Why Africa’s mining industry can weather the commodity-price storm
The correction in the global commodity cycle shouldn’t derail investors’ search for new exploration frontiers in sub-Saharan Africa (SSA), given the region’s high-quality mining and metal assets, and still-growing steel demand in China. In any case, efforts to boost local value-added processing should remain on track.
By Rolake Akinkugbe, head of energy and natural resources at FBN Capital
Mining in the spotlight
Minds have been refocused on SSA’s mining and metals sector since oil prices began their downward climb in June. Only 18 months earlier, the region’s mining industry had come under heavy scrutiny after a series of labour disputes and worker strikes in South Africa’s mines.
Meanwhile, iron-ore, gold and copper prices have been depressed, raising concerns over export revenues for a number of African mineral producers. Should growth in China, which consumes almost 50% of global metal supplies, stagnate, then Africa’s mining sector could be in for a protracted depression.
However, there is some cause for optimism. Despite global economic uncertainty over the past two years, the budget for non-ferrous metals exploration in SSA has remained relatively robust, helping to underpin continued industry investment.
The Democratic Republic of the Congo (DRC), for instance, remains a prime spot for exploration spending, while there was an increased focus on West African gold exploration in the period between 2012 and 2014 in the Sahelian region of landlocked Burkina Faso.
Parallels have also been drawn between West Africa’s iron-ore frontiers and Australia’s Pilbara region, rich in iron ore.
Iron ore: a strong prospect
Close to two dozen companies have commenced iron-ore projects in the region, as West Africa’s iron-ore deposits are globally reputed to be high-grade, generally attracting low processing costs, due to the low levels of impurities found in them. Miners find these types of ores attractive due to the limited need to process them before export.
However, depressed global iron prices have cast a shadow on the resilient appetite for Africa’s iron ore-rich frontiers. Still, as many current investment decisions are based on long-term price estimates, current prices for iron could still have only a limited impact on the supply side and investors’ search for new exploration frontiers in Africa.
Guinea’s Simandou region and Senegal’s Falémé region are two of the promising iron-ore frontiers on the minds of mining explorers focused on Africa, and deposits in both regions are estimated to be in the millions of tons.
Guinea’s planned Simandou iron-ore project includes a mine, around 700km of trans-Guinean railway and the construction of a port south of Conakry, Guinea’s capital. Iron-ore production could ramp up to 100-millon tons a year and the first shipment is possible in 24 months. Simandou is probably positioned to become the largest integrated iron-ore mine and infrastructure project in Africa.
Overall, mining exploration targets in Africa have focused primarily on Burkina Faso, Ghana, the DRC, Namibia, Tanzania, Botswana, Mali, South Africa and Zambia.
Price trajectory not too dissimilar from oil
Unlike the oil and gas sector, across the mining and metals sector in Africa, exploration activity over the past year has been primarily geared towards identifying new mining frontiers, rather than optimising resources at previous discoveries.
However, with iron-ore prices – which have fallen by 60% over the past 12 months – looking flat in 2015, miners could change strategy to optimise current output rather than focus on new exploration.
In theory, resilient steel demand in China would be a boon for African iron-ore producers. Despite the sluggish start in 2015, steel demand in China is projected to increase to 800 million tons by 2016, while Africa could represent around 10% of global iron-ore supply by 2025. This would constitute a giant leap from the continent’s 4% share just four years ago.
The local content question
Notwithstanding the mixed outlook for prices, large-scale mining, like oil and gas, have been less labour intensive than other industries, a fact which has spurred the emergence of new industry policies aimed at opening up linkages between the extractives industry and the rest of the economy.
Many of these hard-commodities investment will thus require the requisite technology and capital to develop the large-scale infrastructure need to develop other sectors.
Beneficiation – used to describe the proportion of the value derived from mineral exploitation which stays in the country and benefits local communities – is hardly a recent phenomenon in SSA. These days there is a significant emphasis being placed on manufacturing activities by requiring that companies locally process mineral resources.
The push has been strong in the southern African region, especially in South Africa, which has introduced a tax incentive for research and development for the mining sector in relation to the mineral beneficiation.
In South Africa, up to 10 of the country’s main commodities have also been identified for beneficiation. Mining giant De Beers has formed joint ventures with the Botswana and Namibian governments to accelerate local beneficiation of raw diamonds, and is also in talks with the South African government.
Recently, Zambia banned First Quantum Minerals from exporting 60,000 tons of copper concentrates for processing, asking the miner to exhaust all local options for processing first.
Similarly, in neighbouring DRC, the mines ministry in April 2013 banned exports of copper and cobalt concentrates in a bid to encourage local processing. As far back as April 2011, Zimbabwe banned the export of unprocessed chrome ore in a bid to boost domestic processing capacity.
With varying degrees of implementation of such policies across the continent, a tangible measurement of the success of beneficiation will be the extent to which it creates sound linkages with parts of a country’s real economy as well as its impact on job creation.
Natural-resource policies have to strike the right balance between distributing the benefits of resource extraction to the wider population and creating incentives for investors to extract minerals in the first place.
A fundamental sub-Saharan challenge is that such linkages are few and far between and are underdeveloped, primarily due to a lack of other critical infrastructure, such as power.
Thus resource extraction on the whole must generate enough output to make local value-added processing viable, while large domestic and regional markets would be necessary to absorb locally manufactured outputs.
Rolake Akinkugbe is head of energy and natural resources at FBN Capital, Lagos, Nigeria.
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