The mining sector is dealing with the ‘new normal’ – but in this post-COVID-19 world, will banks have enough appetite to funding African mining projects?
GERARD PETER finds out from Rand Merchant Bank’s (RMB) HENK DE HOOP and KHANYISILE MOSHOESHOE.
De Hoop is RMB’s Business Development Director of mining while Moshoeshoe is a Resources Sector Focus Lead in the bank’s resources team.
The bank has funded a number of mining companies and projects in recent times such as Asanko Gold (now called Galiano Gold) in Ghana, Gamsberg Zinc project in South Africa and First Quantum Minerals’ operations in Zambia.
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Despite the impact of COVID-19, Moshoeshoe says that banks will still consider funding projects. “We are very clear that mining is an essential part in most African economies. Look at Zambia where copper mining is big or Botswana for diamonds. So, while the supply dynamics might change post-coronavirus, banks will continue to fund the right mining projects on the continent,” she explains.
De Hoop adds that the coronavirus pandemic has placed a lot of pressure on all funding institutions, including commercial banks, because the existing broader client base needs to access liquidity as a result of the severe business interruptions.
However, he states that it is encouraging that the bank’s mining client base has not been a significant strain on RMB.
“This is because mining companies haven’t had the type of sustained interruptions such as for example, the automotive industry, where up to 90% of business was affected. Granted, there have been a few force majeure situations, but none of them as significant as the impact on other industries,” he states.
De Hoop admits that it is not easy to convince a bank to finance a project, particularly juniors. This is partly a result of the severe crunch in the mining sector a few years ago.
This forced a lot of banks to relook at what part of the risk curve they want to play in. Subsequently, banks started putting more conditions in place for project funding.
“One of the weaknesses identified is that a junior company still needs to have a very strong sponsor among its shareholders before we can consider a project. As a bank, we need the assurance that the shareholders are going to be there in times of financial strain.
“Some banks have had their fingers burnt because the projects were very lightly capitalised and the owners pinned their hopes largely on bank funding to carry a project. In times of destress, the banks needed to carry a project to completion while the shareholders ran for the hills and this is not appealing to us.
“We will definitely look at juniors but will be very selective when it comes to the commodities, the quality of the project and who the shareholders are.”
Moshoeshoe adds that having an experienced management team and shareholder is important, especially in the wake of the COVID-19 pandemic.
“We also look at the cost of the operation, how much it costs to get your product out to the market versus your competitors, particularly in commodities that are highly volatile.
“Therefore, having a track record showing that you have ran a successful project before is crucial. Also, it is easier to assess and consider funding a project if you are mining commodities that have a benchmark pricing or can be hedged. .”
Stringent funding conditions
As consumer habits change along with social activism calling for greener economies, De Hoop says that Environmental, Social, and Governance (ESG) is becoming increasingly important when it comes to securing bank funding.
In this regard, there is now a whole set of checks and balances that ensure that no money is lent without those being adhered to. “Firstly, we subscribe to the Equator Principles that ensure a very rigorous assessment of all important environmental and social risk factors.
“It is also a reporting standard that we use as project progress, where we track to see if a company is sticking to its promises to mine responsibly. Fortunately, a lot of these companies go beyond what the local regulations stipulate with regards to mining,” he comments.
Meanwhile, looking at South Africa, De Hoop says that more needs to be done to encourage greater investment in its mining sector. Much of this has to do with the country’s regulatory regime.
“The battle between regulators and industry has given South Africa a very bad name and has created a fractious relationship. As a result, we are missing opportunities.
“We need to find the middle ground that looks at providing enough incentives to attract investments in mining rather than focussing solely on the social imperatives of the required changes in the industry,” he adds.
De Hoop also calls for a more predictive regulatory regime.
“We cannot change legislation every five years to the extent that South Africa has. It creates uncertainty and raises required returns to offset this risk. It will make a huge difference if we can commit to a charter with a lifespan of at least 15 years.”
He further adds that investors are also reluctant to invest in the country because of high regulated input costs.
“If you look at underground mining, these operations consume a lot of power, not only for transport and logistics but also cooling and ventilation. If 50% of your cost islabour, and 20 to 25% is power, this leaves very little flexibility for mine management to manage costs in a highly cyclical and often marginal industry.
“Another important major cost for the bulk producers is Transnet and related port costs. We need to find a way of becoming more competitive in this area and not automatically assuming that pushing above-inflation price hikes to the locked-in client base every year is OK.
“Also, we need to make exploration as easy as possible in South Africa as that generates the project pipeline in mining. This has been a hurdle in the past but fortunately, this is changing as government has realised that there is very little exploration happening as opposed to the rest of Africa. However, now we need to follow through with solving the other challenges that the South African mining sector faces,” he concludes.