African Mining Outlook 2020: Mining Indaba Preview – ASSURANCE, ADVISORY AND TAX SERVICE

2020-01-10T13:31:54+00:00 January 10th, 2020|Mining Indaba|

Andries Rossouw, audit partner at PwC, also responsible for heading up the African energy, utilities and resources industry group, looks at the African mining outlook for 2020.

Andries Rossouw, audit partner at PwC and head of the African energy, utilities and resources industry group. Image credit: PwC

Andries Rossouw, audit partner at PwC and head of the African energy, utilities and resources industry group. Image credit: PwC

Return to index

Andries, which commodities and countries in Africa should we be looking out for in 2020?

The African mining outlook is commodity dependent. The different commodities have different dynamics. At the moment gold is doing well, therefore there is a lot of interest in exploration and development in West Africa where Africa has a lot of gold. So, countries like Ghana, Mali and Burkina Faso are getting good attention with developments happening.

With the energy transition, commodities needed in the electricity sector are receiving a lot of focus; copper is certainly the one commodity where, in the last two to three years, we have seen a lot of development happening. Canadian-listed First Quantum opened their big new mine in Latin America, and before that, there was a lot of focus on Zambia and the Democratic Republic of the Congo (DRC).Unfortunately, the DRC and Zambia are both experiencing a lot of regulatory uncertainty. For example, changes in their taxes and mining royalties have created an increased cost base which could be a deterrent for future investment.

South Africa is going through the same uncertainties. The finalisation of the mining charter has created both certainty and some uncertainty. The Minerals Council went to court to get clarity on, amongst others, what happens when existing mining rights are renewed after the initial period. Something else that has created a bit of uncertainty in our environment is the Xolobeni case and the Bakgatla case, with both cases adding additional focus on interaction with communities by mining companies. Mining companies in the past could negotiate with the leader of a community, now they need to negotiate and engage with individual affected members of the community.

What are the main challenges you foresee for mining companies operating in Africa in 2020?

Companies investing in Africa are often frightened away from investing in exploration in Africa because of the potential long-term uncertainty, and political uncertainty. We unfortunately have a history of very volatile political regimes in several mining jurisdictions across the continent.

” The one thing about mining is that you can only mine where there are resources. Africa is blessed with fantastic resources.”

Socio-economic factors in Africa also play a big role. Interruptions to mining operations are not only as a result of industrial relations, but communities around these mines are closing down the operations for variance grievances. The stakeholder engagement in Africa is absolutely key if you want to make a success of your mining investment. I do think that mining companies understand the importance of investing in their local communities when they invest in Africa. Things have certainly changed from what they were 50 years ago.

Infrastructure constraints is still a big issue in Africa. I think electricity cost and security of supply in South Africa has put a handbrake on economic growth and is a challenge for the future. The same goes for the rest of Africa. A lot of mining sites in Africa need to generate their own electricity and that comes at a huge cost. Infrastructure to support mineto-market is often an inhibiting factor; how do we get the goods out? South Africa has reasonably good infrastructure to get our iron ore, manganese or coal, but there are certainly transport constraints and it’s important that mining companies and the likes of Transnet work together to increase access to freight rail. You cannot be trucking manganese out of the Northern Cape to Durban, as our manganese producers had to do recently, that just doesn’t make any sense.

In other African countries, infrastructure constraints hamper the ability of mines to develop properly. If we do have bulk commodities base metals, they generally need substantial infrastructure to get the product efficiently to the market. But it entails a concerted effort from the whole continent to get our infrastructure in place; electricity, freight rail, transport in general, and harbour capacity to take our products to the market in a profitable and cost-efficient way.

Do you think Africa as a continent has the potential to become one of the top mining destinations in the world?

The one thing about mining is that you can only mine where there are resources. Africa is blessed with fantastic resources. Our resources – except in the traditional mining territories like South Africa – haven’t been explored as well as they should be. That is why you can still find in Africa massive new finds such as copper, zinc, gold and the likes.

In your opinion, will Africa look attractive for investors in 2020?

There is a lot of uncertainty in long-term investment. If you look at the historic trend of capital investment – development in new projects and increasing capacity of new projects – then we’ve seen a big decline in capital investment in the mining industry from 2012 all the way down to 2017. The year 2018 was the first year we saw a bit of an uptick in that investment, but it’s still at historic lows.

Although, it’s fantastic that we are starting to see a bit of reinvestment coming through, there is a desperate need for additional investment to make the industry sustainable in the long term. That investment will only come when mining companies are comfortable that they will be earning a return on their investment they’ve got a level of stability for the future. Or they’ll be pricing the risk in and a lot of these projects won’t get off the ground.

We are seeing a big change in the commodity mix going forward. At the moment, coal is supplying about 38% of global electricity – which is a big number. But there is big pressure to reduce this with the whole focus on being greener. We are seeing a lot of mining companies starting to invest beyond their own mining investment, but looking at the consumer’s needs, looking at how they make their products greener and more environmentally friendly. We see that as a trend coming through. We saw that with the announcement of BHP’s USD400-million investment into downstream research and projects. Other companies are getting out of carbon, for example Rio Tinto sold all their coal assets. You can’t do that when you are a coal only company. For example, Exxaro in South Africa is investing in agriculture to deliver value beyond coal.

Globally carbon taxes are starting to have an impact. There are a number of jurisdictions implementing emission controls and taxes which results in a drive away from coal. Investment bankers are often not funding coal investments anymore. So, we are sitting with this void on the one side in our developing world where Africa, Southeast Asia and India still need coal to provide cheap energy in the short- to medium-term.

What factors are investors looking out for when considering investing in African mining?

Investors are very short-term focused, so they are looking at cash generation now. Currently, investors are not giving the mining industry credit for the profits that they are making. If you look at the record-level of profits and dividends that these top 40 global companies made last year, their market capitalisation didn’t give credit for it. While we say investors are short-term focused, in the mining industry the brand of the mining industry is down at the moment and investors are concerned about the long-term future of mining. They believe mining is a dirty industry and they believe mining is not good for the environment and therefore they don’t want to invest in it.

The global trade uncertainty has created concern around long-term prices as it is negatively impacting global economic growth. That means it negatively impacts on the demand for certain commodities and it creates a lot of volatility in the developing economies that we have in Africa. In the mining environment you invest for the long term, so any uncertainty in the long term creates a bit of concern and increases the risk. When we have this volatility in prices, you don’t know what you need to plan against or for, in the longer term.

Unfortunately, consumers who view the mining industry as negative, don’t seem to realise that the lithium that they need in electric vehicles comes from mining companies, the gold, copper, rare earths that you have in your cell phones – comes from the mining industry.

Your retail investors at the moment are not buying into the mining industry which is unfortunate. A lot of big corporate funds are deciding not to invest in coal mining or carbon energy-type mining or industries because they want to support a green future. All of that results in a negative outlook on the mining industry.

Is the mining industry able to add value for its stakeholders?

I do believe the mining industry can add significant value to all its stakeholders. This continent has to a large extent been built on resources, agriculture or mineral resources. If you look at the history, perhaps the continent did not get all the value that it should have gotten out of mining. It’s a precious resource so countries need to manage it as such, and they need to maximise the value they get out of it. But countries need to do it on a sustainable basis.

Don’t jeopardise the future for future generations by current policy making, think long term. We can’t have instant gratification where governments are looking for big taxes now at the cost of not having the investment now, and therefore the future is jeopardised. We also can’t have irresponsible investment in mining where rehabilitation is not taken care of and therefore future generations have to pay for the mining that we do today and the benefits that we take out of the earth today. Companies, governments and all stakeholders alike should think sustainable mining, long term future, and long-term value, to maximise the value for all stakeholders.