Greg McNab, Global head of mining, Baker McKenzie, and Wildu du Plessis, head of Africa, Baker McKenzie Johannesburg outlines some of highlights from the 2018 Mining Indaba.
With roughly the same number of people as China or India, the African continent continues to present a number of opportunities for our clients and the firm, especially in the extractive and energy sectors.
There was a continued sense of confidence at the Mining Indaba and a focus on new opportunities.
Over the last year, there have been significant improvements in the resources sector and an increasing stream of deals and opportunities, arising from the improvement in commodity prices.
This is expected to continue, particularly in relation to commodities associated with battery technology and electric/hybrid vehicles, such a nickel, cobalt, copper and lithium, which will drive further demand for resources.
In terms of M&A activity, while there has been uptick in mining deals globally, domestic factors have depressed local mining activity in the last few years.
The mining sector in Africa had a slow 2017, but increases in investment are forecast for 2018 and 2019.
Indications are that this M&A activity will be growth-focused, with some large transactions already announced.
There are an increasing number of specialist resource/private equity funds and that are becoming extremely active in the market and are seen by many resources companies as an important partner for funding and investment opportunities.
They are also very focused on potential consolidation opportunities among resources companies and take private transactions.
There is recognition that there is a significant opportunity in resources related infrastructure and a need for capital to fund such infrastructure.
Baker McKenzie has seen an increase in enquiries around listings and IPOS on the Johannesburg Stock Exchange, coupled with listings in other jurisdictions.
We predict cross border capital raising will increase as this is seen as a good way for mining companies to raise money in Africa.
The mining industry
Mining exploration rebounded in 2017, led in large part by a planned increase in gold exploration.
With gold prices hitting a three-month high on the last trading day of 2017, this interest in gold looks set to continue throughout the year ahead.
The African mining industry generally has in recent years been moving the focus on the modernisation of mines to ensure greater safety, productivity and efficiency.
This is expected to continue in 2018, as companies optimize scheduling and material flow, track and improve mining performance through data analysis and develop targeted operational strategies.
The energy needs of resources projects are becoming increasingly important, both in terms of having a reliable source of power (which in South Africa in particular is a real challenge) and in improving the economics of projects.
Many companies are exploring the potential for renewable power facilities, including on a stand-alone project basis as the efficiency of renewable power sources and battery storage continues to improve.
This year there was also a particular focus on companies with resources necessary for battery technology and electric/hybrid cars, such as nickel, cobalt, lithium and copper.
Amongst African countries, South Africa still ranks highly as a mining destination, despite a number of challenges.
Other countries such as Mozambique, the DRC and Tanzania are experiencing change, some of it positive, but still struggle with challenges in the extractive sector.
There is continued interest in West African gold projects, from Ghana through to Côte d’Ivoire.
In terms of the regulatory developments in the mining sector in Tanzania, a return to a state of normality and predictability after massive regulatory changes is now needed.
Certain investors have already been put off, and as those operating in the South African mining sector know, uncertainty is not good for investment.
In Zimbabwe, these are numerous issues that need addressing in the mining sector and generally – the country is coming off a low base and there is a lot of work to be done.
However, the table has been set and it appears the government is re-engaging with foreign stakeholders and re-establishing the rule of law.
The sentiment in Zimbabwe is positive.
The news that the government of the Democratic Republic of the Congo had recently announced plans to reintroduce the shelved changes to the country’s mining code in an effort to capture a larger share of the country’s battery driven cobalt boom was disappointing.
The changes include taxes of up to five percent on “strategic metals”, introducing a form of economic patriotism by raising the stake of the state in the capital of mining companies and outsourcing tasks related to the industry “only to firms in which the majority of the capital is owned by Congolese nationals” and ensuring the repatriation of at least 40% of the revenue of minerals that are sold for export.
Needless to say, these changes were not well received by the industry.
Generally, there is cautious optimism that after several years of recovering from the global financial crisis and its impact on commodity prices and demand, the commodity markets are poised for recovery.
Stakeholders of all kinds have started moving back into the sector so as to avoid being left behind again.
The general theme at Mining Indaba expressed by South African government representatives continues to be that it is time to advance.
Despite a long and generally positive relationship with the extractive sector, current popular views seem to be that mining companies need to do more to share the benefits from the country’s resources.
Further changes to the empowerment regime are needed to move the programme forward.
General topics of discussion at the Indaba
Location, location, location. We said it last year, and this remains an important point.
The resource is where it is. Unlike other industries, jurisdiction shopping (at least for the initial phases) is not an option in the extractive sector.
When deciding where to manufacture a phone, you have a number of choices available.
However, when it comes to mining, a fundamental strategic question remains what resource is in what country?
If that resource is no longer priced to encourage investment, or that country is no longer extractive sector friendly, the other questions don’t matter.
Asset selection is a changing decision. The weighing of local consultation required for a project evaluation has increased.
As a result, a comparatively lower grade uranium project in Swakopmund, Namibia effectively in the middle of tens of thousands of square miles of sand dunes, comes with significantly less concern about the impact on local communities, primarily because the impact is overwhelmingly positive.
A significantly higher grade project in Canada or Australia could be saddled with years of public consultation and permitting analysis.
Of course, that analysis also has to factor in taxes, government stability, corruption and other issues.
Local strength. Mutually beneficial engagement and relationships with local communities continues to dominate discussions around new projects.
Successful mining projects are increasingly seen as an opportunity to provide communities with significant financial and educational benefits.
Appetite for transparency grows. Generally seen as a positive thing in the extractive sector around the world, country rankings with respect to transparency from organisations like Transparency International are having an influence on two fronts.
First, companies use this information to make their strategic decisions. Second, host governments are becoming increasingly sensitive to the global perception of their transparency efforts.
Less M&A and more partnering. The last few years of depressed commodity prices and mining capital markets activity have not resulted in the significant M&A and insolvency wave that many expected.
Instead, small and mid-sized mining companies have managed to survive by partnering with each other and with majors, without actually consolidating.
Leaner and meaner. The last few years of depressed commodity prices and little or no access to equity markets have resulted in some companies getting their house in order and becoming more efficient.
Shedding excess executive management and administrative costs has left some companies as more attractive acquisition targets.
This process has had the same result with many of the majors – over the last few years they have shed billions in balance sheet debt and non-core projects. In hindsight, for most companies, this has been a positive thing.
China still dominates the list of investors, but less so than in the previous year. It is difficult to have a conversation with any African mining industry professional and not have it eventually turn to China and what’s next.
In some ways, the mining markets have become less sensitive to news about China’s GDP (after all, whether it’s 6.8% or 7.8%, it’s still significant).
There is a sense however that China may be acting faster, or with less advance notice than before, when it comes to mining investments.
For example, China had signalled to the world over the last year that it is generally not focusing on iron ore and coal projects, yet the last few months have seen some of the largest investments in the world in these sectors.
Less of a topic of discussion this year are both the impact of Brexit and the (not-so) new U.S. president. There is generally a sense that the UK is still a long way away from finalising what’s going to happen.
There is also a general sense that President Trump is likely to be mining-friendly, but that the changes he may want to implement may take longer than expected.
Technology versus jobs. Job creation continues to be a high priority for mining projects in Africa.
Unlike in countries where the cost of labour is more expensive, using technology to reduce the number of people involved in a project is not always an accepted priority.
The role of stakeholders continues to evolve. As it has in the last few decades, the definition of stakeholders and the role they can have on a mining project continues to increase.
No longer restricted to those parties that have a clear cut legal right to be involved in a project, interested stakeholders can now arise from many sources, many of which can bring a project to a grinding halt.
Gender diversity. Not typically seen as a diverse industry, the mining sector in Africa has taken on the challenge and now ranks comparably to other jurisdictions with respect to female representation in the workplace.
As the African continent and its people continue to develop, carrying on business there requires companies to continually monitor what is changing to ensure they are aware of the risks and rewards of carrying on their businesses and are prepared to react quickly to change.
With the right advisers on your team, Africa can be a rewarding place to do business.