Africa's contrasts - (re)emerging trends of mining in Africa

It has been said that "the greater the contrast, the greater the potential. Great energy only comes from a corresponding great tension of opposites" (Carl Jung). While this was not said in connection with Africa, it certainly finds apt application in the African mining industry, given that the majority of African countries' exports and gross domestic product ("GDP") indicators relate to their natural resources; contrasted with various factors that results in untapped potential. In this article we wish to highlight the trends in the mining industry that have been developing through-out Africa and the impact that this can have on M&A deals in this industry.

10 Sep 2018 6 min read Article

Increases in international commodity prices have been noted as a sign for potential improving profit margins and as a consequence a predicted rise in M&A deals in this industry in Africa.

The rise in commodity prices has, amongst social, economic and political uncertainty, been identified as a trigger for many governments on the continent to attempt to appease voters and to claim a larger portion of the revenues generated from the exploitation of natural resources. Notably, this has resulted in the (re)emergence of controversial nationalisation measures as trends in Africa. In this regard, the Democratic Republic of Congo has implemented amendments to raise the taxes, royalties and other obligations of mining companies. Tanzania has also recently implemented restrictions on foreign banking, legal and insurance entities from working in the mining industry such that, amongst others, the foreign held mining companies will be forced to offer shares to qualifying local persons (with heavily punitive fines being imposed for non-compliance). A further interesting development is, that due to the implemented restrictions, mining companies will be required to retain legal services in relation to their activities and transactions from a firm whose principal office is in Tanzania.

South Africa is no exception to the nationalisation trend. On 15 June 2018, the draft Mining Charter III ("Draft Charter") was released for public comment. The Draft Charter which, if implemented, will apply to both existing and new mining rights, calls for an increase in local ownership to a 30% shareholding by Broad-Based Black Economic Empowerment qualifying persons as well as a hike in the social contribution and tax obligations of mining companies. This increase in local ownership requirements and obligations has not been met with overwhelming support, in that the Draft Charter is viewed as a document which does not balance local initiatives and sustainability of the industry. The increased costs obligations of mining companies in South Africa will result in a consequential increase in overheads and thus a potential for investment withdrawal (and deterrent) and the shutting down or scaling down of mines. The closing of mines or at the very least certain shafts will likely hugely impact the economic landscape of the country and such impact will be felt more heavily by the mine workers and mining communities whom the legislation is seeking to uplift, with negative implications for the long-term growth of the mining industry.

This trend is accompanied by either increased discussions between large mining companies and African governments (leading to investor uncertainty) or disinvestment of certain local operations such as the disposal by Anglo America of certain of its mines in South Africain recent years and the potential withdrawal from Tanzania by Acacia Mining if the talks with the Tanzanian government are unsuccessful.

A further risk to the efficiency of the mining industry is the growing illegal mining trade (including the use of child labour), which trade is likely to be boosted by the recovery of the commodity prices. The overall impact on investors will in all likelihood not only impact revenue streams but also the triple bottom line of mining companies, in that together with the economic implications, there are social (including reputational) and environmental downsides for companies operating in a country that is plagued by an illegal mining trade. Tanzania has been reported as making strides in combating the illegal trade, the Minerals Minister of Tanzania has been reported as claiming the growth in GDP (approximately 1.3%) as attributed to the greater efficiencies deployed in the combating of illegal mining and the more stringent regulatory regime referred to above. However, this positive outcome was accompanied by the statement that the "aim [is] for a larger piece of the pie" and thus a clear intention to continue to strengthen the favour of the Tanzanian legal regime towards local incentives as opposed to boosting investment in general. It has been reported that a major contributor to the growth in Tanzania was the productivity of Acacia Mining in-country which, as noted above, will potentially disinvest from Tanzania as a result of the regulatory overhaul and therefore the growth in GDP recorded may be a short-term phenonium, if the engagement between Acacia Mining and the government does not result in an agreement on the way forward.

Although not a new concept, the lack of adequate infrastructure remains problematic in the mining industry. A report published by BMI Research, confirmed that a key restriction on investment in the mining industry remains the lack of infrastructure which is a long-term structural issue. However, there are indications that projects are being implemented to increase the infrastructure capability of Africa in order to better support the mining industry and attract more investments into the continent. For example, Botswana is investing in developing its power infrastructure to address a shortage in electricity, South Africa is planning to improve its railway network.

Strong trends in the African mining industry are therefore an aggressive overhaul of regulatory frameworks in the Sub-Saharan region to attempt to improve the local benefits reaped from mining operations, a lack in infrastructure and illegal mining. This is contrasted with the reported recovery of commodity prices, long-term projects for the improvement of infrastructure and strides in the illegal mining trade. Thus, while the benefits of an upswing in commodity prices may allow for M&A deals to be on the rise due to a seemingly more attractive profit margin, the downswing of the commodity price recovery will need to be considered in relation to the connected negative impact on local incentive legislation and illegal mining. However, a recent analysis by Deloitte indicates that the potential of a mining market (including the quality of the relevant deposit) still strongly influences investment decisions.

The overall cost of doing business in Africa and in particular the mining industry appears to be on the rise and the level of legislative change has given strength to the adage that only death (or in this case potential disinvestment) and taxes are certain. The mining industry is on a revolving circuit, as the higher the commodities price rises, the greater the possibility that more African countries will seek to impose restrictive local incentive requirements and the more likely that the cost for large mining companies will increase, with a resultant potential for disinvestment. Any disinvestment is likely to have a knock-on effect on any planned infrastructure developments as revenue streams are removed. The social and economic impact of this will inevitably have disproportionate effects on the very persons that the local incentive requirements are seeking to benefit.

The point made in this article is not that local incentive requirements be removed but that governments introduce these in a manner in which it (i) is balanced with the economic reality of carrying out mining operations and (ii) is certain, so that investors have a level of predictability in terms of costs. Disinvestment is not often as a result of the introduction of local benefits, as most mining companies understand the need for social upliftment and local participation requirements. Rather, it is often as a result of the uncertainty of an ever-changing regulatory landscape which makes investment decisions, which require a long-term horizon, difficult.

Therefore, whether the predicted rise in M&A deals in Africa will bear fruit is dependent on (i) investors' abilities to adapt to the rapid changes in legislation and to make use of structures that take into account increased local incentive legislation and (ii) on governments providing greater political and legislative certainty. Whether, a middle road between these contrasting objectives can be found, remains to be seen. However, one thing remains certain, the opportunities in the mining industry in Africa remains the great potential still to be unlocked in Africa.

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