Natural Resources in Africa
Note: This report is an extract from the book "Grow
Rich in the New Africa".
|Table of content:||Part 1: Forests|
|Part 2: Water|
|Part 3: Natural Beauty|
|Part 4: Minerals|
|Part 5: Investments in the Mining Sector|
Investments in the Mining Sector in Africa
Investors and business people can benefit from mineral resources in Africa in two ways. One option is to buy stocks of resource companies. The other option is to directly invest into exploration or mining projects. Both possibilities can be very rewarding yet include many risks.
Portfolio Investing in Exploration and Mining Companies
The majority of listed companies focused on mining in Africa are international corporations with headquarters and stock listings in Johannesburg, London, Toronto, or Sydney. Only very few of them are listed on African stock exchanges.
Depending on the life cycle of an exploration company, analysts focus on different parameters. For example for early-stage exploration companies, the quality of the company very much depends on having experienced managers with proven track records on board and the amount of cash, as they have not generally found resources to mine.
The more advanced the producing company becomes, the less important the financial strength and the quality of management is considered by financial analysts. Instead, they focus more on key figures like enterprise value divided by production, price earnings ratio, price cash flow ratio, and dividend yield.
Artisanal and Small-Scale Mining
Artisanal and small-scale mining (ASM), which is prevalent in Africa, exploits a wide range of minerals, for example gold, copper, tantalum, tin, and diamonds. It sustains basic livelihoods for the miners and their families. Their contribution to national economies is still small, but has the potential to become much more.
Most small mines could greatly increase their output and profitability if the miners had access to financial and technical support. Western investors can help convert ASMs into viable operating enterprises by offering such support. By bridging that gap, investors create win-win scenarios for all stakeholders. Many miners would be happy to offer participation in their mines by entering into joint venture agreements with serious and honest entrepreneurs and investors.
From left: Conveyor belt in an abandoned gold mine in South Africa; medium-scale gold mine in Kadoma, Zimbabwe; separating gold from the ore through washing
Different permits, or licenses, are required for starting exploration or mining activities. This is handled differently by each country. In most cases, subsequent licenses have to be applied for, each consecutive license having more rights, covering less acreage, and becoming more expensive. For example, the Ghanaian Mining and Minerals Law, which was passed in 1986 lists three types of license that are applied equally to Ghanaians and foreigners except for the provisions relating to artisanal mining and exploitation of construction minerals, which is reserved for Ghanaians. The following chart provides highlights of these licenses.
|Reconnaissance license||Regional exploration, not including drilling (remote sensing only)||No limitation on size||12 months renewable|
|Prospecting license||Search for minerals and valuation||150 km²||2 years renewable with reduction of area to not less than half|
|Mining license||Extraction of minerals||50 km² per lease up to maximum of 150 km² per company||30 years renewable|
Mineral Sector Risk Assessment
Business people that want to engage or invest
in exploration and mining projects in Africa, are advised to do as much research
as possible before they take
the first step.
When it comes to gold, a psychological mechanism has to be considered carefully. The bright, shining, yellow metal has fascinated man over several thousand years. Many people become greedy when they get close to gold. If you have to assess gold mining projects, wishful thinking is another common trap. Gold mines can be very tempting as they hold the promise of getting rich quickly. It is very helpful in such situations to have check lists readily available and to complete them tenaciously.
When you assess a project in the mineral sector, you should be able to deal with the following risk parameters: commercial, financial, counterparty, reputational, social, political, location, health and safety, environmental, construction, strategic, operational, and technical risk.
For example, commercial risk can be covered by asking the following questions:
- Is the project commercially viable?
- Is the grade of metal in the ore big enough for covering all costs and allowing a considerable surplus?
- Is the business case robust enough that the venture remains cash flow positive even if the metal’s price decreases significantly?
I honestly believe that the price of gold will continue to climb over the next several years, as the economic and financial crisis will unfold its full potential. Access to gold mining assets will be sought after by many banks, hedge funds, institutional investors, and high net worth individuals. Parabolic price advances that usually occur at the end of great bull markets have not yet been observed.
However, when the average person starts buying gold mining stocks, you should think of selling and moving to another asset class. This will still take some time before this tipping point will be reached. Investing in natural resources will remain to be one of the best asset classes that you can have exposure to, for many years to come.
The New Multipolar World Involved in Africa’s Resources
The first big race for exploiting Africa's natural resources happened when ruthless slave traders from Portugal, Spain, Great Britain, France, and some other nations caught young African men and women and “exported” them to the colonies in the New World. The next dark episode started in the late 19th century when the above-mentioned European powers, including Germany, Italy, and Belgium began to colonize Africa and took large quantities of natural resources from the continent.
The enclave structure of the African mining sector must be seen as a colonial
legacy. Most of the mining industry has very weak links with the rest of the
national economy leading to structural deficiencies. For example, railway lines
were built to connect major mining areas with the next port, instead of connecting
the large cities with each other.
The chase for resources continued after the colonies became independent in the 1960s and 1970s. Soon after the great bear market in commodities began in 1980, the chase cooled down.
At the beginning of the 21st century, when the new super cycle of commodities started to unfold, foreign powers again turned their attention toward Africa. When the People’s Republic of China “discovered” Africa as a valuable source of commodities, Chinese state companies invested heavily in resource-rich countries like Angola, Sudan, Chad, Zambia, and Nigeria. Their primary focus was, and still is, on oil, but soon other commodities like copper, cobalt, and coal captured their interest as well. China quickly became the most dominant foreign player in Africa.
Whenever U.S. or European companies want to get access to large infrastructure projects in Africa, they have to compete with Chinese corporations. The problem is that it is not possible to successfully compete with the Chinese on price.
However, the predominance of Chinese players in Africa is about to change. Large emerging countries, such as India and Brazil, are expanding in Africa’s mineral resource sector. Vedanta Resources from India has massively invested in the Copper Belt in Zambia while the Brazilian company, Vale do Rio Doce, and the Indian Tata Steel group are competing for the gigantic coal resources in Mozambique.
Land grabbing has become a concern in the agricultural sector. Asian countries are looking for huge pieces of arable land that they can cultivate and export the produce to their own countries. Dominant players in this neo-colonial game are South Korea, China, the United Arab Emirates, Qatar, Saudi Arabia, Libya, Pakistan, and India. The preferred target countries are Sudan, South Sudan, Ethiopia, and Madagascar, but Tanzania, Zambia, Zimbabwe, the DR Congo, Cameroon, and Liberia are also seeing significant interest for their land resources.
However, not every major project involved in huge land deals is grabbing for land. These projects, if implemented correctly, can help local economies, create jobs, and even serve the local markets. In doing so, project developers are more likely to create sustainable ventures, as has been the case with Feronia in the DR Congo. Feronia has consistently operated there for 100 years.
The increasing demand from foreign countries and multinational companies for natural resources in Africa is boosting the opportunities for governments of resource-rich African countries to negotiate more favorable licensing and tax regimes. Unprecedented demand, driven by large developing-country industrialization, particularly China, will continue to create an anxious global environment over security and reliability of metals and minerals supply.
It can be hoped that the intensifying competition as the new normal of a multipolar world will lead to introducing and strengthening policies of fair mining and farming in Africa. This would create another big shift in Africa that must be considered by entrepreneurs and investors.
Africa is tremendously rich in natural resources above and under the ground. Export of raw materials, especially crude oil, gold, diamonds, and platinum, has been and still is the major driving force of the continent’s long-term economic upswing. However, the best is yet to come, because many regions are still deeply underexplored, allowing the opportunity for mining companies and oil firms to make further discoveries. As governments of African countries are trying to renegotiate better deals with international resource companies, it can be anticipated that a high number of resource projects will remain in Africa, benefiting local communities and businesses which will lead to better living conditions and prosperity.
The same is true for resources above the ground like forests and water. The
natural resources of Africa are a major key to creating, releasing, building,
leveraging, and preserving wealth - not only for Africa and her people, but
also for bold and responsible companies and individuals from the developed
world that will help develop these resources.