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African Mining Sector Rallies, Though Investors Remain Sceptical

With a three-year slump hopefully behind it, the African mining industry is now looking to the future, though many investors – with the possible exception of China – remain unwilling to back this lucrative, but conflicted, sector.

Photo: The African mining sector: While confidence is returning, will investors be willing to dig deep? (Media Club South Africa)
The African mining sector: While confidence is returning, will investors be willing to dig deep?
Photo: The African mining sector: While confidence is returning, will investors be willing to dig deep? (Media Club South Africa)
The African mining sector: While confidence is returning, will investors be willing to dig deep?

Following a three-year slump, there are now signs of renewed confidence in many of the markets that have traditionally supported Africa's mining sector. This, at least, was the message sent out by many of the delegates attending this year's Investing in African Mining Indaba in Cape Town.

While the continent can lay claim to 30% of the world's mineral resources, many of Africa's mining companies have seen their fortunes plummet over recent years, with the low point coming in 2015 when commodity prices fell to their lowest level for a decade. Although largely driven by China's slowing growth and the subsequent decline in demand for construction minerals, a number of other factors also played their part.

Mining investor confidence, for instance, had already been dampened by a series of sharp price declines between 2014 and early 2016. On top of that, the African mining industry was beset with regulatory and legislative uncertainty, while the slowing momentum of world trade was also casting a long shadow.

The tough global commodity markets inevitably had an adverse effect on mining across the continent, with South Africa among the hardest hit. In 2015, this saw the country's revenue from its mineral resources declined 69% year-on-year, a figure that was also nearly 80% down on the 2013 total. As a result, heavily resource-dependent South Africa only narrowly avoided falling into a recession in 2016.

It was against this grim background, then, that this year's Mining Indaba took place, an event traditionally regarded as the world's largest gathering of mining executives, government officials and investment fund managers. Even though many such attendees now do their deals outside the spotlight of the main arena, it is still regarded as the primary barometer of investor sentiment in the mineral-resources sector, South Africa's biggest earner of export revenue.

With demand from China – one of the world's largest consumers of African metal ore – now rising, the global commodity supercycle is experiencing something of an upswing. This led prices for several commodities to rally last year, including gold, iron ore, zinc, copper and platinum. It also saw a return to profit for a number of African mining operations, including Anglo Gold Ashanti and Gold Fields.

With something of a sense of a reprieve in the air, the mining executives attending this year's Indaba were far more positive about opportunities and investments in the sector than they were last year. Indeed, at times, the 2016 session tended towards the funereal.

Despite these clear signs of recovery, though, many remained wary of prospects in the near term – including Mark Cutifani, Chief Executive of Anglo American, the London-headquartered mining giant. Giving his own take on the precarious health of the sector, he said: "While the worst may have passed, tough times still lie ahead. The steep price declines of 2014 and 2015, the slowdown of China's growth and the increased volatility of commodity pricing should be seen as the new normals in the mining sector."

With many of the mining companies having had a tough time over recent years, they were only too keen to show investors they had weathered the storm, emerging as stronger, leaner entities, having cut costs and boosted productivity. Despite this, investors seemed largely unconvinced, with many adopting a wait-and see-stance rather than committing themselves to any major undertakings.

Given the uncertainties that still characterise the market, it was seen as all the more important for commodity-dependent African countries to attract foreign investment through attractive regulatory and policy frameworks. This perception, however, did few favours to South Africa, with many investors only too aware that all was far from well with the country's mining industry.

Photo: Harmony Gold: South Africa’s third largest gold mining company. (Media Club South Africa)
Harmony Gold: South Africa's third largest gold mining company.
Photo: Harmony Gold: South Africa’s third largest gold mining company. (Media Club South Africa)
Harmony Gold: South Africa's third largest gold mining company.

Despite South Africa's huge mineral reserves and the fact it has the most developed mining industry on the continent, it has signally failed to attract investment. Regulatory uncertainty, high-profile disagreements between mining companies and government policymakers, and high labour costs have all combined to make most investors look elsewhere.

Throughout the conference it was apparent to most observers that representatives of the South African industry and their Department of Mineral Resources counterparts were still clearly not on the same page. In particular, a speech by Mineral Resources Minister Mosebenzi Zwane was criticised as a missed opportunity as it largely reiterated the same promises made a year ago, while stating that regulatory and policy certainty were high on the government's agenda.

Many in the industry remain adamant that the government is yet to make good on any such promises, with the long-delayed Mineral and Petroleum Resources Development Amendment Bill and the revised Mining Charter yet to be finalised. There was also criticism of the safety stoppages that have been applied to certain mines, interventions that – in some cases at least – were later legally overturned.

For its part, the government has taken an aggressive stance towards the mining companies with regard to black empowerment, criticising the sector for failing to racially transform company ownership. While the government wants to prioritise radical economic transformation, the industry argues that this will only come at the expense of much-needed investment.

Until a settlement is reached on these divisive issues, it is unlikely that any such investment will be forthcoming, a development that may well benefit the mining sectors of the less obviously conflicted nations. One country likely to capitalise on this is Ghana, a nation thought to have one of the continent's most conducive mining environments as well as one of the world's largest unmined gold reserves.

Another possible beneficiary is Botswana, a country that has won a number of plaudits for the way it has effectively managed its resources, primarily its abundant diamond stocks. Perhaps more surprisingly, even the war-torn Democratic Republic of Congo is finding some favour after having successfully implemented a number of positive policy changes in its mining sector.

Overall, according to finnCap, a UK-based investment bank, the top five African mining countries to invest in are Ghana, Botswana, Namibia, Lesotho and Senegal. At the bottom of its list of 25 prospects come, perhaps unsurprisingly, Zimbabwe, Guinea and Angola.

In terms of investors, China has been the dominant player in Africa's mining and minerals sector for several years now, a role it maintained even during the commodity price downturn. The number of deals it is currently striking across the continent is also seen as a clear testament to its continuing commitment.

Several Chinese firms have recently entered into new agreements with regard to mining activities in both Congo and Tanzania. Among delegates at the conference, it was also widely thought that China has a keen interest in accessing Ghana's gold reserves.

Overall, it was thought highly likely that many Asian companies will now look to increase their investment in Africa, a development only accelerated by US president Donald Trump's clear anti-China and pro-protectionist stance. In, perhaps, a sign of what is to come, back in January, China's foreign minister Wang Yi visited several African countries, many of which have previously benefitted substantially from Chinese FDI. At the time, the visits were taken as reaffirming China's continuing economic engagement with African development, particularly with regard to the extractive sector.

Photo: The Investing in African Mining Indaba: The world’s largest...(Mining Indaba 2017)
The Investing in African Mining Indaba: The world's largest extractive industries gathering.
Photo: The Investing in African Mining Indaba: The world’s largest...(Mining Indaba 2017)
The Investing in African Mining Indaba: The world's largest extractive industries gathering.

Emphasising that it's not all about China, however, Graeme Robertson, Chief Executive of Intrasia Capital, a Singapore-based venture-capital firm, said: "The investment coming into Africa isn't just Chinese. In Mozambique, for instance, it's largely Japanese. There is also a substantial amount of South Korean money coming in and, interestingly, a notable rise in funding coming from Indonesia."

The Investing in African Mining Indaba 2017 was held from 6-9 February at the Cape Town International Convention Centre.

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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