COVID-19

76% of majors have indicated a reduction in exploration and development spending over the next 12 months suggesting a focus on consolidating existing operations.

After a relatively flat year for metal prices and financings in 2019 with trade tensions between the world’s major economies weighing heavily, the mining sector, globally, now has a far greater challenge to surmount.

Quite predictably, most mining and exploration companies in Africa have reported a moderate to severe impact on their operations because of lockdowns and travel restrictions introduced by governments in efforts to combat COVID-19 outbreaks in their countries.

At this point, suppliers and service providers remain relatively less impacted, likely due to order fulfillment cycle time patterns and those mining companies still in operation requiring their usual supplies.

The pattern across all four segments persists for the short-term, suggesting most within the industry are not expecting a return to ‘normal’ this calendar year.

Operational expenditure: Mining companies

76% of majors have indicated a reduction in exploration and development spending over the next 12 months suggesting a focus on consolidating existing operations.

This, of course, follows a year where exploration spending across the globe was down 4%1.
1 Reducing Maintaining Increasing State of Mineral Finance 2020, Prospectors & Developers Association of Canada

Juniors, at least those with significant cash in the bank and/or confidence in their ability to raise capital, do not intend to reduce spending to the same degree, with a slim majority anticipating maintaining or slightly increasing exploration and development expenditure.

Most juniors, at this stage, are simply expecting to delay or defer planned work. However, on aggregate, it is looking likely to be a lean 12 months for mining supply chains in Africa with 60% of Majors and 55% of Juniors planning to reduce operational expenditure over the course of the period.

Operational expenditure: Service providers & suppliers

Suppliers and service providers are indicating even tighter control on their spending over the next 12 months with 68% of respondents reducing operating expenditure in the region of 25% – 75%.

Of the four segments, suppliers and service providers have been least impacted by COVID-19 to date. The figures on operational expenditure, however, indicate most have come to the natural conclusion that the pain will be protracted and are adjusting their budgets accordingly

Investment over the next 12 months: Mining companies

A slim majority of mining and exploration companies (55%) anticipate either maintaining or slightly increasing their capital expenditure over the course of the next 12 months, suggesting that most expect the effects of COVID-19 to subside over the medium-term.

The priority is seemingly being given to increasing production capacity, development stage projects and strategic partnerships (read M&A), with exploration investment lagging with 57% expecting a reduction over the period.

With some commentators already expressing concern over lack of exploration investment and discovery of new deposits prior to the pandemic1, it will be interesting to see if curtailments to exploration spending will result in supply pinches for certain commodities over the longer term, or whether COVID-induced shifts in demand curves will relieve this pressure.
1 State of Mineral Finance 2020, Prospectors & Developers Association of Canada

M&A forecasts

Most respondents expect M&A valuations to be lower than their pre-COVID-19 forecasts with juniors, perhaps rather hopefully, significantly more bullish than the majors and the finance and investment community.

Commentators naturally point to the gold sector as the exception with strong price performance so far this year and bullish forecasts, leading to relatively strong valuations.

Both majors and juniors operating in Africa are more inclined to expect further consolidation in the sector through M&A.

A truly remarkable moment in modern history, the COVID-19 pandemic of 2020 has left no sector of the global economy untouched. Even as many countries enact their plans to lift lockdown restrictions and commence the long journey back to economic and social recovery, the long-term effects of the world’s response to the current crisis remains very much unknown.

By surveying a cross-section of industry leaders, we wanted to provide our community with an insight on the effects of the virus on African mining to date and hopefully some understanding of the direction of the sector from this point forward.

There will be a reshaping of the industry’s landscape with most respondents representing mining companies expecting M&A activity to accelerate through the period.

Of course, much is dependent on stimulus packages handed down by governments, changes in consumer behaviour and, perhaps most importantly, how the major economies interact and trade with one another in a post-COVID-19 world, but the results suggest a cautious optimism amongst the community once the immediate effects of the virus wear off.

Undoubtedly, many challenges still lie ahead which will require the industry to be agile and progressive until we reach the point of recovery. In this time of uncertainty, we will continue to do all we can to keep you abreast of industry developments and produce content to help you make informed investment and business decisions.

Read more about COVID-19

AUTHORS:

Simon Ford:
Portfolio Director, Investing in African Mining Indaba
Kael O’Sullivan:
Director of Investor Relations, Investing in African Mining Indaba