JOHANNESBURG (miningweekly.com) – Sub-Saharan Africa’s mining sector will remain the riskiest in the world over the coming quarters as regulatory uncertainty rises in various markets across the region, says BMI Research.
In addition to increasing regulatory uncertainty, the region will also witness challenges stemming from underdeveloped infrastructure and small mining sectors.
However, BMI on Wednesday pointed out that the region will also receive greater investor attention owing to low labour costs, strong mining sector value growth and a solid competitive landscape.
Botswana will most likely continue as the region’s best performing country, followed by Ghana and South Africa, as a result of low country risk profiles and an above average business environment.
In BMI’s index report on its outlook for the African mining sector, it notes that sub-Saharan Africa’s mining sector will continue to be plagued by rising regulatory uncertainty as rising mineral prices will prompt local governments to demand larger shares of mineral resource wealth.
In the first quarter of this year, the Democratic Republic of the Congo (DRC), Tanzania and Zambia have implemented changes to their respective mining regulations, which BMI says damages investor sentiment in the region.
Regulatory risk in the DRC and Tanzania had been an anticipated and was taken into account in the index, the company said, as is reflected by both of these countries already having low government regulation scores of 18.9 and 13.1, respectively.
This is below the 37.8 regional average, BMI said.
However, an announcement by the Zambian government in January indicated that the country would be forcing miners to transport 30% of cargo for export by rail, as the government looks to revive local rail services.
An effort to undertake a tax audit of all domestic miners is an indication of the rising regulatory risk in the country, BMI noted.
Should further Zambian regulation be implemented and deemed unfavourable to miners in the country, BMI said it would be downgrading Zambia’s regulatory score, which is currently at 55.7 on the regulatory risk indicator.
Similarly, an announcement by the Malian government that it may unilaterally alter its mining code to increase mining royalties this year will pose downside risks to the country’s solid regulatory score of 50.
The recent change of government in South Africa, however, has an upside risk to the country’s poor regulatory score of 40.2, as the new government and local mining industry representatives have started negotiations on the final content of the new Mining Charter.
Should negotiations lead to an agreement that is acceptable to all parties in the coming months, the country’s regulatory score will be upgraded, BMI noted.
While uncertain mining regulations will continue to be a key risk in the African region over the coming quarters, BMI laments that poor infrastructure will remain a key drag on the region’s worst performing markets.
The correlation of this is reflected in the rankings, as the three worst performing countries on the index – Sierra Leone, Mauritania and Liberia – are also last in the region in terms of electrification rates, with both Sierra Leone and Liberia ranked last globally.
Additionally, countries such as these three with small mining sectors are generally dominated by one commodity such as iron-ore or gold, and therefore suffer from indirect cyclical factors, such as a vulnerability to changes in commodity prices.
BMI’s Risk Reward Index (RRI) will, however, continue to favour the relatively stable political and economic environments of South Africa, Ghana and Botswana.
These countries, consequently, score above the regional average at 50, 55.8 and 56 respectively.
Botswana, in particular, will lead BMI’s regional RRI owing to a favourable country risk outlook, topping individual indicators such as short-term political risks (80.3), long-term political risks (77) and short-term economic risk (57.4).
These scores, BMI noted, reflect miners’ continued emphasis on treading carefully and avoiding over-exposure to high-risk environments as they look to improving balance sheets rather than engaging in risky growth ventures.
Results from outperformers, however, also suggest that mining industry value (MIV) growth and size are poor predictors of top performing countries in sub-Saharan Africa’s overall RRI.
Subsequently, BMI has overhauled its RRI methodology to more accurately capture the different elements that impact the overall investment attractiveness of a country’s mining sector.
“We have increased the number and variety of indicators that make up the final index score and we have reassessed the weighting of the reward and risk indicators to ensure the most accurate reflection of the risk/reward environment is reflected through our matrix,” BMI commented.
The RRI uses a combination of its proprietary industry forecasts and analyst assessments of the regulatory climate. As regulations evolve and forecasts change, the index scores change thereby providing a highly dynamic and forward-looking result.