Growing opportunities no guarantee for investors

Grant Thornton’s managing director of Asia Business Services, Lauren Patlansky, said that while foreign investors are reticent to invest in Africa, there is massive opportunity for mining throughout the continent, and as infrastructure grows, so will mining.

The Grant Thornton Global Mining Survey for 2014, which analyses industry sentiment about mining trends affecting the industry, identified factors constraining the ability of mining companies to expand their organisations.

These included increased government regulations (39% of all respondents stated this as a constraint), volatile commodity pricing (26%), access to funding (10%), and permitting or processing procedures (9%).

Patlansky said the three major challenges associated with foreign mining investment into Africa remain political, economic and regulatory uncertainty.

In addition, black economic empowerment (BEE) regulations in many African countries and aggressive unionisation in South Africa made foreign direct investment (FDI) increasingly unattractive to global investors, who are turning their attention – and funding – elsewhere.

“The challenges are not new, but they are becoming more onerous.

African governments have matured and as a consequence are making it more challenging for foreign investors to access resources.

"They are no longer giving away Africa’s resources and wealth,” said Patlansky.

Uncertainties affecting mining in SA

With specific reference to South Africa, Patlansky saw uncertainty surrounding the mineral regulatory regime, the question of beneficiation and labour unrest as some of the major factors keeping investors at bay.

“The unionisation of the mining industry is a challenge unique to South Africa. There is no doubt that our unions scare off foreign investors.

Companies need to consider the unions when doing financial long-term calculations, taking into account what possible strikes could occur and at what cost, over the next 10 years.

“The rest of Africa is not unionised, and many investors choose to face the many pitfalls in other African countries, such as political instability, rather than risk the financial and reputational costs of industrial unrest,” said Patlansky.

Barclays Africa head of investment banking Philip Lindop said there exists a reality, but also a perception around investment in South African mining: the perception is that the sector is risky for a host of reasons; the reality looks purely at the economics – the profits are still being made and companies are continuing to invest in the country.

“We firmly believe that growth in Africa is stronger than it has ever been.

"From last year’s Mining Indaba, where the discussion was on emerging markets, Latin America and China, the focus has shifted to looking at Africa being the next growth frontier.

"Africa has seven of the 10 fastest growing countries in the world,” said Lindop.

After all, a mining giant such as AngloGold Ashanti could mine anywhere in the world, yet it continues to commit capital to South Africa, added Lindop.

Randgold Resources chief executive Mark Bristow agreed that mineral hungry countries eager for resources turn to Africa to find them.

“If you want to find multimillion rand mineral deposits, Africa is a very good place to look,” said Bristow.

Government versus unions

While challenges may run high, opportunities on the continent abound, and while recognised as the African powerhouse, South Africa cannot afford to be complacent in its effects to attract investors hungry for a share of the continent’s rich spoils.

Risk factors such as labour costs and labour unrest, volatile commodity prices, rising energy costs, interruptions to power supply, regulatory uncertainties, and BEE regulations all play a role in reducing investor confidence and deterring FDI.

Labour unrest is having a monumental impact on the gold and platinum industries – with labour costs rising, commodity prices dropping, strikes and wage demands, companies in the sector have taken a pounding.

Patlansky said mining is all about long-term investment, and unfortunately neither government nor unions are seeing the long-term picture.

“Government and unions in South Africa have completely different agendas. On one hand we have government, particularly now being pre-election period, asking how it can create jobs quickly while still squeezing as much from the mining industry as it possibly can.

On the other hand, the unions are seeking higher salaries without thinking of the long-term impact that will have on the industry and the labour force.

How do foreign investors view us if our unions and government aren’t even on the same page?” said Patlansky.

SA's rising competition

Other southern African countries competing with South Africa for international investor attention include Botswana, Angola, Zambia, Mozambique and Ghana. And further into sub-Saharan Africa lies Nigeria, forecast to be the next frontier of the continent.

David Hale, founding chairman of David Hale Economics, predicted that within five years, the world would be questioning whether the major African country in the G20 should be Nigeria rather than South Africa.

“In the next month, we will pass a great landmark in the economic history of Africa. Nigeria is revising its GDP accounts to reflect the growth of its telecommunications and service sectors.

The revision will see the country’s GDP exceeding $400-billion, pushing South Africa with its GDP of $370-billion, from first to second economic player for the first time in African history.

“The imminent privatisation of Nigeria’s electricity system will result in a massive investment boom, which could boost the country’s growth rate from 6% to as high as 10%.

By 2020, Nigeria’s GDP will be 50% larger than that of South Africa, which will have profound implications.”

Hale added that, in his opinion, Nigeria now represents the future, and South Africa the past.

Whether Nigeria will take over from South Africa as the most important economy on the continent remains to be seen, said Guy Lundy, futurist and principal consultant at Odgers Berndtson.

But to achieve that, Nigeria will have to manage its enormous population as its rapidly urbanises, which will mean more people to feed, house, educate and employ – all a considerable challenge.

Keeping SA favourable

Industry heads agree that engagement, collaboration and partnership are crucial elements to re-securing South Africa as the darling of investors.

Ongoing engagement between government and unions to reach consensus, consultation between government and stakeholders for the promotion of good policy and regulatory certainty in the sector, ongoing skills development, and social upliftment are some of the areas of focus in the spotlight for the South African mining sector.

Lindop said the degree and quality of dialogue between mining stakeholders in South Africa has improved since Marikana.

“It’s sad that it took such a tragic circumstance for labour, government and business to come together and to recognise that there needs to be dialogue.

"It seems we just haven’t reached that stage of maturity where a constructive community with greater degrees of trust sits on all sides of the table.

Conversations should be able to be had – readily and regularly, not just from the podium at global conferences, coming up with real solutions to the real problems facing the industry,” concluded Lindop.

This article forms part of a supplement. Content was sourced independently by the Mail & Guardian supplements team. 

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