Addressing key development needs

A lack of infrastructure and endemic energy shortages are key challenges Africa’s mining industries face. The absence of modern infrastructure, like road transport and energy supply, add major development and running costs to companies’ mining operations, making it very expensive to mine in some of Africa’s mineral-rich countries.

However, as economic growth and development progresses, infrastructure development will advance, which will facilitate further growth and development.
This is according to Anglogold Ashanti’s public affairs executive Alan Fine, who will be attending the 18th Annual Investing in African Mining Indaba conference in Cape Town this month. Infrastructure development is one of the key issues the 6 500 delegates from around the world will discuss.

Australian Stock Exchange-listed minerals and development company Elemental Minerals’ investor relations executive Ilja Graulich says infrastructure development will be crucial for the further development of mining in Africa. He says the current infrastructure in most of Africa’s mineral rich countries is simply not making the grade. Much needed road and rail infrastructure, as well as ship ports that are big enough to handle large volumes of ore, must be built.

“Mining is a volumes game,” he says. And, as things stand, “heavy volumes cannot be moved efficiently.” Ferdi Dippenaar, CEO of Canadian gold mining company Great Basin Gold, agrees. He says that Africa needs better roads and electricity infrustructure for mining on the continent to develop further.

Webber Wentzel’s head of Africa mining and energy projects Peter Leon says, “Some African mining regimes have encouraged and sometimes compelled investors to build and operate their own infrastructure, such as ports and railways, with ownership reverting to the state after, say, a thirty year period (normally the length of a mining licence). He says in some post-conflict countries, such as Liberia, there is simply no infrastructure to speak of. So, mining companies are obliged to create this at huge capital cost.

Although Great Basin Gold does not have any specific problems affecting its operations adversely, “electricity supply seems to be a risk, until new power plants are built”. He says the problems associated with power supply shortages in South Africa are well known. However, it is important that Eskom completes its current infrastructure development as planned. This includes a number of coal fired power plants, which, if all goes according to plan, will only start benefitting the mining sector in 2014.

Dippenaar says over and above a shortage of infrastructure, political stability in some African regions is apparently becoming an issue again. Mining companies with operations in SA will, apart from labour-related challenges, also have to deal with working and capital cost inflation. This will continue to put pressure on their profit margins. Dippenaar says the Canadian and North American mining industries will also face inflationary pressure on working costs and capital expenditure. “Mining is always at the mercy of water, power, and, in particular, transport infrastructure,” explains Webber Wentzel’s Leon.

JP Morgan analysts warn that drastic under-investment in water infrastructure over the past decade could cause water supply problems in the future. Leon notes that South African Finance Minister Pravin Gordhan acknowledged the need for greater investment in this area, particularly to meet the urgent needs associated with acid mine drainage. However, he says it remains to be seen whether sufficient funds will be forthcoming and from whom: the State, the South African mining industry by means of a new levy, or from both. Power supply is a constant concern, with Eskom warning that meeting energy demands will be “particularly challenging” this year.

“Although most miners seem confident that power supply will be sufficient, the perpetual instability of SA’s energy situation presents some cause for concern. “SA’s inadequate transport infrastructure, in particular, is hampering growth in the mining industry,” says Leon. He notes that the challenges presented by limited and often poorly maintained transport facilities are compounded by the fact that the State, through Transnet, owns and maintains a monopoly over the entire logistics infrastructure.

“South Africa is rather unusual as a developing country in that it does not allow industry to build and operate its own logistics infrastructure. Late last year, the SA government acknowledged the infrastructure deficit and its drastic impact on mining. It recently initiated a R17-billion rail project to carry more coal to the coast through the Lothair rail project, a joint venture between Transnet and SwaziRail.

Leon says it is, however, still unclear whether the government will ever allow the South African mining industry to build and operate its own logistics infrastructure. Government’s reluctance to relent on this aspect was identified by Bheki Sibiya, CEO of the Chamber of Mines, as one of the most important issues facing the mining industry. Leon agrees. He says an additional threat to South Africa’s mining industry is a decline in investor confidence following the country’s well publicised debate on the nationalisation of its mines. “Given the significant capital investment required for mining, investors are wary of unrestrained resource nationalism, let alone nationalisation.”

The fact that the ANC has delayed its final decision on whether nationalisation will become party policy until its elective conference in December 2012 means that a cloud of uncertainty continues to hang over the industry. He says this may potentially increase SA’s sovereign risk profile. This could have further ramifications for the country’s mining industry in terms of attracting foreign direct investment.

Leon says that both the Mineral and Petroleum Resources Development Act of 2002 (the backbone of SA’s mineral regulatory regime) and the Mining Charter (which sets out a framework for the promotion of BEE within the industry) are characterised by a number of vague and ambiguous provisions. SA’s National Treasury has even gone as far as to criticise the regime as being “opaque.”

The sector is further affected by the department of mineral resources (DMR) taking consistently longer to process prospecting and mining rights than regulators in competitor jurisdictions. More than 90% of mining rights applications took more than a year to process and some up to five years. The DMR’s annual report for 2010/2011 shows that the situation has not improved over the past year: of the 3 798 licence applications received, only 1 387 were processed within the prescribed timeframes. This means only 36.5% of applications were processed on time.

To nationalise or not
Will governments nationalise mining assets, or not? Fine says, “It is about the relationship between the resources sector and society, and more specifically, the fairest way for mining companies and their host countries to share the benefits of mining.” This is a key issue around the world, not just in Africa. Last year, the Australian government drastically increased mining taxes. Other resource-rich countries around the world are considering similar steps. “Mining companies need to recognise the legitimacy of these countries’ aspirations,” says Fine. “For governments, the challenge is to not impose conditions that damage investment prospects.”

The SA mining sector faces similar challenges. The main issue is whether government will nationalise the country’s mining assets, or not. Leon says for mining investors and companies, unrestrained resource nationalism is a major threat. “We expect this debate to move away from nationalisation towards a more sensible discourse on how mining can help solve unemployment, poverty and inequality,” says Fine.

“Mining is a high risk, capital-intensive industry in which security of tenure is paramount. Mining companies simply cannot be faced with the risk of unpredictable or arbitrary administrative action.” They need predictability in a country’s mineral regulatory regime,” warns Leon. “In order to ensure continued investment in their mining industries, and thus encourage economic growth, African governments need to strike an equitable balance in obtaining a fair share of resource rents, while ensuring that mining investors are not exposed to an unpredictable or indeed predatory mineral regulatory regime,” says Leon.

SA mining also faces health and safety issues. While the industry is making good progress, “more needs to be done,” he adds. Fine says a related issue is the need for mining companies to enhance socially responsible operational methods.

Sustainable development
A major focus of the Indaba will be the link between mining companies’ corporate strategies and sustainable development issues. Leon says, “Mining companies in Africa are increasingly concerned about the need to obtain a social licence to operate.” This includes obtaining the support of the local community when commencing and continuing mining operations.

He says mining companies at the same time require certainty in terms of the legal regime governing their mining operations and stable investment conditions in order to ensure the long-term security of their investments. “It has become imperative that foreign investment in the mining sector foster sustainable development, while protecting the interests of the host governments, mine communities and investors in an equitable way.” “At a strategic level, the social imperative needs to be the focal point of our work in developing a sustainable business,” says Fine.

Dippenaar says, “Companies will be faced with more demand from the communities in which they operate. Over and above jobs that are created, communities want to see more direct benefits from these mining activities. These include infrastructure development and improvements, and housing for more than just their employees.” He adds that mining companies will face higher levels of corporate responsibility spending. This will increasingly become part of the cost of doing business in Africa.

Commenting on how these challenges feed into devising a successful business strategy, Dippenaar says, “Mining companies should incorporate higher levels of involvement in and spend more money on dealing with these challenges. They should also be willing to get involved in these areas a lot sooner than in the past. “It is part and the cost of doing business anywhere in the world, not just in Africa. It must be incorporated in the company’s business strategy. Community support for projects is critical and cannot be ignored,” he adds.

The Investing in African Mining Indaba, takes place in Cape Town. from February 6 to 9

This article originally appeared in the Mail & Guardian newspaper as an advertorial

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