The secret, or not so secret, key to ensuring a sustainable mining industry for future generations is exploration. But exploration is a high risk investment in the best regulated mining jurisdictions, making the ability to raise capital for exploration in South Africa an almost impossible task.

Could a ‘back to basics’ approach be the solution to this challenge, LAURA CORNISH asks AmaranthCX director and owner PAUL MILLER.

This article first appeared in Mining Review Africa Issue 10, 2020
Read the full digimag here or subscribe to receive a print copy here

Mining is always capital intensive – the cost to explore, build, operate and sustain mining operations runs into millions and millions of Rands/Dollars/Pounds, etc.

Consequently, most junior miners, raise capital on a public stock exchange to advance their projects.

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Frankly speaking, the global investment appetite for the junior mining sector sits in London, Australia and Canada – who have highly developed and diverse financial services sectors and who for the large part are open to investing in early stage explorers and developers, unlike South Africa’s public market participants.

This is a strange situation considering South Africa’s mining sector is mature and boasts one of the largest industries (by GDP contribution and supply volumes) in the world.

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“Many stock exchanges were originally established to finance the upfront capital required by new mines and this heritage certainly could be seen on the JSE some 40 years ago when it traded more than half of the world’s total mining capitalisation.

“It was without doubt the greatest mining stock exchange in the world at the time,” states Miller, a business development specialist with a background in financial services, mining finance, minerals exploration, mine development and mining operations.

Today, South Africa’s financial world has changed substantially and Miller indicates there is a substantial disconnect between investors and potential mining entrepreneurs– in part a result of the Financial Advisory and Intermediary Services (FAIS) Act – which has put in place barriers between those wishing to raise capital and potential investors. 

It is now much harder for smaller companies to reach smaller investors, as the traditional retail stockbroker has been forced by FAIS into becoming a fiduciary financial planner.  This is an important, but different role to that traditionally played by retail stockbrokers.

It is simply too expensive in terms of time and effort, under the strictures of FAIS, for financial services players to include new or small companies in retail portfolios or on recommended investment lists.

Also South Africa’s financial savings sector remains highly concentrated with Miller estimating that 90% of funds under management being managed by just 11 fund management houses, meaning that funds are often simply too big to bother with anything outside the 80 or so largest and most liquid listed companies.

“In essence, there are no accessible pools of risk capital in South Africa and as a result of the above-mentioned pointers, the blockage between the capital and exploration funding opportunities will remain.”

So, while South Africa boasts a large number of mines and mining companies – roughly 340 mines operated by in excess of 100 companies, according to Miller’s research and estimates – with only 25 of those companies listed on the JSE.

“In Canada and Australia there are 10 times the number of listed mining companies than actual mines – in South Africa it seems to be the reverse.”

Further fuel to the challenges around junior listings in South Africa is the direct and indirect cost – “which in terms of the JSE listing requirements, makes compliance astronomically expensive.

The junior mining market segment should have a more fit-for-purpose regulatory regime,” Miller highlights.

Section 12J investment schemes have also not delivered any results for the junior mining sector in the country. This is ironic considering they were established largely in response to lobbying by the sector.

It is Miller’s view that incentives for junior mining, specifically exploration, should serve to not only promote junior mining and thereby the future of mining, but also promote diverse participation in South Africa’s public markets. 

“The Section 12J incentive failed on both counts.”

South Africa is widely regarded as a mature mining country, and perception around finding valuable new deposits is low.

“As a country, we have not applied modern geophysical techniques on a regional scale for at least 30 years and if government invested in such initiatives, and made the findings widely available, we could showcase the potential this country still has to offer and generate interest in building a new wave of mines here,” Miller continues.

“Ultimately, it is vital that government put in place both incentives that will get drill rigs turning and create a public market ecosystem which works to mobilise capital for junior mining.

“As a concluding thought on this, the Canadian flow through shares concept is a fantastic incentive because it does both,” Miller notes.

Investment in the rest of Africa

There has been a resurgence of resource nationalism in parts of Africa – which is aimed at capturing a greater portion of financial and economic returns for the host country but at the same time reduces the returns to capital providers, thus inevitably serving as an investment deterrent.

“It is not surprising to see the industry struggle in countries including Tanzania and Zambia as a result of significant changes to their regulations, after years of attracting strong investor interest.

“The Konkola copper mine, a Zambian mining stalwart for example, has been liquidated, as a result. The industry also views these changes as a sign of government reneging on their promises.

“Angola, on the other hand is in the reverse, and is a country looking to reform its regulations and ownership laws to re-attract investment after hitting an investment low in 2018 – “they are an interesting country to watch.

“Naturally, the West African region not only boasts high quality deposits, but countriesincluding Ghana, Burkina Faso and Cote d’Ivoire have deliberately not significantly changed their mining laws in 20 years – they are thus certain, clearly understood and consequently regarded as investment-friendly,” Miller concludes.