In the third quarter of 2018, four themes will remain particularly pertinent within the sub-Saharan Africa mining sector states BMI Research.
BMI Research is a unit of the Fitch Group.
- Rising metal prices will lead to increasing regulatory pressure on sub-Saharan Africa (SSA) miners, as local governments demand a larger share of mineral resource wealth
- Major mining markets across Africa will face growing risks from illegal mining activity in the coming quarters, with gold-producing countries to be particularly affected
- Mining M&A activity in SSA is set to rise on a y-o-y basis, as miners’ balance sheets continue to reap the benefits of rising commodity prices
- South Africa’s mining sector will witness upside risks to growth in the coming months following the election of business-friendly Ramaphosa as new president.
Regulatory pressure to continue as mineral prices rise
A positive metal price outlook will lead to rising regulatory pressure on SSA miners, as local governments claim a larger share of mineral resource wealth.
In line with our global themes for the mining industry this year, so far in 2018 several governments in the region have either implemented or announced intentions to review their respective mining codes.
Particularly noteworthy are changes recently enacted in the DRC, where on 10 March President Kabila signed into law a new mining code that will raise royalties on minerals across the board, as he tries to shore up the support and funding need to retain power.
While these changes pose downside risks to the DRC’s investment profile, we do not expect them to impact our growth outlook for the country’s mining industry over the coming quarters.
The new restrictions follow on from laws passed last year that ban the exports of gold/copper concentrate and allow the renegotiation of contracts with mining companies and will likely lead to asset sales or a reconsideration of planned investments into the country’s mining sector in the coming quarters.
Similarly, Zambia announced in January that it will force miners to transport 30% of their cargo for export by rail as the government looks to revive local rail services.
Other countries in SSA could enact similar regulatory changes that would increase costs for miners in the coming months and we highlight Mali as a risk following declarations by the government in March that it intends to draft a new mining code this year.
Illegal mining activity to increase
Major mining markets across Africa will face growing risks from illegal mining activity in the coming quarters.
Gold-producing countries will be particularly affected as gold is easier to extract through artisanal means and global gold prices recover, offering further incentives to illegal miners.
We expect gold prices to average US$1,300/oz in 2018, up from $1,250/oz in 2017.
Illegal mining or ‘Galamsey’ will continue to be particularly problematic in Ghana.
Ghana’s information minister has stated that there were around 200, 000 people engaged in Galamsey in Ghana as of 2017 while more than a third of the country’s 2.6 Moz of production in 2016 already originated from artisanal mines.
On top of higher prices, we expect that the 14% decline in cocoa production in 2018 – due to a surplus after a bumper harvest in 2017 – will drive an uptick in farmers selling or leasing land to miners.
Meanwhile, insufficient resources to address illegal mining will also limit the government’s ability to stop the practice.
Other countries that will remain at risk from illegal mining include mining powerhouses such as the DRC, where the use of child labour continues to be common practice and South Africa, mainly because of high levels of unemployment.
As well as dissuading investors looking to invest due to potential loss of revenue, illegal mining poses a host of social, political and environmental challenges to countries affected.
Merger and acquisition activity to pick up
Mining M&A activity in SSA will continue to perform positively on a y-o-y basis in the coming months as miners benefit from improved balance sheets following a surge in prices for key commodities over 2017.
This favourable price environment will allow miners to engage in strategic acquisitions once again as profit margins increase. As an example, major African miners Anglogold, Randgold and Impala Platinum are all estimated to improve their profit margins in 2018, according to Bloomberg consensus and company data.
The highest free cash flow in six years for miners will support the return to growth strategies, although cautious language from executives and in reports indicates the focus will be on brownfield projects and partners hips.
Already ahead of peers, Glencore completed several transactions over 2017, most notably purchasing the remaining stakes in the Mutanda and Katanga copper cobalt mines in the DRC for $922 million and $38 million, respectively.
South African prospects to improve following government change
We see upside risks to South Africa’s mining sector outlook in the coming months as the election of business-friendly Ramaphosa as president in February improves the country’s investment environment.
A new mining charter introduced last year, had been suspended as a result of a legal challenge by the country’s Chamber of Mines, plunging the sector into regulatory uncertainty over the past months.
However, shortly after Ramaphosa’s election, the Chamber of Mines postponed its legal challenge in a move that signalled a willingness to establish negotiations over the final content of the charter.
The appointment of Gwede Manteshe as the new head of South Africa’s Department of Mineral Resources will send further positive signals to investors that an agreement over the new charter in the coming months is possible, due to Manteshe’s popularity among major stakeholders in government and mining industry circles alike.
We expect negotiations will lead to a more accommodating mining charter, through a reconsideration of controversial and legally questioned elements such as the requirement that a 30% black ownership participation rate must be maintained throughout the life of operating mines, even if black shareholders sell their position.
However, we do not expect a complete revamping of the charter since any discussions around this will have to include key stakeholders such as community groups, which will remain supportive of higher or more favourable local content requirements.
Furthermore, any attempts by the Ramaphosa administration to implement reforms in the mining sector, as within the broader economy, will continue to face significant headwinds from an ANC party that remains deeply divided on policy issues.