Nkateko Mathonsi, resources analyst at Investec discusses mine production trends in Africa.
Nkateko, are mining companies in Africa producing more and will that trend continue in 2020? What about exploration? Are there enough new exploration projects in Africa?
Mine production trend in Africa has generally been upwards, evidenced by copper and gold production increasing by 10% and 2% CAGR from 2005 to 2019. Even coal production increased by 1% CAGR in the past 10 years. Africa production continues to dominate the global production of platinum group metals, manganese, cobalt, chromium amongst others, mainly due to Africa’s dominance in resources/reserves of the specific commodities. However, continuous exploration underpins a thriving and sustainable mining industry, in our view. In this regard, Africa remains significantly underexplored relative to other major mining jurisdictions such as Canada, Australia and Latin America.
By way of an example, Africa represents less than 10% of global active exploration sites for base metals versus Australia, Canada and Latin America at greater than 20% respectively. Even gold exploration in Africa continues to lag these three jurisdictions besides being the most explored commodity in Africa in terms of drilled activities. Before even considering cost competitiveness, regulations, infrastructure and other constraints; the sustainability and future competitiveness of Africa mining is in the first instance disadvantaged by lower exploration relative to other major mining jurisdictions. For Africa to close this exploration gap and ensure that this key sector continues to thrive into the future; a longer-term view for Africa mining is required. Longer-term policy certainty is the utmost in our view, stronger governance structures and infrastructure investment are as key.
What are the challenges standing in the way of a booming African mining industry?
According to Magnus Ericsson’s research paper published on Mineral Economics journal in July 2019, 12 of the top 20 countries with the largest contribution of mining to total GDP are in Africa. The significance and reliance of many African states on mining continues to necessitate a more intricate balancing of interests, particularly between capital, government and communities. It is the challenge of developing a country specific shared value concept that takes into account the interests of all stakeholders including the cost of capital. A finessed shared value model is even more critical for countries with a higher reliance on mining as the commodities markets are cyclical, thus, value creation is highly variable. An equitable, shared value model could be negative for near-term returns but a necessary cost for a stable and predictable operating environment, thus potentially value accretive longer-term. Infrastructure constraints in Africa is a topic that has been widely discussed, one that I do not perceive as insurmountable if the right regulatory framework is in place. The beneficiation of Africa’s mining production is another challenge that requires a finessed solution, one that attracts beneficiation, not just regulates it.
Can mining help in developing the lagging economies of some African countries?
Africa’s abundant mining resources remain largely untapped, with perhaps the exception of South Africa. Africa mining goes beyond financial returns; it changes lives of communities, many of whom live below the poverty line. Mining in Africa has its own constraints, but the rapid technology advancement opens up options to navigate these challenges.
From an investment viewpoint, what does 2020 look like for mining in Africa?
The state of the global economy generally underpins the trend of mining performance. As it is, the risks in the global economic outlook are tilted to the downside in our view, as trade and political tensions remains largely unresolved. Business confidence has been on a decline while manufacturing PMIs in major regions are in contraction.
With copper being the bellwether of global economy, the negative news is priced into this commodity despite its favourable long-term fundamentals, supported by climate change related themes. We however expect the Central Banks to maintain the easing path that gathered momentum in 3Q19. Allied with ongoing domestic stimulus by China, this should be broadly positive for commodities as an asset class. The prices of precious metals rallied hard in 2019 and still looking attractive due to prevailing market conditions. The weakening of currencies in emerging economies has also been a tailwind as the bulk of production is export bound and traded in dollars. Therefore, 2019 is broadly looking positive for mining in Africa, despite high uncertainty related to global trade tensions.
What are the factors that investors look out for when deciding to invest in mining in Africa?
Mining investments are long term in nature thus longterm regulatory certainty is paramount. In countries where policy certainty is ambiguous, only high-value projects with shorter payback periods tend to attract capital. This creates a vicious circle of greater dependency by all stakeholders on the few mining projects able to attract capital. Investors are increasingly placing a higher weighting on environmental, social and governance (ESG) aspects before committing capital. There are many examples across Africa where investor value erodes, and ESG-related shortcomings are at the centre. The outlook of the specific commodity is also a key consideration. The availability and reliability of key infrastructure such as electricity, roads and rail network are also critical as it reduces the quantum of the capital investment and enhances the viability of projects.
How supportive is the African mining industry for women?
Mining has increasingly opened up to women at all levels, albeit still far from reflecting the demographics. As an equity analyst, I am not qualified to comment on the day-to-day struggles of women in mining, but we are increasingly seeing women underground, women driving the big LHD trucks and women in the boardroom. An encouraging trend from where I’m standing. In South Africa, Mme Daphne Mashile-Nkosi and Ms Bridgette Radebe are the titans who have gone beyond and are women owners of mining projects. It would seem the barriers against women in mining are surely being shattered.
Nicolaas Steenkamp, independent geologist and consultant, talks about the most important trends to look out for going into 2020.
Nicolaas, what trends in mining will be the most important to look out for in 2020?
A trend that will continue affecting the mining scene in Africa in 2020 is social licencing. The challenge will be for mining companies to clearly communicate and manage community expectations. The world-wide economic slowdown has significantly affected the mining industry and as a consequence the communities where they operate. This, coupled with reckless political statements, has nurtured a sense of entitlement.
In recent years, community demands have increased and in some instances the expectations of the benefit that should be reaped far exceed the realistic investment a company can make as part of its social and labour plan. In South Africa, the impact of service delivery protests will continue to affect operations.
Higher royalty and tax legislation will continue to be implemented by African states in 2020. The trends seem to indicate that the legislation tabled is aimed at using the mining industry to cover the domestic monetary short falls, as a short-term fix. It is also expected that more stringent environmental legislation will be passed.
Bowline Professional Services also expect that international companies will be put under more pressure to partake in ethical sourcing reporting and audits, where Bowline is ideally suited to undertake these types of consultation services. The push for in-country beneficiation will continue, but with infrastructure lacking in most countries, the practical implementation will take longer than the projected timelines. A case in point is Guinea, that is pushing an agenda to have all iron exports done through Guinean ports, but had to concede that the current ports do not have the capacity nor is the rail infrastructure developed enough to handle the volumes and exports can continue to be handled for now through Liberian facilities. Technology trends that may pick-up during the coming years is the impact of the fourth industrial revolution and the increasing impact of circular economies. The application of satellite and other remote sensing methods is set to increase, allowing for quicker assessment of large exploration areas to delineate the main area(s) of interest for ground truthing.
Automation of operations and the introduction of green energy on remote sites is set to increase, especially in regions where there is no stable supply from the national grid. The industry will however need to embark on campaigns to allay fears of job losses due to the introduction of new technology. A combination of the international trade wars and environmental consciousness movement are the main drivers of circular economies gaining momentum. Where the impact of recycling was considered to be minor in the last decade, there has been a notable shift in sentiment in the last year. As little as three years ago, recycling of Rare Earth Elements (REE) magnets were not considered viable due to the cheap supply of large volumes of material from China, the trade war between China and the USA led to REE products becoming weaponised in the dispute. Now major companies are looking at constructing collection points and reprocessing plants for REE magnets.
What minerals should we keep an eye on in 2020?
Minerals set to potentially gain in the coming year are palladium and tin for industrial applications and gold as a safe haven investment. In my opinion, battery minerals, more specifically cobalt and lithium, will remain under pressure for the remainder of the year. REE’s hard rock deposits may see an uptick in exploration, but due to the long development lag time, it is highly unlikely that we will see new operations coming into production soon. The graphite market may also be nearing saturation levels.