Please comment on the status quo of mining in South Africa and Africa, as well as the revised mining charter and its implications for the industry?
Sometimes, mineral-rich jurisdictions that have endless possibilities for development and growth shoot themselves in the foot. One of the most recent examples is the declaration by the Democratic Republic of Congo (DRC) that cobalt is now a strategic mineral. Cobalt royalties already increased in early 2018 from 2% to 3.5% under the DRC's new Mining Code which came into force and effect, in mid-2018. With the declaration of cobalt as a strategic mineral, the royalty rate will increase to 10%. This prompted immediate, negative responses from investors in the DRC.
The mining and natural resources sector in South Africa, like all countries that have vast natural resources, is a good barometer of South Africa's economy. Depending on how well the sector is doing (or not), this impacts on all aspects of the economy. It is also a very good indicator of how South Africa is performing on broader socio-economic deliverables. Several commentators have expressed the view that South Africa's mining and natural resources sector prevented South Africa from sliding into a recession, in the second quarter of 2018.
Despite this, the sector has been plagued by policy and regulatory uncertainty which has impacted significantly on investment in the sector, including the life blood of future mining development – exploration and prospecting.
The publication of the Broad-Based Socio Economic Empowerment Charter for the Mining and Minerals Industry 2018(Mining Charter 2018) has gone some way to addressing policy uncertainty in relation to key elements, like ownership of South Africa's mining assets. The fact that Black Economic Empowerment is not required for prospecting rights, in terms of Mining Charter 2018, has generally been welcomed as an acknowledgement of the high-cost and low-return nature of prospecting, and the importance of facilitating more prospecting, so that mining operations can be developed for the benefit of all South Africans. The announcement of the withdrawal of the much-criticised amendments to the Mineral and Petroleum Resources Development Act, No. 28 of 2002 (MPRDA), has contributed to some positive sentiment, and possible regulatory certainty.
While South Africa's mining and natural resources sector has been grappling with roller- coaster commodity prices and cyclical demand, and policy and regulatory uncertainty, which has impacted on investment, many investors have been considering investment in the rest of Africa, more positively, with countries like Namibia, Ghana, DRC, Angola, Uganda, and Ethiopia in the spotlight. Some of these countries have committed to and implemented investor-friendly environments. Direct foreign investment in Africa has increased, and published figures seem to suggest that South Africa’s mining and natural resources sector may have lost out, to some extent, as an investment priority jurisdiction.
South Africa, like other resource-rich countries, is in a competition for investment. It is said that capital, like water, finds its way around obstacles. It is also said that capital is extremely scared – it runs at the first sign of trouble. Countries that are able to cut through the ‘red tape’, and provide an investment-friendly environment including policy and regulatory certainty and stability, are likely to attract better quality investment.
To create an investment-friendly environment, however extends beyond policy and regulatory uncertainty. Not all exploration and development of mining and natural resources, can be carried out by the majors – to the contrary, some of the biggest exploration spend is by single-project and asset companies, that require access to cost-effective capital that will allow them to explore and develop the assets up the value curve.
It is not only the exploration and development companies that require access to capital – mining ventures go hand in hand with parallel industries and sectors, like infrastructure development (ports, rail, electricity and roads), telecommunications and agriculture.
Mining and natural resources, and its related and satellite industries and sectors, rely heavily on small and medium enterprises (SMEs). SMEs are critical for the growth of emerging economies and increasing employment, but access to finances is one of the biggest obstacles for SMEs to grow.
This SMEs funding gap is well documented. The World Bank Group has conducted a number of studies on this, with estimates that globally the gap for formal SMEs is as high as USD1.2 trillion, with half of formal SMEs having no access to formal credit.
Approximately 70% of all SMEs in emerging markets lack access to credit. The gap is particularly wide in sub-Saharan Africa. This has however provided opportunities for alternative non-bank lenders to both lend and have a developmental impact across the continent.
According to the World Bank, formal SMEs contribute up to 60% of total employment and up to 40% of Gross Domestic Product (GDP) in emerging economies, and this is significantly higher when informal SMEs are included. With more access to finance, SMEs can play an even bigger role in economic growth and development of the region. The need and opportunity for power and infrastructure development in Africa is enormous. In sub-Saharan Africa, only approximately a third of its people have access to electricity. This need for power across Africa has opened up specific opportunities for SMEs in the energy sector, for example, and for alternative lenders to fund across the value chain from power producers, commodity traders and producers, to other energy infrastructure and logistical services. Alternative and innovative funding mechanisms seem to be necessary, with borderless crypto-capital and metal streaming arrangements also under serious consideration.
In addition to creating country-specific investment friendly environments, the formation of the African Continental Free Trade Area may provide further opportunities for growth and development, that have, until now, been lacking. On 21 March 2018, 44 senior government officials from across Africa met in Kigali, Rwanda, to sign the Agreement Establishing the African Continental Free Trade Area. This agreement has the potential to change the way that trade is conducted in Africa. Once ratified by the twenty two signatories, the agreement will establish the African Continental Free Trade Area (ACFTA). The ACFTA aims to create a continent-wide common market for goods and services. The ultimate aim is to create an Africa-wide customs union.
The two-phased approach to implementation contemplates that, in phase one, 90% of tariffs on intra-African trade will be eliminated, while in phase two, various protocols will be implemented on investment, competition, and property.
An increase in intra-African trade through the establishment of the ACFTA can only assist in creating an investor-friendly continent.
With the publication of the Mining Charter, the withdrawal of the amendments to the MPRDA, the announcement by President Ramaphosa of the stimulus package, and continent-wide initiatives like the ACFTA, Africa looks in good shape to attract quality investment.
In your opinion, is Africa still predominantly dependent on its natural resources, and if so, what are the pros and cons of this dependency?
Africa remains heavily dependent on the mining and natural resources sector and cannot be looked at in isolation – it is the ‘engine room’ of every economy in a country with substantial mineral resources. The mining sector in these countries is also a good indication of whether or not the economy is healthy.
In countries with substantial mineral resources, the mining sector plays a critical role in transformation and development, and where the mining sector is not performing, this manifests itself in various forms including the failure to deliver on socio-economic expectations, the rise of resource nationalism (and in some cases, the call for nationalisation of the mining sector, i.e. complete control and ownership of the mining sector by government), community unrest, and often, in undemocratic and unconstitutional attempts to drive through unsustainable changes to Mining Laws, creating policy and regulatory uncertainty, and the consequences that flow from this – a downturn in investment, and socio-economic upheaval.
The mining sector generally operates within the wider context of infrastructure development (ports, rail, water and roads), agriculture, telecommunications, construction, and engineering. When the mining sector is performing, these related sectors generally also perform well, with the broader benefits that flow from this, including increased investment, socio-economic development, and consumer spend on aspects like housing.
Even at the most basic level, the mining sector has an impact, whether good or bad. In the mining sector, generally, every mine worker supports or provides a form of income for up to ten other people, including direct dependants, extended families, artisanal and micro businesses (like transportation and food), and the medium to large consumer-focused entities that have taken their business to mining towns and communities.
Africa remains a mineral-resource rich continent, providing not only the ‘usual’ minerals like gold, copper, and platinum group metals, but also, for example those minerals that are absolutely key to a sustainable future where energy is not entirely dependent on fossil fuels – the ‘battery minerals’. This, on its own, means that Africa should be a key investment destination. Add to this Africa's growing working-age population and its developing consumer base, and it is a perfect mix for investment.
Within this context, it is completely understandable that foreign direct investment into Africa is increasing year-on-year.
While South Africa may have lost out on this increased investment activity, in the short term, due to several factors, including policy and regulatory uncertainty, the costs of doing business, the ‘red tape’, corruption, and licencing delays, other African countries are benefitting. These countries include Ghana, Uganda, Angola, and Namibia. Where countries provide a business framework that is investor friendly, capital will naturally flow to these countries.
Actual or perceived corruption has played a significant role in investor decisions in 2018, and more and more companies are focusing on compliance, anti-bribery and corruption measures.
Whether this is driven by listings requirements, legislation, reputational risk, or moral grounds, compliance and monitoring programmes have increased in complexity, with a strong emphasis on acknowledging the current borderless world of crypto currency, the slippery slope of the first ‘facilitation payment’ made to expedite and facilitate the licencing process, and socio-economic realities in several mineral-rich countries.
There have been strong calls for greater transparency from several stakeholders in the mining sector so that there can be increased accountability and improved accessibility to basic information like where minerals are located, who holds the licences in respect of these minerals, and when licences expire.
The digital age has provided several opportunities for irregular practices, and it has been interesting to see the progress being made on the Tracr Diamond Industry Blockchain Traceability Platform. While diamonds have been the subject of several traceability and authenticity programmes, the principles of traceability are likely to receive further focus in 2019, for minerals other than diamonds.
There has been a strong move towards conscious decision-making by investors in 2018, and programmes that provide assurance of tracking from production to end-use, could impact significantly on investment decision-making in 2019.
While some countries, like Canada, are moving towards total electrification of mines, and are moving away from costly and often ineffective diesel power, Africa seems set, in the short to medium term at least, to generate the bulk of its energy from fossil fuels.
Renewable energy sources will play a significant role in a sustainable mining sector, and while progress has been made towards diversifying the energy mix, in 2018, 2019 is likely to see a strong focus on renewable and sustainable energy.
The mining and natural resources sector does and can contribute significantly to growth, development and transformation throughout Africa.
In summary, our experience is that ‘investment money’ is very scared – it runs at the first sign of trouble. This may however be changing, with a more positive focus on ‘investment is like water – it finds its way around obstacles’. However, political instability, and concern regarding regulatory and policy uncertainty, together with a weak judicial system, still presents a fundamental risk, and therefore plays a substantial role in investment decision making. In our experience, despite these concerns, there are still a number of investors interested in Africa because of the potential return on investment, which is in many instances still preferable and better than competing continents like South America, and Africa's growing working age population. The view is that the growing working age population will create opportunities like employment and a greater consumer base.
In addition to political and regulatory uncertainty, other key risks and concerns include the ability to access funding, safety and security, business integrity, and corruption and irregular processes.
These risks, whether perceived or real, can be mitigated by a process of informed decision-making which relies on accessibility to good information and advice. Provided investors have access to realistic and unemotional information, good investment decisions can be made.
Broadly speaking, African countries that are committed to implementing, or have an investor-friendly framework based on policy and regulatory certainty, sound financial structures, and accessibility to a working judicial system, are likely to attract investment. The country must have good reserves of mineral and natural resources, particularly those that are regarded as being necessary, like oil and gas, the ‘battery minerals’ and the affordable ‘vanity minerals’ like gold and diamonds. It seems, for the foreseeable future, that countries like Namibia, Ghana, Uganda, Angola, Nigeria (to a lesser extent), Mali and the DRC are set to attract good investment.
Ethiopia seems to be struggling. The recent political changes and promise of further political reform created a wave of optimism. At the same time, however, the wave of optimism created great expectations from a population which has historically faced significant political and socio-economic depression. The perception is that the rate of reform is not as fast as was expected, and any factors which impact or potentially impact at the pace at which political reform is brought about, are likely to have a negative impact on the Ethiopian economy. This includes historical investment from China. Ethiopia's exposure to historical Chinese investment is likely to have a further negative impact on the country’s economy, and put further strain on what is regarded by many as a fragile economy, despite Ethiopia being the fastest growing regional economy.
The downscaling in further investment by China in Ethiopia, is likely to have a long-term impact on an economy that is not only fragile, but also the subject of strident calls for reform, particularly in relation to its foreign exchange capacity and its banking and financial institutions.
It is important to note that the caution shown by China in relation to future investment in Ethiopia, is not confined to Ethiopia. Chinese investors and the Chinese government started viewing many investment destinations with caution, seemingly because of various political and policy-certainty concerns, and reduced return on investment and the domestic requirements within China itself. These decisions have also been taken within the context of political reform in China, which has had a knock-on effect in the various recipient countries of Chinese investment.
Ethiopia's current financial position has not made the situation any better. There is an increasing shortage of foreign exchange because imports to Ethiopia have outstripped exports for the last three to five years. China would, understandably, be cautious.
There are also concerns regarding the Ethiopian government's debt management, which is also creating jitters.
Unless Ethiopia can persuade China that it remains a good investment, the Ethiopian government may find itself in an extremely difficult position both in respect of historical investment exposure and a downscaling of future investment.