Foreign investors still wary of challenges facing mining projects in Africa

3 February 2014

There appears to be a significant lack of foreign investment capital to develop mining projects in Africa.  The continent still poses too many challenges to investors – and these obstacles are growing as African governments mature.

“While foreign investors are reticent to invest in Africa, there is massive opportunity for mining throughout the continent, and as infrastructure grows, so mining will grow,” says Lauren Patlansky, managing director of Grant Thornton’s Asia Business Services.

The Grant Thornton Global Mining Survey for 2014, which captures industry sentiments about mining trends affecting the industry and individual mining businesses, identified 52 different countries where mining assets are located around the world.  The majority of assets reported in the survey were in Australia (33% of the respondents surveyed), USA (28%) and Canada (27%).  Approximately 19% of miners who participated in the 2014 survey indicated that they have assets located in South Africa.

The major challenges associated with foreign mining investment into Africa remain political, economic and regulatory uncertainty.  In addition, black economic empowerment (BEE) regulations in many African countries and aggressive unionisation in South Africa make foreign direct investment (FDI) increasingly unattractive to global investors who are turning their attention elsewhere.

Grant Thornton’s 2014 Global Mining Survey reveals that the factors which are constraining miners’ abilities to expand / growth their organisations are increased government involvement / regulations (39% of all respondents stated this as a constraint), volatile commodity pricing (26%), access to funding (10%) and permitting or processing procedures (9%).

Table 1: To what extent are the following constraining your ability to expand/grow your organisation?

Global results – Grant Thornton Global Mining Survey 2014

Rank	% of respondents
Increased government involvement/regulations	38.7%
Volatile commodity pricing	25.7%
Access to funding	9.9%
Permitting/processing procedures	9.1%
Volatile energy and fuel costs	2.0%

Mining companies that should have been in production throughout Africa by now have had timelines stretched by years because of a variety of challenges.  These delays are prohibitively costly.

“The challenges are not new, but they are becoming more onerous,” says Patlansky.  “African governments have matured and as a consequence, they are making it more challenging for foreign investors to access their resources, compared to in the past.  They are far more cautious about foreign investment, having learnt the hard way.”

Today, South Africa has strict BEE regulations, while Zimbabwe has an indigenisation policy and requires compliance certification for all business operating in the country.

“Africa is protecting its own people and governments are no longer giving away Africa’s resources and wealth,” says Patlanksy.

The Global Mining Survey highlighted that the factors which are most constraining South African miners are increased government involvement and regulations (45%) – a constraint which is clearly affecting mining on a global scale – volatile commodity pricing (37%) and a shortage of skilled / experienced workers (31%).

Uncertainty surrounding the mineral regulatory regime also keeps investors at bay. Governments are clamping down and introducing strict FDI regulations which make investing trickier.  Often, the exact nature of legislation in the pipeline is too vague for a clear understanding of its implications.

There is also a significant move in many African countries to enforce local beneficiation.  Zimbabwe now has strict beneficiation laws and investors can no longer export manganese and iron ore in its raw form.

In South Africa, the proposed Mineral and Petroleum Resources Development Amendment Bill of 2013 authorises the minister of Mineral Resources to decide which, and how many, minerals must be locally beneficiated.

These regulations, imposed to ensure job creation, do nothing to attract foreign investors as beneficiation is significantly cheaper in other countries, such as China. 

The threat of religious, tribal and political wars plays a key role in keeping foreign investment away.  Whereas manufacturers can erect a plant, manufacture for a few years and then pull out in the case of unrest, mining is a major long-term investment difficult to walk away from should war erupt.

The recent violent resurgence by Renamo in Mozambique, after more than 20 years of peace, is just one of many examples of the volatility of the continent. 

Lack of good infrastructure remains a critical challenge throughout Africa.  While South Africa generally offers excellent infrastructure, there are still major challenges.  One of the biggest is the inability for foreign companies to move coal out of the country.  Cartels own the rail infrastructure to Richard’s Bay and there is little allocation for foreign companies.

A challenge unique to South Africa is the unionisation of the mining industry.

“There is no doubt that our unions scare off foreign investors,” says Patlansky.  “Companies need to take the unions into account when doing financial long-term calculations.  For example, they need to take into account what possible strikes could occur and at what cost, over the next ten years.

“The rest of Africa is not unionised and many investors choose to face the many pitfalls in other African countries, including political instability, rather than risk industrial unrest with its financial and reputational costs.”

While there has been a slowdown in foreign investment by the United States and the European Union recently, China increased its global outbound FDI spend to a record US$87,8 billion for the year to September 2013.

“China has a strong appetite to invest in mining in Africa,” says Patlansky.  “Chinese State-owned enterprises have the funds available to withstand the risks of investment into Africa.”

Patlansky adds that the weak South African rand may further stimulate foreign investment interest and it will probably make the country a more lucrative destination for Chinese investors to consider.

In South Africa right now there are many smaller companies, some of which were never involved in mining formerly and looked to diversify, are now battling to secure funding for their exploration projects. Minerals are worth nothing under the ground, no matter how promising, and these junior miners who are nowhere near production are facing huge challenges. 

“Five years ago, when mining was booming, many jumped into the industry with exploration projects,” says Patlansky.  “They listed on the Stock Exchange and invested their own funds but are now struggling to raise the appropriate funding.  

The Grant Thornton Global Mining Survey also reviewed miners internationally who are considering exiting the industry.  The global research indicated that 12% of respondents expect their companies will be sold or taken over in the next 12 months, 17% state they will complete a partial sale or recapitalisation in the next year, 19% will sell a unit or division and a startling 27% will sell material claims or projects in the coming 12 months.

Approximately 12% of the South African mining executives surveyed indicate that a sale or takeover is likely, with 10% of miners expecting to go under administration while 16% are sadly likely to temporarily halt operations.

“In today’s economy, African mining companies would do well to remember that companies with capital seek more advanced projects that have less lead time and less risk,” she concludes.