Rising regulatory risks, as a consequence of improving commodity prices, are expected to challenge the improving profitability experienced by mining companies in sub-Saharan Africa over the next few months, the latest report by BMI Research shows.
This will be further compounded by widespread illegal mining activity and a slowdown in mining merger and acquisition (M&A) activity in the region on a year-on-year basis.
The positive outlook for commodity prices is leading to rising regulatory pressure on sub-Saharan African miners, BMI notes, as it points to local governments working to claim a larger share of the mineral resource wealth through amended mining codes.
“In line with our global themes for the mining industry this year, so far in 2018, a number of governments in the region have either implemented or announced intentions to review their respective mining codes,” the report outlines.
The Democratic Republic of the Congo (DRC) signed into law a new mining code to raise royalties on minerals across the board, which poses increasing downside risks to the country’s mining outlook.
Despite this, BMI maintains a positive growth forecast for the DRC’s mining industry over the next few quarters, owing to a favourable global commodity price environment.
“More damaging will be the Tanzanian government's announcement, on February 20, to restrict foreign banks, insurance companies and law firms working or financing the mining sector,” the report says.
“The new restrictions follow on from laws passed last year that ban the exports of gold/copper concentrate and allow the renegotiation of contracts with mining companies and will likely lead to asset sales or a reconsideration of planned investments into the country’s mining sector in the coming quarters.”
Further, the Zambian government, in an effort to revive its own local rail services, says it will require miners to transport 30% of their cargo for export by rail.
“Other countries in sub-Saharan Africa could enact similar regulatory changes that would increase costs for miners in the coming months and we highlight Mali as a particular risk, following declarations by the government in March that it intends to draft a new mining code this year,” BMI adds.
Meanwhile, mining M&A activity in sub-Saharan Africa will remain subdued in 2018 on the back of the rising operational and regulatory risks in the region that will hinder the investment momentum gained last year.
In 2017, rising commodity prices contributed to M&A activity recovery, with a surge in transactions of over 50% year-on-year, including Glencore's purchase of remaining stakes in the Mutanda and Katanga copper/cobalt mines in the DRC for $922-million and $38-million respectively.
“While major African miners Anglogold, Randgold and Impala Platinum are all estimated to improve their profit margins in 2018, according to Bloomberg consensus and company data, cautious language from executives and in company reports indicates that growth strategies will focus on brownfield projects rather than new strategic acquisitions,” says BMI.
The BMI report shows that, as of late June, the region had $1.4-billion worth of M&A activity in the basic materials sector, down from $3.2-billion over the same period in 2017.
Exacerbating the challenges faced by the sub-Saharan African mining sector is increasing illegal mining activity, with gold-producing countries most at risk.
“Gold is easier to extract through artisanal means and gold prices continue to recover, offering further incentives to illegal miners. We expect gold prices to average $1 300/oz in 2018, up from $1 259/oz in 2017,” BMI predicts.