Considering what makes your project investable

Most, if not all, African countries face similar investment challenges, particularly in the mining industry. These include: perceptions of systemic corruption, political instability, regulatory uncertainty, high costs of employment, community activism and the state of infrastructure. Despite these challenges, Africa remains an investment destination for investors who take the time to properly understand the investment climate and accept the associated risks because of the return on investment the continent promises.

Unfortunately, mining in Africa often receives negative international attention and this impacts on capital raising. The international downturn in demand for Africa’s resources and the consequential slide in commodity prices has also not done the continent any favours. However, the downturn has created an opportunity for investors to acquire assets at good prices. Several investors have taken up this opportunity and 2016 saw new investors such as India, Turkey and Germany focusing on African investment.

Hot commodities

There has, recently, also been an increase in the demand for so-called “technology minerals”, such as graphite and lithium, primarily destined for the production of lithium-ion batteries. Zimbabwe is currently the fifth largest producer of lithium, and it is probable that Zimbabwe will increase production to cater for the increased demand. There are also significant graphite projects in Madagascar, Mozambique, Namibia and Tanzania.

Modernisation and automation

Yet, significant challenges remain: the costs of production as well as the cost of the infrastructure like roads, rail and ports needed to bring minerals from the mines to market. In an attempt to reduce costs, investors are considering mechanisation and automation of the mining operations. This is strongly aligned with the “mines of the future” concept.

The development of appropriate infrastructure is equally pressing and has become ever more complicated and costly to address. Historically, mining companies developed infrastructure like ports, railways, roads and water and electricity networks and this allowed them to control the flow of extracted minerals from mines to the market. This control gave mining companies a competitive edge.

This approach is under consideration, primarily because of the increased cost of developing infrastructure. At the same time, however, governments around the world are increasingly demanding that the infrastructure mines put in place should also provide wider benefits to the economies of the countries they operate in. These benefits should go beyond simply providing basic services to the communities who provide labour to mines.

Making infrastructure work for everyone

This is forcing mining companies to reconsider the way they approach the development of infrastructure. One model under consideration is including government in transactions, while another sees mines involving third parties to finance and construct infrastructure that can also be used by other beneficiaries – an open access model.

There are several mining development projects involving third parties currently pending on the continent. The development of the Simandou mine in Guinea provides one example. The project seeks to mine one of the world’s largest untapped iron ore reserves, but requires a large investment in infrastructure due to its remote location, including a 650 km railway line and port on the Guinean coast. It envisions a third-party Infrastructure Consortium to fund, build and own rail and port infrastructure which can not only be used to transport ore from the mine, but also agricultural products as well as passengers. Although the project has suffered several setbacks, Guinean mines minister Abdoulaye Magassouba told news agency Reuters in a recent interview that the country’s government will not deviate from this deal structure even as Rio Tinto has sold its stake in the mine to Chinese state-owned company Chinalco.

Regardless of governmental imperatives to develop shared infrastructure, there is another critical trend which seems to be a driving force behind open access arrangements. This is the developing reality that mining companies will no longer be allowed to develop and operate their mines unless communities grant them a social licence to do so. Infrastructure which benefits a wider community and not just the mining company and, possibly, a small community has now become a crucial requisite for that licence and an important determining factor in any new mining investment in Africa.