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.
