No More Easy Money In Mining

Forbes Africa
Published 8 years ago
No More Easy Money In Mining

If there ever could be heaven on earth, this was it. The sun peeped over Table Mountain and lit the winding streets below with a brilliant light as I walked through Cape Town to the first morning of the Mining Indaba—the 20th annual gathering of investors and mining experts. Its rays exuded optimism and felt like a warm, comforting hand caressing your face.

Without wishing to stretch the metaphor, South Africa’s mining minister, Susan Shabangu, tried to emulate the sun’s rays in her keynote speech.

“This is Africa’s time; indeed Africa has arrived and we shall seize the opportunity with both hands,” says Shabangu.

True, it is Shabangu’s job to hold the line when her country’s mining industry is under attack, especially with an election coming up on May 7. Even so, this was a speech too far; dismissed by most at the Mining Indaba. She was at pains to present a rosy picture, saying the number of mines and mining revenue had increased; further that South Africa had topped a list of 158 countries, compiled by the World Economic Forum, for corporate auditing and reporting. She also mentioned billions that will be spent on infrastructure and pledged to protect investors.

When it came to the strike on everyone’s lips in Cape Town—70,000 workers at the platinum mines, which earn 9% of South Africa’s export earnings—there was disbelief when Shabangu said there was no need to be complacent and there were many areas that needed improvement. The understatement of the year, in light of a strike that cost the South African economy 10,000 ounces of platinum and more than $40 million-a-day.

Roger Baxter, the chief economist for the Chamber of Mines, warned that 45% of the platinum shafts were either loss making or marginal. A long strike, followed by a high wage settlement, may push many more over the edge, he says. South Africa has 80% of the world’s reserves of platinum and 40% of supply; by the next Mining Indaba, the latter figure is likely to have fallen. This is one reason why many foreign investors, looking for a competitive return, say off-the-record, they are fighting shy of South Africa for now.

“The world mining funds are flush with cash right now, but they don’t want to put it here because they are very risk averse at the moment,” says one investor in Cape Town.

“They may look at an easy project, but let’s face it most of the easy projects in Africa have gone.”

Another concern for investors is the threat of South Africa’s government amending its mining bill to give the mining minister the discretionary powers to make certain minerals strategic. That would mean the producers of minerals, like iron ore and coal, could have to ask the government for permission to export and accept prices fixed by the state. For South African power generator, Eskom, this would be a boon because it could have all the coal it needs for its power stations in the country at a price it can afford. Critics, like mining lawyer, Peter Leon, has called the move creeping nationalization and warns it could frighten investors.

“It means we are closed for business,” says a former coal mine boss in Cape Town.

The Chamber of Mines paints a less worrying picture. It says that the government is unlikely to touch prices and a clause in the bill ensures consultation with the mining industry over exports. The bill was due for review on February 18.

“We are still engaging with the government,” says Baxter.

What is likely is that the government is going to push ahead with the transformation towards the 26% black ownership promised by the Mining Charter 10 years ago. In 2014, the Mining Charter—a voluntary document signed by the mining companies—will be reviewed. It is widely accepted that the ownership figure is far short of the target. Foreign investors often don’t understand South Africa’s often clumsy attempt to rebalance the scales after apartheid; the mining companies complain the process of transferring equity, to those who didn’t have the vote before 1994, is expensive and futile.

“Many mining companies put transformation systems in place thinking that 2014 will be the end of it. Nothing is further from the truth,” says Shabangu.

There is more hope across the rest of the continent for mining held in the rugged hands of the Australians. It seems the Australians don’t know what a difficult project is and are pouring billions of dollars into mining, from the Democratic Republic of Congo to Ghana, in some of the most inaccessible corners of Africa.

The Mining Indaba heard there are 246 mining companies operating in Africa. They include Sundance Resources, which is spending $5 billion on building two iron ore mines, 40 kilometers apart, in Cameroon, near the border with Congo-Brazzaville. It is hoped that by 2018 they will be producing 35 million mt of iron ore every year.

The project is an 11-hour drive from the capital and the Australians will also build a 500 kilometer heavy gauge railway to the coast to export the iron ore.

“Risk? Mining is risk and we Australians have a way of tackling it,” chuckled Giulio Casello, the managing director of Sundance Resources.

“What really impressed us on this project is that Cameroon put together a committee of experts to help us set up this project. Cameroon doesn’t have a mining industry and clearly wants one.”

Another Australian carving his way through the African outback is Harry Anagnostaras-Adams, who spent 30 years working in the banks of Sydney and now spends his days trying to figure out how to get gold out of Ethiopia. Through his resources company, KEFI Minerals, he spent $6 million buying Tula Kapi Mine, 500 kilometers west of Addis Ababa. The mine, which has two million ounces of gold in resources and another million in reserves, went for a knockdown price—ten cents in the dollar—because the previous owner had failed to deliver.

Anagnostaras-Adams will invest $150 million in the mine with the hope of producing 60,000 ounces by 2016.

“It is not for the fainthearted,” he says.

“The response to us trying to fix the problems of the mine was like greased lightning. The government always wanted us to get the show on the road; I was impressed by their pragmatism.”

There were other encouraging signs at the Mining Indaba. Brazilian resources giant Vale told how it was going to invest billions into increasing output from the Moatize coal project, in the north west corner of Mozambique, from 4.7 million mt to 20 million mt. More than $2 billion will be ploughed back into the mine; $3.4 billion will go into building a railway line from the Moatize, through Malawi, to the export port of Nacala. Another billion dollars will build up Nacala so it can ship more coal.

There were also encouraging words from the Toronto Stock Exchange, the great mining fund raising bourse in Canada. Graham Dallas, the head of business development for the holding company TMX, said around $800 million had been raised in 2013 for mining projects in Africa.

“I think if you have the right asset and the right management you can still raise foreign investment. It is not all doom and gloom, things have been better, but there is no reason to despair.”

If this optimism was not enough, Nick Holland, the CEO of Gold Fields, was brave enough to make this prediction.

“I think China is going to come back. I’ll stick my neck out and say there could be a mining boom by the end of next year,” says Holland.

This is the kind of bullish approach that has sustained mining in Africa and built the Mining Indaba into one of the biggest industry gatherings on the planet. Twenty years ago, the Mining Indaba held its humble beginning in one room in the Cape Sun; in 2014 it has expanded to fill the vast International Convention Centre. African mining has to play a clever game over the next 20 years or risk ending up back in one room at the Cape Sun.