BMI Research believes the mining sector in sub-Saharan Africa will remain the riskiest in the world over the coming quarters as regulatory uncertainty rises in various markets across the region.
BMI Research is a unit of the Fitch Group.
Sub-Saharan Africa will also witness challenges stemming from underdeveloped infrastructure and small mining sectors that will ensure Sierra Leone and Mauritania remain as regional laggards.
Nevertheless, the region will receive investor attention due to low labour costs, strong mining sector value growth and a solid competitive landscape.
Botswana will consolidate its position as the region’s best performing country, followed by Ghana and South Africa, because of low country risk profiles and an above average business environment.
Main regional features and latest updates
Overall, sub-Saharan Africa is placed behind all other regions on our Mining Risk/Reward Index (RRI), averaging a score of 39 out of 100, particularly due to low scores in country risk and country reward indicators.
Policy uncertainty will be a particularly pertinent theme that will hamper growth opportunities in sub-Saharan Africa in the coming quarters as major mining markets in the region make changes to their regulatory frameworks.
Under performers Sierra Leone and Mauritania are dragged down by infrastructure deficits which will remain prevalent throughout the continent, as well as undeveloped mining industries.
Botswana will consolidate its position as regional leader with a score of 56 due to strong country risk scores and a solid performance in business indicators such as mining regulations and competitive landscape.
Relative to other regions in our index sub-Saharan Africa performs best in terms of its low vulnerability to commodity price volatility, due to its diverse resource base in precious, base and rare metals.
Heightening regulatory uncertainty to be key investor risk
Sub-Saharan Africa’s mining sector will continue to be plagued by rising regulatory uncertainty as rising mineral prices prompt local governments to demand a larger share of mineral resource wealth.
Over the course of Q118, the DRC, Tanzania and Zambia have implemented changes to their respective mining regulations, damaging investor sentiment in the region.
Regulatory risk in the DRC and Tanzania had been anticipated and is already taken account in our index, as reflected by both countries already low government regulation score of 18 .9 and 13.1, respectively – firmly below the 37.8 regional average.
However, the January announcement by the Zambian government that it will force miners to trans port 30% of their cargo for export by rail as the government looks to revive local rail services there and efforts to undertake a tax audit of all domestic miners are an indication of rising regulatory risk in the country.
Zambia currently s cores 55.7 on our regulatory risk indicator, notably higher than the regional average.
If further changes to regulations that are deemed unfavourable to miners are implemented in the country in the coming months, we will downgrade Zambia’s regulatory score.
Similarly, the Malian government’s announcement that it may unilaterally alter its mining code to increase mining royalties this year, will pose downside risks to the country’s solid regulatory score of 50.
On the other hand, we view the recent change of government in South Africa as an upside risk to the country’s poor regulatory score (40.2) as the new government and local mining industry representatives begin negotiations over the final content of the new mining charter.
If negotiations do lead to an agreement that is acceptable to all parties in the coming months, we will upgrade the country’s regulatory score.
Under performers to be hurt by poor infrastructure
While uncertain mining regulations will continue to be a key risk in the region over the coming quarters, poor infrastructure remains the key drag on the region’s worst-performing markets.
This correlation is reflected in the rankings, as the three worst performing countries on our index, Sierra Leone, Mauritania and Liberia are also last in the region in terms of electrification rates, with both Sierra Leone and Liberia ranking last globally.
Overall, sub-Saharan Africa’s electrification rate score of 13.1 is 52.4 points lower than our average combined score for the Americas, Europe and Asia in this indicator – a larger differential than any other indicator.
We therefore continue to see Africa’s severe infrastructure deficit relative to the global standard, as the key negative aspect of the region’s mining investment outlook.
Additionally, countries with the smallest mining sectors in our regional list, Liberia, Mauritania and Sierra Leone are among the lowest scoring on our index.
Because of smaller mining sectors which are generally dominated by one commodity such as iron ore or gold, many of these countries suffer from indirect cyclical factors.
One such example is vulnerability to changes in commodity prices, with all three scoring below 90% of their peers in the region and both Sierra Leone and Liberia coming bottom of all mining countries globally in this regard.
Low-risk markets to top scores
Our RRI will continue to favour the relatively s table political and economic environments of South Africa, Ghana and Botswana.
These countries consequently score above the regional average, at 50, 55.8 and 56, respectively.
Botswana will lead our regional RRI due to a very favourable country risk outlook, topping individual indicators such as short-term political risk (80.3), long-term political risk (77) and short-term economic risk (57.4).
These scores reflect miners’ continued emphasis on treading carefully and avoiding over-exposure to high risk environments as they look to consolidate improving balance sheets rather than engage in risky growth ventures.
Results from out performers also suggest that mining industry value (MIV) growth and size (industry rewards) are poor predictors of top performing countries in sub-Saharan Africa’s overall RRI.
For example, South Africa and Botswana are both among the top three in our RRI index despite posting scores of 8.2 and 42.6, respectively, in terms of MIV growth – firmly below the regional average of 57.8.
On the flipside, high mining sector growth countries such as DRC and Mali, which are among the top three performers in sub-Saharan Africa on this metric, will perform below the regional average on our overall RRI index.
New mining risk / reward index
We have overhauled our Mining Risk/Reward Index (RRI) methodology to more accurately capture the different elements that impact the overall investment attractiveness of a country’s mining sector.
We have increased the number and variety of indicators that make up the final index score and we have reassessed the weightings of the Reward and Risk indicators to ensure the most accurate reflection of the Risk / Reward environment is reflected through our matrix.
The RRI uses a combination of our proprietary industry forecasts and analyst assessments of the regulatory climate.
As regulations evolve and forecasts change, so the Index scores change providing a highly dynamic and forward-looking result.