After a protracted period of consolidation, cost reduction initiatives and suspended dividends, the global mining sector is today in far better shape than it was during the years that followed the 2008/9 financial crisis and the subsequent commodities crash, notes Herbert Smith Freehills South Africa director Patrick Leyden.
“Global mining revenue has increased 8% year-on-year, with shareholder returns up 38% on previous years,” he comments, adding that the JSE/FTSE Africa Mining Index is the highest it has been since 2008. “Globally, the mining industry is in a better place than it has been in the last decade.”
However, he notes that many junior and mineral exploration companies are still struggling to secure funding, as investors seek lower risk and higher returns within other sectors.
“Juniors, particularly those focused on exploration, are typically funded through equity rather than debt,” which traditional financial institutions do not provide, so juniors and prospectors seek to attract funding from investment and private- equity funds with higher risk tolerances than traditional lenders would normally allow.
The problem is that “capital is not sentimental”, Leyden comments, adding that these private-equity and investment funds will switch sectors if other sectors with similar or lower risk profiles offer higher returns.
This, combined with the recent rise of “shareholder activism” – which, apart from actively influencing the behaviour of mining companies, has resulted in some companies being pressured into divesting from or disposing of fossil fuel assets in line with their investors’ climate change demands – means that, while there is still mining investment available, investors are far more discerning.
Moreover, competition to attract and retain this investment has increased, particularly amid the constrained macroeconomic environment.
However, Eunomix CEO Claude Baissac believes that the greater concern is that African mining jurisdictions have become mired in a “macabre cycle” characterised by reactive nationalism, economic collapse, debt forgiveness and privatisation, all of which flow from the cyclical nature of mining.
“History shows that mining, because of its essential cyclicality, has crests and troughs in terms of its capacity to attract investment. For example, the long commodity bear of the 80s and 90s was characterised by low commodity prices and low investment, but changed dramatically at the onset of the 2000s,” Baissac notes.
He says that the “hyperfinancialisation” of the global economic system – led by the US – resulted in the continual pursuit of ever-higher returns, which continued until the 2008 financial crisis.
“The search for ever-higher returns was due to the incorrect notion that the economic cycle had been defeated,” Baissac comments, adding that it was a doubled-edged sword for mining, because, while it made capital available to mining companies in a way that was unprecedented, it also led to imprudent decisions by several mining companies.
“We all remember the explosion of projects, many of which were unrealistic because they were banking on ever-rising prices.”
Baissac says the global industry has returned to a “saner” scenario, where mining companies, chastened by commodities prices tanking and demand stabilising, have been deleveraging and “going back to basics”, resulting in the loss of “speculative” investors looking for quick returns.
Essentially, the global industry is about where it was in the 90s; however, some African jurisdictions have reverted to the 70s.
In 2013, in a Eunomix report, titled ‘Is Africa’s ‘great boom’ sustainable? Growth, prices and the resources rent between 1970 and 2010’, Baissac and his team noted that, “following the commodities boom of the 1960s, most African governments took steps to increase government intervention in the sector – including through the expropriation and nationalisation of mining companies and orebodies”.
The report noted that significant production declines throughout the seventies, eighties and nineties followed, and that the wealth generated by mineral production decreased to “well below” the performance of commodity prices. Owing to countries’ overreliance on their mining industries, their economies all but collapsed and sank into ever-increasing debt.
Further, “poor policy choices gravely exaggerated the impact of the commodity bust by effectively sterilising a large part of the natural resource endowment”.
It also stated that, from the late 80s, under tremendous fiscal and economic pressure, governments embarked on the privatisation and liberalisation of the sector, which appears to have started producing meaningful benefits only from the onset of the 2000s commodity supercycle.
Baissac notes that all indications point to history repeating itself.
This is seemingly affirmed by that fact that, “over the last three years, more than ten mining jurisdictions have either significantly amended or replaced their mining codes – examples include South Africa, Kenya, Tanzania, the Democratic Republic of Congo, Senegal, Togo and Zimbabwe”, says Leyden.
He agrees that countries changing their mining codes can be attributed to the commodity cycle’s decline.
“During these commodity downturns, African States, many of which are heavily reliant on revenues generated from mining, are left with two options: the first is to amend their mining codes to make the country more attractive to investment and the second is to impose nationalistic policies which are aimed at increasing revenues but often have the opposite effect.”
Although he understands the inclination towards resource nationalism, Baissac tends to be unsympathetic towards the subject – “at least the way it is practised in Africa” – because it is not only self-defeating and regressive but also ruins production and returns, which, in turn, destroys investment.
“In African jurisdictions, the mining sector has made huge promises – jobs and profits and tax revenue – many of which [materialised], but not sustainably . . . Resource nationalism is the wrong answer to the right problem.”
Baissac says African resource nationalism is poorly executed: “Nationalistic economic policies are not inherently unsuccessful; for example, South Korea, Taiwan, Germany under Bismarck and France under De Gaulle . . . show me an African country that employs truly nationalistic economic policies that are effective in terms of enriching the country and serving the people rather than an elite.”
He notes that the Zambian government in the 70s did not reinvest in the State mining corporation: “They took out money, just [as] they’re doing now with the whole VAT story . . . then they become creditors to the mining industry and resort to de facto expropriation.”
He explains that African jurisdictions’ failure to establish the foundations of a sustainable mining industry, regardless of price fluctuations, means that, when prices inevitably fall, frustration and fear lead to an angry reaction, resulting in legislation aimed at sanctioning mining companies, thereby further undermining production and reducing investment.
BREAKING THE CYCLE
Baissac believes that African countries should, like their peers in North America, Europe and parts of Latin America, establish an updated database of their mineral endowment.
While many governments have embarked on mapping exercises, he cannot nominate an African jurisdiction with a thorough, up-to-date and accurate database of known mineral reserves.
Governments should introduce long-term policies with stipulations that allow for investment to flow during constrained periods and for superprofits to be supertaxed when the market allows for it.
These surplus revenues are to be reinvested to “ensure that the public administration . . . in charge of the mineral sector is properly resourced and host communities are properly compensated, with the rest of the mineral tax applied to create macroeconomic stabilisation through sovereign funds”.
Baissac also recommends the establishment of public–private partner- ships, similar to those established in Brazil, through which governments enable “competitive and transparent bidding processes to exploit a resource”.
Reuters reported last month that, according to a United Nations report, foreign direct investment (FDI) in sub-Saharan Africa rose 13% last year to $32-billion.
Most of the investment was attributed to the development of new mining and oil projects. Reuters noted that the Southern Africa region, excluding South Africa, performed the best, with FDI of nearly $4.2-billion, and FDI in South Africa more than doubling to $5.3-billion.
Meanwhile, Ghana, where there is an oil and gas boom, had inflows of $3-billion, and became West Africa’s leading destination for foreign investment.
Leyden notes that investment tends to flow into countries with positive growth forecasts, but that, with mining, the decision largely depends on the price and availability of minerals as well as the policies regulating mining in those jurisdictions.
However, he adds that mining companies and investors considering investment in Africa have been doing so for decades, and they are “generally aware of the risks – including policy and political uncertainty, infrastructure constraints, government intervention and restriction on the flow of capital”.
This means that they are unlikely to be deterred by the political and or socio-economic environment, unless there are drastic changes that could not be modelled or planned for.
Leyden notes that Africa remains a high-risk and high-reward jurisdiction and that “it’s ultimately a matter of managing and mitigating that risk”.
Although Baissac is wary of the nationalisation-collapse-privatisation cycle repeating itself, he is optimistic that governments, if they are willing to learn and take stock, could implement effective and practical policy.