The advent of 2019 has made it clear that the path to economic recovery for Zimbabwe will require significant foreign direct investment.
While tireless efforts are being employed to procuring fresh capital for Zimbabwe, it is not coming in at the pace and volume that can immediately alleviate the challenges being experienced.
In that light, a cocktail of strategic measures has to be implemented to bolster the drive to attract significant FDI to key pillars of the economy of Zimbabwe. One of these measures is aggressively leveraging natural resources.
Mining presents one of the most consistent foreign currency earners in
Zimbabwe and can generate revenues which can play a pivotal role in the resuscitation of the economy.
The sector has significant potential but is under-performing due to the current fiscal and monetary constraints and lack of fresh capital. In the absence of domestic resources to develop mineral reserves
Zimbabwe has to look to the international investment market.
However, with the increased occurrence of resource nationalism, geo-political tensions, trade tensions, instability and recessions this market has now become highly sensitive to increased risk and the pool of available investment funds is shrinking and highly sought after.
In such an environment it is not enough to depend on just having minerals, the mineral potential has to be developed and presented in a manner that resonates with the issues affecting the investment market today.
In the first week of January United States born entrepreneur, Erik Prince, announced the establishment of a fund designed to acquire and invest in greenfield mineral deposits for onward sale to established mining companies or investors who do not ordinarily want to invest in upstream exploration activities and are seeking “ready for production” assets.
The Fund seeks to raise US$500 million to operationalize and will concentrate on battery metals that are vital to the electrical vehicle revolution.
In particular, he is eying mineral deposits in Africa and Asia and has indicated that his business niche is based on the realization that countries such as China who are on a drive to dominate the metals supply chain are not interested in investing in upstream exploration activities and usually target developed assets for acquisition.
This creates an opportunity for venture capitalists to acquire seemingly unattractive deposits in hard to get places, develop them and sell then off as “ready for production assets”.
It is a considered view that this business concept presents a learning point for mineral resource countries.
Due to the haste of technological advancement and rising risks of uncertainty and instability, investors readily take up easier assets over ones that require long term commitment and development before they can start bringing returns.
Venture capitalists such as Prince are willing to take up this opportunity which in principle should be the prime strategy of any mineral rich governments today.
Investors now want to limit the time between acquisition of an asset and the commencement of production, in that light, assets that require significant capital for exploration and preparatory works are sometimes not attractive.
Whilst the role of extensive exploration has traditionally been undertaken by private entities it is an area that governments now need to venture into for strategic reasons.
Mineral rich countries need to increase their capacity to identify, ascertain and prepare assets for investment if they intend to be able to attract adequate capital and derive value from their minerals within short periods of time.
This strategy requires building up domestic capacity to deliver extensive and comprehensive geological assessments and setting up basic infrastructural structures in the areas where the deposits exist.
This allows the country to present a semi-prepared asset to investors which can be brought to production in a shorter period. In Zimbabwe this means enhancing the capacity of the geological survey department to scout, identify, conduct and complete bankable exploration reports.
Once a deposit has been identified local government and other departments responsible for infrastructural development can move in to ensure that the site has preliminary amenities necessary for the setting up of a fully functional mine site.
Once the asset has been developed tenders for investors can be flighted.
Such an asset will readily have takers compared to an undeveloped asset because it can be brought to a position of production quicker.
This approach can also make the requirement for government or indigenous shareholding more palatable to investors because the issuance of shares will be based on the exploration and preparatory works that government would have invested into a deposit.
The shareholding would no longer be entirely free carry shares but would be also constituted of the value added to the asset by the host government. Sharpening focus on the internal capacity to lead exploration is a fundamental aspect in establishing a sustainable mineral resources policy.
A sustainable and attractive framework is built on extensive knowledge on what you have, how much of it you have and what is required to develop it for one to then decide on the appropriate mineral development plan or investment requirements.
The Department of Geological Survey and institutions of higher learning can collaborate and constitute a core teams that embark on extensive resource exploration.
In order to achieve this, the Department needs to be adequately resourced and prioritized. The exercise can assist policy makers in shaping the investment strategies and also aide in contract negotiation by improving bargaining power.
Likewise, the same concept of enhancing mineral assets applies to brown field or non-performing projects that have stalled or have become financially distressed.
The reality is that no one wants a debt-ridden asset or financially draining asset. Therefore, the best way to find investors for such projects is to first bring the asset back to a viable and sustainable financial position.
This may require the mobilization of domestic resources to finance this revival or approaching domestic financial institutions to structure appropriate and risk balanced financial packages that can be securitized by production.
Legacy debts make assets very unattractive and limits the attractiveness for investment even for seemingly viable projects. Every investment drive has to be driven by strategic leveraging of competitive and attractive assets.
The possession of minerals in a country is a unique feature but it is not an exclusive feature. This means that all mineral resource countries are in competition to attract the same pool of investors.
There are many issues that are taken into consideration by investors when deciding where to place their money. As discussed above, the time frame between the point of acquisition and the point of revenue generation is an important consideration for many investors.
Other key considerations include the strategic value of the mineral in the global market, supply and demand dynamics, fiscal restraints, policy and legal certainty, infrastructural support structures, the size and viability of the deposit, value of the investment and projected returns, the political economic and legal stability of the host country etc.
While investors are sometimes willing to get into hostile conditions for a good return the added risk and expense comes at a cost to the host country and the investor.
In many instances in order to offset the added risk or expense, the investor will also seek to negotiate trade offs in other areas of the agreement. These trade offs may eventually weaken the overall projected impact and benefits of the project.
The overall environment in a country is very important in attracting the right type of investors and also in eventually deriving multiplier benefits from invested projects.
The threat of instability in any of the key considerations diminishes the level to which investors commit to developing the full potential of mineral resources in the host country or their desire to extend to other areas of the value chain.
It is therefore important for mineral rich countries to holistically look at the policy and legislative consistency, economic conditions, infrastructural deficiencies, technological deficiencies and political stability and address any shortcomings as this will impact the extent to which one can get the full value and benefit from their resources.
Among the problems cited in Zimbabwe, one of the primary concerns for any investor is the current fiscal and monetary constraints.
Mining in Zimbabwe heavily depends on the importation of various consumables and services that are critical for operations, therefore the ability to mobilize cash flows for operational requirements and access to foreign currency is critical.
The cost of production as compared to regional peers is also a concern in Zimbabwe. The current economic environment drives costs for labour, equipment, services and energy high and this resultantly threatens the viability of operations, many large operations have had to shelve expansion, downsize or operate below capacity in order to keep costs in check.
The effect is shrinking growth and under performance. In 2018 the Government attempted to alleviate some of the monetary challenges for small scale miners by adopting favorable fiscal measures through Fidelity and the Reserve Bank so as to bolster their liquidity and increase production.
Similarly, this year strategic monetary and fiscal measures should be taken to support and ease the fiscal and monetary conditions for both large- and small-scale operations. It is important to foster growth on both fronts in order to have balanced growth and performance from the mining sector.
It is imperative to pay attention to the sensitivities of the minerals market and in turn develop mineral resource strategies that fall in line with the direction the market is heading and advance strategies which are ultimately competitive.
Undeveloped mineral resource potential is of no value to a country until it can be sustainably and viably extracted thus it is important to either deploy or attract adequate capital towards the exploration and extraction of minerals.
Salient issues such as the time it takes to bring mining projects to revenue generation is similarly critical to both the mineral owner and the investor because market and technological advancement dynamics are rapidly changing in a manner that requires players to expedite the use of opportunities presented.
In order to shorten the period deposits can be brought to production governments have to stay ahead of the market by leading exploration.
The internal capacity to conduct extensive exploration and stay ahead of demand plays a key role in determining the pace and extent that a country can attract foreign investment into its mining sector.