Continuing rand strength is likely to discourage foreign investment in South African mining as investors look for cheaper alternative destinations, putting the future development of local mining at risk, industry participants were warned on Tuesday.
Speaking at the 2004 Investing in African Mining Indaba in Cape Town, Gerald Holden, managing director at Barclays Capital, cautioned that South Africa risked losing its attractiveness as a centre for mining development should the rand maintain its strength.
The local currency appreciated by 28% against the US dollar in 2003. In 2004 three key factors challenging South African mining would be rand strength, wage inflation and the availability of financial and human capital, Holden believes.
At the same time, although the government has developed a robust framework for empowerment in the industry, what was required now was “more carrot and less stick” to encourage further foreign and local commitment.
Meanwhile, he noted, investment into African mining in general had been boosted in 2003 by strong commodity prices after several years of foreign spending by both large and small mining companies.
Africa had surpassed Australia for the first time to move to third place on the investor recipient list with $374,2-million from $256,9-million in 2002.
“African geological potential is attracting more and more interest,” he observed.
“Exploration budgets are now rising having totaled an estimated $2,4-billion in 2003, as the majors increased their spending and focused on reserve
replacement. Plus higher commodity prices have attracted keener interest from
the junior miners.”
Metals prices were likely to remain firm in 2004, he said, given major support from continued strong demand from China.
However, the gold price was vulnerable to a significant short downward correction over the medium term as investor interest wanes and the dollar begins to strengthen, likely in the second half of the year.
Another threat to the continent’s mining industry was the proposed changes to the World Bank’s lending guidelines, to which 19 lenders were already signatories, added Holden.
“These new guidelines could preclude lending to mining companies,” he said.
“This is likely to be the one of the biggest challenges for African governments in the near term.” – I-Net Bridge