Africa mining

Mining may get a bad press in Africa, but there’s no denying the potential – and it’s importance. Nearly one quarter of the continent’s GDP is now based on extractive resources, the highest ratio among all regions, and between 2000 and 2008 alone, the value created from natural resources in Africa rose from $39.2bn to $240bn.

Yet this is all achieved despite a huge deficit in infrastructure, especially in rail. So a new Grindrod rail network deal in Zambia should be good news – if it can be delivered. 

Shares in Paladin rose after the miner announced the sale of a 25 per cent stake in its Namibia uranium mine to the China National Nuclear Corporation. The deal was partly about cutting debt at the Australian miner. But it also signals that low uranium prices, especially in the post-Fukushima era, are taking a toll on African exploration.

Between 2005 and 2007, the uranium price increased steeply from $20 per pound ($44 per kg) to almost $140 per pound ($311 per kg) during what came to be described as a ‘nuclear renaissance’. The drivers included growing momentum towards low carbon energy, carbon cap schemes, high oil prices and potentially epic demand for new nuclear capacity among large emerging economies. In several African countries, uranium surveys were eagerly commissioned and new deposits sought. 

No-one likes a large tax bill, especially in arrears.

London-listed Randgold and Mali’s government are heading for international arbitration at the International Center for Settlement of Investment Disputes over a disagreement over around $60m in tax connected to Randgold’s Loulo gold mine. 

Mining country?

It’s well known that Nigeria’s oil industry is going through a rough patch – and one that’s likely to get rougher as a US shale boom revolutionises the global energy market. The government has noticed too and is setting its sights on other sectors as future sources of economic growth. Mining is high on the list. 

When it comes to natural resources in Africa, coverage tends to focus on the problematic (see Rio in Mozambique), the awkward relationships (see China), the political risk (see Congo) and the collapse in labour relations (see South Africa).

But despite the setbacks, Africa still has vast untapped reserves and lots of potential. So what should investors look out for in the next few years? Research from Ecobank has identified six themes. 

By Cate Reid

China may dominate the rare earths market, but there are many unexplored sources – and it is Africa that geologists believe holds the most potential. Junior mining companies are scrambling to get a foothold into this promising sector – and many countries could be set to reap the benefits.

But with high extraction costs and an unpredictable market, it won’t be easy. 

Gold mining companies are fast-reducing their drilling activities in Africa, pushing down the exploration levels on the resource-rich continent to a 17 month low.

It’s bad news for many Africa countries – gold mining makes a big contribution to GDP and foreign currency earnings. 

Zambia’s plans to make companies repatriate foreign currency export earnings back to Lusaka are part of an effort to crack down on tax avoidance, particularly in the mining sector.

But are they going to be enough? Perhaps not, according to the country’s vice president Guy Scott. 

Botswana may be the world’s top diamond producer, but it is keen to diversify its exports away from precious stones. The country has been steadily mapping out a plan to develop what it says are its huge coal resources.

The benefit would be clear: in addition to boosting domestic energy supplies, a coal industry would be able to export to countries such as China and India in the future. The question is, just what is the size of its reserves? 

African Barrick Gold continues to fail to live up to expectations. The Tanzania-focused miner, which was spun off from Barrick Gold in 2010, disappointed investors again on Wednesday with guidance in its full-year results suggesting its gold production would be 540-600 thousand ounces in 2013.

This compares to 2012′s 626koz – 9 per cent less than 2011 – and suggests the company is once again heading for a decline in production. 

South Africa once attracted economic migrants from across the continent. The tables are now turning. Growth in South Africa is 2.5 per cent, half that in sub-Saharan Africa and South African companies are now crossing borders to cash in on this growth, according to a Special Report from the FT

Gold diggers beware! The World Bank is setting up a trust fund to give African nations some muscle when dealing with foreign investors in the extractive industries. The $50m fund is driven by concerns that African governments are allowing the natural wealth of their country to be chipped and siphoned away, with little benefit to local people.

Recent strikes in South Africa have left foreign investors wary of putting money into African mining. Further challenges won’t be welcome. 

It was bad news for Zambia in March when Fitch, the ratings agency, downgraded the country’s economic forecast, citing concerns over the new government’s direction on mining reform. But things seem to be looking up for Africa’s biggest copper producer, with First Quantum Minerals announcing a hefty $3.7bn investment in the country. 

For a few hours last week, the Zambian kwacha was the world’s best performing currency, reaching its highest value against the dollar in over a year.

But the move is not necessarily a vote of confidence in Zambia’s economy. It is more the result of a law introduced in May restricting the use of foreign currency to settle domestic payments in Africa’s largest copper producing country. This has pushed up demand for the kwacha as businesses and individuals rush to exchange their dollars.