By Shirley Webber, Coverage Head Natural Resources at Absa Corporate and Investment Banking (CIB).
Global investor interest in Africa’s mining sector remains strong despite various challenges facing the sector. The African continent has vast resources with sustainable future growth in the exploration and development of commodities, and therefore the growing demand for these strategic resources by foreign investors and commodity users worldwide in the long term.
However, to harness this interest, stable political environments, compliance with legislation, stable labour relations and regulatory certainty will be key to ensure the continent remains an attractive destination for mining investment.
The regulatory environment must be certain and consistent from one year to the next because mining is a long-term business, and from a bank’s view, it is a three to five-year investment. Therefore, both banks and shareholders need consistency, be it regulations or aspects like royalty taxes for example.
The regulatory environment across some African countries is improving for the mining and metals sector as governments realise the importance of providing certainty to attract new investment. As a result, some investors have been considering green-fields projects, especially in West and East Africa. There’s a renewed focus on battery minerals as well and this is evident in the drilling activity on the African continent over the last two years. Increased capital expenditure is envisaged in gold, copper, lithium, mineral sands, cobalt and graphite.
There is a more collaborative approach between governments and investors in order to attract sustainable investment in the regions. The key to unlocking investments into Africa is for industry stakeholders to continue to collaborate responsibly to promote investment in mining and ultimately economic growth in the countries they operate.
Equally important will be the availability of reliable cost-effective power supply. For example, there have been power cuts in South Africa, and this has affected mining companies. Mining companies prefer certainty about the available power so that they can manage their cost structures and plan production accordingly. In the rest of Africa similar energy crisis situations are evident, therefor the need for more renewable energy sources, thereby curbing power interruptions and costs in the long-run.
Because mining is a capital-intensive business, factors such as rising production costs, infrastructure challenges, electricity supply as mentioned and rising labour costs continue to be of major concern to mining companies. And these are issues which need to be dealt with responsibly.
As costs rise and margins come under pressure, diversification will be important for the mining and metals industry to ensure that companies remain competitive with volatile economic cycles and commodity prices.
Diversification is a key differentiator as it is not only about various commodities but also geographical diversification too. Some of the mining companies are expanding into both Africa and globally. On the other hand, consolidation remains a key theme that includes large players forming one entity for efficiencies or even selling of parts of the value chain.
The long term sustainability is dependent on sourcing, developing and mining high grade reserves. Change in the reserves’ estimates or development prospects pose a risk to mining companies. It will however be important to achieve efficiencies particularly as the cost of extraction continues to rise due to the geology of some minerals which is forcing mining companies to access more difficult reserves underground. It is important to focus on enhancing operational efficiency to perhaps look at inclusion of automation and new technologies where applicable.
Equally of concern to mining companies is the volatility in commodity and foreign currency markets which will need appropriate risk management strategies in order to ensure financial institutional funding of investments in mining. Innovative hedging solutions to clients who have exposures to interest rate fluctuation, foreign exchange fluctuation and commodity variability are necessities for operational project success.
Banks such as Absa, which is one of the 130 banks from 49 countries who are signatories to the United Nations Principles for Responsible Banking, now have an increasing and important role to play by funding not only commercially viable projects but also ensuring that they complied with sustainability principles which align business strategy to society’s goals.
The key role of a bank like Absa now includes making sure that where we provide funding, the economy and communities benefit. Going forward when considering funding of certain commercially viable projects which include natural resources and extraction, lenders will place additional focus on the positive impact of funding and whether it aligns with a country’s developmental goals, the environment and its people.