as part of the broader Namibia Economic Empowerment Framework. The Democratic Republic of Congo (DRC) and Kenya have also announced intentions to reform their existing mining codes. In the case of the DRC, this could involve raising government’s share of revenues through an increase in royalties on mining activities, while in Kenya’s case, government is looking to introduce reforms that will attract much-needed investment into the domestic mining sector.

SSA’s regulatory score averages 37.6 on BMI’s mining RRI, firmly positioning the region as the worst-performer worldwide.

Botswana to Lead Stable Markets

The importance of business environments in the scores of BMI’s RRI will continue to favour the relatively established and stable markets of South Africa, Ghana and Botswana. Consequently, these three countries obtain an average score of 54.8 on BMI’s index, above the Americas average of 50.7, but still below the Asian regional average of 56.1. Botswana, in particular, will top the regional RRI, owing to its favourable country risk outlook, positive labour costs and a dynamic competitive landscape, underpinned by a solid regulatory environment. These scores reflect miners’ continued emphasis on treading carefully and avoiding overexposure to high-risk environments as they look to improve balance sheets rather than engage in risky growth ventures.

Results from outperformers also suggest that MIV growth and size (industry rewards) are poor predictors of top-performing countries in SSA’s overall RRI.

For example, South Africa and Botswana are both among the top three in BMI’s RRI, despite posting scores of 21.3 and 49.2 respectively in terms of MIV growth – firmly below the regional average of 60.1. On the flipside, highest-growth countries such as the DRC and Mali, which are expected to witness a strong average annual growth rate of 10% in MIV from 2017 to 2021, will perform below the regional average on BMI’s RRI.

Size and Power Matter

While MIV growth is typically offset by political instability or underdeveloped infrastructure on BMI’s SSA RRI, MIV size is a strong predictor of underperformers.

Accordingly, countries with the smallest mining sectors in BMI’s regional list, such as Liberia, Mauritania and Sierra Leone, are also the lowest scoring on the company’s index. As a result of smaller mining sectors, which are generally made up of one commodity, such as iron-ore or gold, many of these countries suffer from indirect cyclical factors. One such example is vulnerability to changes in commodity prices, with all three countries scoring below 90% of their peers in the region and both Sierra Leone and Liberia coming bottom of all mining countries globally in this regard.

Power will also remain a key factor in determining the investment attractiveness of mining markets in SSA moving forward. This correlation is duly reflected, with the three worst-performing countries on BMI’s index, Sierra Leone, Mauritania and Liberia, doing particularly badly in terms of electrification rates, where both Sierra Leone and Liberia come bottom from all mining countries at a global level – a reflection of Africa’s severe infrastructure deficit relative to the global standard.

New Index

BMI has overhauled 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 company has increased the number and variety of indicators that make up the final index score and it has reassessed the weightings of the reward and risk indicators to ensure that 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 do the index scores, providing a highly dynamic and forward-looking result.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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