Article:

A Return to Africa

16 January 2019


Africa has always held its reputation as the land of opportunity, however the decline in commodity prices from 2013 to 2016 following the mining downturn forced Australian companies to focus on “low risk” assets closer to home. The companies that made it through the tougher times were able to do so by reducing administration costs. The continuation of the improved performance in the last few quarters, together with the increased availability of funds and rising costs in Australia, is driving the appetite for ASX explorers to go back into Africa.

In the lead up to the 25th Anniversary Mining Indaba conference on 4 - 7 February 2019, held in Cape Town South Africa, we asked Sherif Andrawes – BDO Global Natural Resources Leader & Corporate Finance Partner, Peter De Leo – Managing Director Lycopodium Limited and William Witham - CEO AAMEG to provide their anecdotal thoughts on mining in Africa and what is on the horizon in 2019.

Q:  Given the positive year we have had in Australia, is this sentiment being felt in Africa? 

Peter De Leo:
I believe so, we are seeing a significant level of activity across Africa and are busy working on projects or studies in 16 different African countries. Importantly, the number of projects in detailed or advanced stage feasibility study is also encouraging. The main driver for this I believe is the quality of the prospects when considered against a global backdrop, as well as the level of interest from the investment community.

Sherif Andrawes:
It is fair to say that Australian junior explorers have not had an easy time raising funds in the last half of 2018.  Raising funds was easier for them in 2017 and in the first half of 2018 but a general fall in the market has found exploration companies which are seen as been as being at the riskier end of the investment spectrum being less sought after by investment funds.  By contrast those companies which are more advanced and are either already producing or are in the development stage have found it easier to raise funds through equity, debt or alternative means such as royalty streaming or offtake funding. It is these companies with projects in Africa which are most likely to see an uptick in 2019.  Risk aversion, particularly for equity investments, has returned which may make life a little harder for exploration companies in Africa.

William Witham:
Yes, the ongoing strong demand for most commodities and the increasing anti-mining sentiment in Australia is forcing mineral explorers to have a closer look at Africa. We are seeing many projects, initially looked at in the last two “booms” both from the mid 1990s and the mid to late 2000s, being looked at again.  But it must be said that since August 2018, the stock market has been much more subdued and raising money for outright exploration has been very difficult. Development projects on the other hand seem to be attracting much more interest. We are hoping with the increase in the price of gold that there will be strong interest in the gold sector this year.

Q:  What opportunities for Australian mining companies do you see in Africa?

Peter De Leo:
For those groups that remain largely Australia focused there is obviously the benefit of geographic diversification. In addition, as I have noted previously, there are a number of quality prospects. Finally, I believe Australians are generally well received across the continent, combined with a strong history of mining in analogous conditions and geologies, it is no surprise that there have been many groups set up that operate successfully in a host of African countries.

Sherif Andrawes:
Australian companies have been attracted to Africa for many years and have developed a depth of experience of operating throughout the continent as a consequence. The appeal has been driven by the presence of vast natural resources which are considered to be cheaper than those in their home country. With the strong history of developing projects in Africa, as well as new technologies making older mines and marginal projects viable, Australian mining companies will continue to be at the forefront of mining activity in the region.

 William Witham:
Battery minerals (Nickel, Cobalt, Lithium and Graphite) and Gold, given the recent price increase, present big opportunities for Australian mining companies in Africa. 

Q:  What do you perceive as the major challenge/s for foreign mining companies to be successful in Africa?

Sherif Andrawes:
It’s not enough to have exploration, development or production experience gained in Australia.  It is important that Australian companies ensure they have staff with sufficient in-country expertise and that they work closely with local staff and contractors.  A mindset that is important for them to adopt is one of partnership with the government, contractors and community rather than being outsiders who work purely at a transactional level.  Australian companies who have been successful in Africa have worked hard at being part of a collaborative team with the Government, as well as local staff and community to ensure that everyone wins in a fair and sustainable way.

Peter De Leo:
In my view there a number of challenges. The first relates to fiscal clarity and stability. Obviously the development of resource projects requires significant capital. The most attractive destinations for capital are those where returns are good, and risks are clearly understood and considered manageable. It becomes more difficult for resource companies to access and commit capital where there is flux or uncertainty in fiscal matters. Changes to laws relating to the development and operations of mines undermines confidence and in the very least makes capital more expensive, if not unavailable altogether.

The second aspect that has emerged over the last 5 or so years is the increasing concern around security of personnel and assets in certain African jurisdictions. This has added a layer of risk that needs to be understood and managed to ensure the safety and wellbeing of a Company’s personnel, as well as protecting its’ investment.

Finally, the increasing demand for local content in both the development and operational phases of projects, which in itself is a sound objective, adds another level of complexity in balancing development/operational needs and social license.

William Witham:
The challenges for foreign companies include learning and understanding cultural differences as well as the ever-changing international laws on Human Rights, Anti-Bribery and Corruption Laws. Safety and security are also key aspects that need to be managed effectively, in addition to poor infrastucture. 

Q:  What has been the greatest change from last year's meet-up in Cape Town?

Sherif Andrawes:
February 2018 saw visitors to Cape Town met with the most optimistic conference in several years.  Despite some geopolitical uncertainties, things were overwhelmingly positive.  Since then however, global tensions have increased leading to more uncertainties in the commodity and equity markets. The potential impact of global trade wars and Brexit have further driven uncertainties for 2019.  On her other hand, we have seen an uplift in M&A activity across mining and mining services companies. This has been led by the merger of Barrick Gold and Randgold. It is likely we may see many more in 2019.

Peter De Leo:
I guess 2018 was another year of relatively stable markets. So notwithstanding the concerns around the impact to commodity prices related to the changing trade / tariff landscape, we have seen good projects being funded and move from study into development phase. As a consequence, I would expect to see reasonable optimism around 2019 being a good year for the African resource sector and therefore hopefully the development of more momentum in the sector.

William Witham:
I feel there is much more certainty this year. Last year there was some concern on proposed recent mining and tax legislation changes in countries such as Tanzania and South Africa. These issues seemed to have settled down somewhat and companies have more confidence to invest this year.

Mining Indaba 2019 & 121 Mining Investment Cape Town

The highly anticipated 25th Anniversary Mining Indaba conference on 4 - 7 February 2019, and 121 Mining conference held in Cape Town is expected to see the largest amount of investors, mining executives and junior miners from across the globe come together for this deal making forum, in addition to the BDO Cocktail Function and 121 Mining Investment Cape Town conference, proudly sponsored by BDO.