Against the background of weak commodity prices, there is likely to be an increase in corporate activity in the mining sector as companies look to consolidate their positions and as investors return to the market to fund projects and buy undervalued companies.
Speaking on the sidelines of the 2015 Investing in African Mining Indaba in Cape Town Rob Legh, Chairman of pan-African corporate law firm Bowman Gilfillan Africa Group, said, “The scramble for resources in Africa, which has seen investors commit billions of dollars, may have stumbled due to falling commodity prices, but there are signs that a recovery in the mining sector could materialise sooner than expected.”
Indicative of conditions in the sector is that most mining and resources stocks on the Johannesburg Stock Exchange (JSE) lost significant value last year as commodity prices fell across the board. Lower prices also meant that fewer funds were allocated to exploration.
Said Mr Legh: “The main reason behind the fall in commodity prices has been slower economic growth globally. For example, the price of copper, considered a leading indicator for commodities in general and an indicator of economic strength because the metal is widely used in construction and manufacturing, has been falling on growth concerns, especially in China.”
Other resources prices, including steel have trended downwards as have those of iron ore, coal and oil, zinc and aluminium, gold and platinum.
China’s economy, now growing at about 7% a year from double-digits in the recent past, has been the biggest driver of demand for commodities over the past decade. Despite continued robust consumption of base metals in the stronger US economy, slowing growth in Europe has also been a concern.
Because African economies have a reliance on resources, the IMF and World Bank have noted that, while the growth outlook for sub-Saharan Africa remains promising at close to 5%, forecasts for the region have been trimmed due to lower oil and commodity prices. The IMF’s predictions of economic headwinds include the global economy, which is expected to grow 3.5% this year, down from the previously forecast 3.8%.
More positive, possibly, is the European Central Bank’s €60bn monthly stimulus of the eurozone economy, designed to fight low inflation and low growth. While this could assist SA’s economy through trade and investment channels, the benefits may fall short of the capital flows emerging markets experienced during a similar stimulus programme by the US Federal Reserve, which ended last year.
Said Charles Young, Head of the Mining Sector Group at Bowman Gilfillan: “Africa’s economies have benefitted over the past decade from high resource and commodity prices, along with positive demographics, rising consumer spending and industrialisation. We anticipate a continuation of this positive narrative.”
He noted that some fund managers have become cautious buyers of heavily sold resource stocks which are seen to offer value and an opportunity for long-term returns.
“Many resource companies have improved their capital allocation and are well positioned in terms of costs.
“As commodity prices start bottoming out, we expect an increase in corporate activity in mining, including mergers and acquisitions, and higher levels of investment that has tapered sharply since 2011. Investors will be more inclined to buy undervalued companies and to fund projects,” said Mr Young.