Warren Beech, partner: Head of Mining and Infrastructure at Eversheds-Sutherland talks about regulations and resource nationalism in the sector.
Warren, the past few years have seen an increasing populism and swing towards resource nationalism in many parts of Africa, with issues in Zambia, Tanzania, and the DRC, to name but a few. Do you expect this trend to continue into 2020 and beyond, and do you foresee any major new trend emerging? If so, what will they be?
South Africa has faced strident calls for the nationalisation of the mining and natural resources sector, which, in my view, is the final step along the spectrum of resource nationalism.
Recent events across Africa – including Tanzania, Zambia, and the DRC – particularly with the amendments to the mining Laws in these countries, are strong indicators that resource nationalism is sweeping the African continent.
Calls for nationalisation (as in South Africa), and the measures that are implemented from time to time in support of resource nationalism (particularly, the changes to the mining laws), tracks very closely with two phenomena; namely upcoming elections (mainly as part of the election rhetoric and promises to gain support), and the state of the economy at any point in time (the worse off the economy, the greater the socio-economic demand for jobs, services, commercial opportunities, and, ultimately, participation in the actual or perceived wealth generated by mining operations).
There are a broad range of measures along the spectrum of resource nationalism, including the implementation of trade and other tariffs, establishing restrictions on procurement (goods and services) indigenisation and ownership requirements, increased royalties, and restrictions on the export of certain minerals, or, at the very least, the export of raw minerals, aimed at encouraging local beneficiation. The most recent example of this, outside of Africa, was the announcement of Indonesia to enforce a complete ban on the export of raw nickel ore from 1 January 2020, two years earlier than initially planned. The purpose is to secure supplies of raw nickel ore for numerous smelters that are under construction, and the drive to increase local processing capacity. South Africa has stopped short of nationalisation, but has made provision (and created the mechanism) for outright State ownership if the State wants to do so (it can apply for and be granted prospecting and mining rights), and has actively created the legislative framework for resource nationalism in various forms including changing the mineral ownership regime from private ownership to State custodianship of minerals of behalf of the citizens, with the right-holder only being given a right to the minerals under the prospecting and mining rights; implementation of a standalone Mining Royalty Act, which also casts the collection net a lot wider; implementation of ‘windfall’, and ‘super’ taxes which impact the Mining and Natural Resources Sector, and the implementation of indigenisation Laws (in the case of South Africa this is Mining Charter 3, which requires compliance with specific targets relating to black ownership, procurement of goods and services, and diversity).
Changes to mining laws in other African countries, including, most recently, Mali, are supportive of resource nationalism, regardless of the terminology that is used.
Most, if not all African countries that have significant mineral resources, face calls for outright nationalisation, and for more stringent resource nationalism as their economies fluctuate, and the political landscape and political players change. The reality of attracting investment often challenges this position – more mature governments typically implement the resource nationalism measures incrementally to ensure that investors are not scared off, but later become locked in by the investments that have been made.
Commodity cycles also impact on the implementation of resource nationalism measures – the better the cycle, and the better the price, the higher the demand from citizens to benefit from this, regardless of whether the uptick is sustainable or not. Increased calls for resource nationalism are also part of a broader anti-west anti-colonial past. Fears that there is a new wave of colonialism through economic investment, are being explained away, on the basis that ‘this time it is different’ (many African countries are however realising that the investment from countries such as China and Russia, are coming with its own ‘golden handcuffs’).
The China / Russia (and to a lesser extent, the other BRICS partners) investment potential and dynamic is being used to play off the ‘traditional’ western investment and investors, and to drive up the costs of acquiring prospecting and mining rights, in other words getting more, ostensibly to meet socio-economic demand from citizens; induce more commitment to infrastructure development at the cost of the investor, including, for example, the ‘open access’ use of infrastructure by multiple / ancillary sectors such as agriculture, and obtain support for policy and regulatory change, desired by the relevant political party in power.
Representatives of various African companies have, on several occasions, indicated that “if you don’t like what we are offering, we will get Russia or China to invest”. Investment or potential investment from Russia or China seems to give the African governments a better-perceived or actual bargaining position, where there are options waiting in the wings.
Resource nationalism is likely to continue as a trend in Africa in 2020 and may impact on investment decisions. There is also a trend towards cautious investment from all investors, including China, but the risk appetite varies, with China and Russia seemingly having a greater appetite for risk, probably to support the strategic intent to control the full value chain (in the case of minerals, this control would be from extraction and beneficiation, all the way to marketing and end use) and to develop geopolitical influence.
Resource nationalism is of course, not the only trend, but it remains, probably, the most important driver of recent changes to the mining and mineral laws. With resource nationalism being a populist concept, over-enthusiastic implementation by African governments could backfire not only because this could impact on investment decisions, but also because the expectations that are created may not be met, and this could result in disruptive activism. Implementation of resource nationalism could also be impacted by poor governance and corruption, which, ultimately, contributes to the undesirable cycle of demand for resource nationalism, unfulfilled promises, and disruptive activism in support of further or more stringent resource nationalism measures.
In Zimbabwe, for example, it has been reported that approximately USD15-billion has been unaccounted for at the Chidzwa Diamond Mine, a mine run by Mbada Diamonds, linked to the Zimbabwean government and defence force.
Africa however remains attractive as an investment destination, to appropriate investors, and the investment patterns are likely to continue, particularly in those jurisdictions which support the global move to a ‘green economy’ and those countries which have available reserves of the ‘battery minerals’.
What, in your opinion, are the main concerns in terms of regulations (in Africa) that mining companies need to be aware of in future?
The cautious approach adopted by investors seems to be predominantly influenced by regulatory and policy uncertainty, security threats, political instability, increasing royalties and other taxes, increased costs associated with employment, commodity cycles and uncertainty and political instability and risk. However, by far, one of the biggest factors has been the threat of enforcement (or actual enforcement) of environmental laws, and the environmental liabilities (rehabilitation and remediation). The associated reputational risk also plays a huge role.
The recent claims by Zambian communities against mining companies, including Vedanta, and the court cases in multiple jurisdictions (Zambia, South Africa and the United Kingdom), will have a sobering effect on mining companies, and could add to the cautious approach to investment.
There are several common themes and concerns regarding recent changes to the Mining Laws and the potential landscape in various African countries. These common themes include: (a) stabilisation arrangements which are generally put in place to attract investments and, theoretically, to support such investment, until the mine becomes profitable, (b) indigenisation laws, particularly where specific indigenisation levels are required in relation to strategic minerals (which often require higher investments), (c) increased royalties, (d) exchange control and the impacts that this has on procurement, particularly imported goods, and (e) currency fluctuation and the uncertainty that this brings to investment decisions.
One of the primary concerns faced by investors is the uncertainty which results from regular changes to mining laws and regulations, often, because of the particular political climate and socio-economic drivers. Often, regardless of the wording of a particular mining law or regulation, governments and the relevant ministries such as the Ministry of Mines, interpret and apply the mining laws and regulations to suit the political climate at that time and socio-economic demands at a particular time. It is extremely difficult, in these circumstances, to do business, because often, by challenging the interpretation and application of the mining laws and regulations, this creates an adversarial relationship between the miner and government. The reality is that the relevant governments hold the power and this power can be used to disrupt mining operations, impact export of the minerals, and repatriation of funds.
Indigenisation laws, which are often linked to resource nationalism, remain a concern, because of the regular changes that are made – if they remain stable (no ‘moving of the goal posts’), investors can factor the requirements into the feasibility studies, and investment decisions. While there has been a generally positive response to the changes in the indigenisation laws in Zimbabwe (including in respect of diamonds and platinum), the concern is that positive changes may be shortlived, as demands are placed on the government of the day. This creates an extremely uncertain investment environment.
The global move towards a greener economy has started impacting on South Africa, particularly in relation to South Africa’s coal subsector. Conscientious investing typically means that certain investors, have taken the decision to divest from so called dirty commodities, and not to make any new investments in these commodities. This, together with increased environmental compliance and enforcement is of concern to certain investors.
The global developing trend of enforcing the polluter pays principle may also be of concern. The most recent example is of the reported USD4.5-billion spend, to date, by Vale, following the tailings dam collapse at Brumadinho.
What have African governments done wrong (in terms of mining regulations) in the past? What have they done right? In a perfect world, what should they do in terms of legislation and regulations to attract more mining investment? (If possible, could you illustrate this with examples of countries or regions?).
Historically, investors have required higher levels of certainty in relation to the various factors that are taken into account to determine the feasibility of a proposed investment, and whether to continue investing in a particular project or operation.
While certain investors still require high levels of certainty, there is a growing group of investors that are prepared to invest, despite uncertainty regarding certain investment criteria. However, most, if not all investors require specific levels of certainty in relation to criteria such as the required levels of indigenisation, security of tenure, and a legal system which gives the investor an opportunity to challenge any adverse decisions of the government, in a fair, reasonable and transparent manner.
Regular changes to the mining laws and those laws which impact materially, such as exchange control, are probably where governments go wrong, particularly where changes to the mining laws and related laws, are made with little or no consultation or in complete disregard to bilateral or multilateral treaties, and without having regard to international conventions.
Investors cannot of course expect indefinite consultation, particularly in those African countries where governments are facing increasing pressure by their citizens to participate and benefit from natural resources.
The starting point is always for there to be policy certainty, because policies provide the framework for regulatory certainty. For African governments to increase investment, not only directly in relation to the natural resources sector, but also for example, infrastructure development, policies which are clear, are necessary. Sometimes, for example, it is not necessarily about the percentage of indigenisation, but rather, that there is certainty around indigenisation requirements with the expectation that those requirements will remain stable for a particular period.
Transparency is critical – all processes, including applications for prospecting or mining rights and how those rights can be impacted upon, must be readily available and accessible to stakeholders.
Just as important however, is the need for fair administrative processes, where rights may be impacted upon or where the exercise of administrative discretion, can impact on or disrupt operations.
Lastly, the rule of law remains a critical factor, together with accessibility to a court system which is independent, unbiased, and which can determine disputes quickly.
A government which is willing to listen to all stakeholders and respond appropriately, is more likely to attract investment. The recently published new mining code in Mali is a good example. Initially, stabilisation arrangements were not specifically addressed, but shortly after publication, it was confirmed that the stabilisation period would be limited to 10 years. There will, of course, be extensive debate on whether a 10-year stabilisation period (down from the previous 30-year period), is appropriate – not all stakeholders will be happy with the 10-year period.
While there are significant challenges being faced by the Zimbabwean government, the announcement of the intention to repeal the Indigenisation and Economic Empowerment act, in March 2019, and the changes to the indigenisation laws, is another example of an African government grappling with those challenges, which could present road blocks to investment. The Indigenisation and Economic Empowerment Act was implemented by former Zimbabwe President, Robert Mugabe in 2008. It required that 51% of mines had to be black Zimbabwean owned, which limited foreign ownership. The act was subsequently amended to limit requirements to platinum and diamond mining companies.
The initial amendments, which limited the indigenisation requirements to diamond and platinum mining companies only, and the subsequent announcements that the act will be repealed and replaced, were driven by concerns that the requirements were impacting on growth and development. The announcements by President Mnangagwa that Zimbabwe was open for business had to be supported by the implementation of meaningful change in the investment framework, including the Zimbabwean mining laws. The announcement that the act will be repealed means that the restrictions, including in relation to diamond and platinum mining companies, will be done away with, and hopefully open up investment opportunities, for Zimbabwe.
Zimbabwe will however also need to radically overhaul its mining laws, to attract further investment, including in respect of an ageing and crumbling infrastructure. It can do so by amending its policy and regulatory framework so that it supports investment, while benefitting the Zimbabwean people.
African countries that can create a legal landscape with the least amount of red tape, are likely to attract more extensive investment. In Uganda, for example, there are no restrictions on foreign investment in mining, provided the mining activities benefit the local communities. This has attracted large investment from companies such as Rio Tinto, and in the third quarter of 2018, Uganda recorded and all-time high in terms of its GDP from mining. Botswana is another example where, because of its legislative framework, mining companies believe that they are able to function effectively and efficiently. About 40% of the GDP of Botswana is a result of mining, and this is mostly due to the relatively certain policy and regulatory environment.
Rwanda has more recently made amendments to its mining laws and regulations in a bid to attract foreign investment, which is aimed at promoting partnerships between foreign investment companies and local companies. The new mining laws were introduced in Rwanda in 2018, and it is still too early to tell whether these new laws will attract the expected investment.
Which regulatory risks should mining companies and suppliers that venture into Africa be aware of? How should they go about mitigating these risks before entering that country?
The most important thing that mining companies can do, before investing in a country, and to mitigate the risks, is to have a proper understanding of the relevant landscape in the relevant country – there has to be a realistic view, and expectations must be managed accordingly.
What is absolutely critical to successful investment is to have a good understanding of the community landscape. Unless mining companies invest and develop mines in such a way that they are granted the social license to mine, investors and the mining companies can expect to face lengthy delays, and disruption to the implementation of the project, and, once the mine is up and running, disruption to mining operations, including getting the minerals to market.
Community activism is extensive, and potentially disruptive. This can be avoided by not only identifying the need to engage with communities, but also to understand the needs and wants of particular communities (social and socio-economic projects cannot simply be implemented without understanding what the needs and wants of the community are), and delivering on promises made. For example, it is not simply good enough to build a structure for a school – everything that is required to make the school function properly, must also be provided, such as furniture, IT, qualified teachers, and proper administration and funding.
Recent cases in South Africa (Duduzile Baleni and Others, and the Minister of Mineral Resources and Others, and Grace Masele Mpane Maledu and Others, and Itereleng Bakgatla Minerals Resources (Pty) Ltd and Others) have also highlighted the importance of understanding decision–making structures within communities and the acknowledgement that, different communities have different decision making structures and requirements. These principles also apply elsewhere in Africa.
Hidden costs of implementing mining projects must also be considered. These hidden costs may come in the form of additional taxes, import and export duties, exchange control regulations, regulations around which minerals can be sold, and to whom, and the often-extensive costs involved in complying with a particular country’s mining laws. Investors and mining companies should also be mindful of the additional costs incurred as a result of delays, particularly where the processes contemplated in the mining laws, are not complied with, properly, or at all, because they are not understood properly.
Where do you see the African mining industry in the next year or two? Which countries or regions in Africa will be the hotspots and why? Will West Africa continue attracting the majors and exploration companies? Will East Africa become attractive again?
Most, if not all the African countries that are mineral rich, face the challenge of having a dual mining system: namely a formal mining sector; and an informal (small scale an artisanal) mining sector. Often, the two are not aligned, and therefore clash.
While formal or large-scale miners cannot always be said to comply with the mining laws (including the environmental laws) in a country, it is often the artisanal and small-scale miners that flout the mining and environmental laws, essentially, making them illegal miners.
This must, however, be distinguished from the true illegal mining activities which are carried out, often, side by side with lawful mining operations at existing mines, where the illegal miners are facilitated by those employed in the formal or legal mining sector, and at abandoned mines.
This is likely to be a significant challenge to the mining sector, within Africa generally, and it is necessary to regularise the small scale and artisanal mining, and the true illegal miners by creating regulatory frameworks which facilitate easy access, administration and management. This may not be easy. In certain instances, the small scale and artisanal mining forms part of a greater corrupt and criminal network, often supported by members of government, protected by the defense force and police services in that country.
The reality is that Africa is a mineral resource-rich continent, including battery minerals, and there will always be investors who are willing to take the risks, regardless of the level of uncertainty.
Africa is therefore likely to continue seeing significant investment in the mining and natural resources sector and, out of necessity, the infrastructure which ultimately supports getting the mineral to market.
2020 is likely to see further investments in countries such as Angola, Uganda, Rwanda, and Egypt, based on the view (and possible perception), that these countries still offer a good return on investment.
Growth and development of the mining sector in Africa is heavily dependent on exploration spend. Exploration is high risk, with low return, and African countries will need to create incentivised frameworks which encourage investment on exploration.