Africa: a continent of contrasts
David McKay (MiningMx)
Posted: Thu, 20 Dec 2007
[miningmx.com] -- NEWS in October that Industrial & Commercial Bank of China Limited (ICBC), China’s biggest bank by market capitalisation, wanted to establish a $1bn fund for investment in African resources is just the tip of the iceberg.
Speaking a month earlier, Dawie Roodt, an economist at the Efficient Group, said the government of China could pump as much as $250bn of a projected trade surplus into Africa.
Incredible? Well, data showed in 2007 that the investment in Africa is beginning to blossom. Miningmx reported in September on United Nations figures that showed foreign direct investment (FDI) in Africa grew 20% to $36bn in 2006 from 2005. The interest in resources is partly because it’s cheaper for China to source its own raw materials than buy it from third parties who might seek a much higher margin.
Yet for all the advantages of investing in African resources, there are demerits. In fact, Africa proved itself a potentially perilous place to invest in 2007. Two test cases, the Democratic Republic of Congo and Zimbabwe, highlight that the risk part of the risk/reward equation is very high.
A string of companies including Brinkley Mining (uranium explorer), Metorex (copper/cobalt miner), Africo (base metals explorer), Camec (base metals), First Quantum Minerals (base metals), Moto Goldmines (gold), AngloGold Ashanti (gold) and Exxaro Resources (diversified) stubbed their proverbial toes against the rock of Congo bureaucracy in 2007.
In nearly all cases, the Congo government questioned the probity of the mining licenses/transactions/deals from which companies justified their right to explore or dig for metals in the country. Eventually, the government unveiled plans to audit all mining licenses granted in the country.
In early November, a report by the Congo’s mining commission, leaked to Bloomberg News and Reuters, said 61 mining contracts should be cancelled or renegotiated. Thirty-seven contracts, including those with international firms Freeport McMoRan Copper & Gold, BHP Billiton and Nikanor, needed renegotiating while the remaining 24 should be terminated, the document recommended.
In the wake of an investor outcry, the Congo government hastened to explain the mining commission did not have executive powers and could only make recommendations. But mining companies have reason to be fearful. Already Exxaro Resources and First Quantum Minerals lost the right to develop the Kipushi zinc mine; Exxaro similarly lost the right to develop Kamoto, a copper mine now owned by Katanga Mining.
The Congo successfully completed its democratic elections in 2007, with relatively little civic disorder, but the results of the country’s mining license review – which could unhinge investor confidence - will be watched closely.
At least the Congo has a strategic plan which it appears to be following. Contracts negotiated in terms of the review may actually call for mining firms to provide better social investment in the country.
In Zimbabwe, however, there’s neither rhyme nor reason to that government’s many diktats the last of which is so-called ‘localisation’ legislation which effectively threatens to seize control of the assets of foreign-owned mining companies.
While the planned legislation requires presidential signoff, Zimbabwe’s chamber of mines is trying to figure out the implications. For Impala Platinum, which has about a third of total resources sown up in Zimbabwe’s future, there are questions whether it’s existing empowerment efforts are enough to comply with the localisation bill.
Impala has already ‘sold back’ resources to the Zimbabwe government and concluded local investment to qualify it for an estimated 30% to 40% empowerment. It’s not known whether these previous agreements exclude it from having to meet the 50% threshold demand by the new localisation bill.
Meanwhile, power constraints, runaway inflation, and the inability to earn a decent price, especially for previous metals also continues to dog Zimbabwe. The country has recently signed an agreement to import power from Mozambique’s Zesa, but the future of the country rests squarely on the ageing and increasingly unpredictable Robert Mugabe.
Plans were hatched in February, mainly by the Congo mining utilities such as Miba (diamond board), to consider listing. Endiama, the Angolan state-owned diamond firm, also raised the possibility of going public. Though nothing has come of the proposals, the fact African governments are considering such ideas is recognition they are not deriving enough value from the commodity bull market.
African governments have recognised that mineral properties they sell to foreign-owned mining companies derive a higher value when listed offshore. That’s another reason why African governments are seeking to derive higher royalties from foreign miners. In February, the Zambian government announced plans to increase royalties payable by miners to 3% from the current 0.6%.
In South African, the government furthered plans to impose royalties from 2009. The third draft of the so-called royalty bill, delivered in December, acknowledges a need to reduce or remove royalties for struggling miners. It has also lowered the royalty payable by diamond producers.
Lithium has been removed due to my involvement in the acquisition of lithium prospects in Africa. Contact Carel van der Merwe at email@example.com or +27 62 538 7750 if interested.
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Africa: a continent of contrasts