This content was supplied to CNBC Africa by Absa Corporate and Investment Banking
Johannesburg, 5 February 2018 – Concern about the mining regulatory environment, a volatile currency and labour productivity issues have created an uncertain market for foreign direct investment and mergers and acquisitions in the South African mining sector, says Craig Brewer, Co-Head of Banking Africa at Absa Corporate and Investment Banking (CIB).
He says this has been worsened by political uncertainty, the two-year impasse on the Mining Charter which is currently under legal review, corruption headlines as well as credit downgrades. As a result, a perception has been created that there are increased risks of doing business in South Africa.
But this may be changing. The embattled mining industry is seen as the winner from the new leadership of the ANC. Initial views is that the new leadership will change the current confrontational relationship between Government and industry.
Brewer says this positive change is happening at a time when global miners are finding more attractive investment destinations in other countries in Africa, other than South Africa. There is clear investment globally in mining and South Africa faces tough competition for investment and needs to radically change the way it approaches investors and this new dawn may well be the catalyst.
In recent years, Brewer says South Africa has failed to attract significant direct foreign investment in mining due to slow economic growth, policy uncertainty and higher labour costs. In 2017, the country recorded FDI inflows of over a $1 billion less than the average annual inflows ten years ago.
“There is a clear need for a change in how South Africa markets itself as an investment destination facilitating inward investment. All players must engage to unlock the industry. Partnerships between mining companies, government and labour are key,” he says
Brewer says there also needs to be a refreshed approach to empowerment, a focus on retaining employment, and ensuring a fair distribution of the country’s resource wealth to all the people of South Africa, rectifying the legacy of apartheid.
“South Africa needs this investment having missed recent commodity upswings because of low investment. While mining is 8% of GDP on a direct basis, it can account for almost double that on an indirect basis and importantly, represents over 40% of exports which bring in needed foreign currency,” Brewer says.
“Mining requires significant investment with long lead times and with environmental issues will become more costly. At the same time, the global move in mining is to automation which in itself requires significant up from investment, prior to the actual returns of mechanization coming through,” he says.
With the correct strategy and a transparent mining regulatory platform, there will then be positive balance between investment into South Africa and those South African mining companies venturing offshore
“We have seen South African mining groups going offshore very successfully – the recent poster child is Sibanye-Stillwater which has been bold in its offshore ambitions. Investors will look forward to the post-merger management in bedding down these Platinum Group Minerals (PGM) acquisitions including potentially Lonmin with the expected release of synergies and a more optimally structured western limb of the platinum belt,” Brewer says.
“Others mining companies are looking at investment closer to home and just across the border. With the positive political changes in Zimbabwe, its significant resources are again being looked at. Tharisa, the platinum and chrome mining company, has publicly stated its intentions to look at Zimbabwe and has been meeting with the Zimbabwean Government,” he says. Pan Africa Resources is also looking at potentially new geographies including Zimbabwe and the DRC so the appetite for ongoing external M&A continues.
Brewer says he sees increased interest in lithium and cobalt. Brewer says technological innovations, such as the electric vehicle, will materially increase the demand for battery metals. This could benefit countries such as Zimbabwe which has one of the larger deposits of lithium a key battery component, as well as the Democratic Republic of Congo, which has huge untapped cobalt reserves. This interest in lithium is such that there are now traded ETF’s focused just on lithium exposure.
Increased demand for energy will also benefit uranium producing countries, while interest in gold, will continue to be influenced by the movement of the US dollar, says Brewer. “The US dollar is a major factor with its inverse value relationship with gold, but a potential rate cycle increases in the US may negate much of the recent positive gold momentum” he says.
“Down side risk in commodities is always present” Brewer cautions, in that possible slower than anticipated demand from China or an easing of production restrictions on China’s heavy industries will lower commodity demand from China will negatively affect iron ore prices and potentially lead, nickel and zinc, which in turn directly affects the Africa mining economy,” he says.
Commodities and mining will never remain constant and there will always be challenges and substantial opportunities. In South Africa, this has never been truer. “With the current change in sentiment, South Africa could once again be one of the leading commodity based countries in Africa,” Brewer says.