Africa – open for business?

By Siobhan Lismore-Scott, Laura Syrett, Nilima Choudhury
Published: Friday, 24 January 2014

Besides a long-envied geological resource abundance, Africa boasts many attractions for mining companies. Yet development has been hampered by political turmoil. Now, as much of the continent begins a concerted drive to increase investment in its mining sector, IM Staff take a look of some of the industrial mineral projects on the African horizon.

Africa’s mineral wealth potential has, for decades, been the green-eyed focus of many an international mining company.

From a geographical perspective, Africa spans both hemispheres and has ports facing major Asian economies in the east, the North and South American continents to the west and Europe to the North.

Demographically, Africa has a young population, offering a plentiful source of labour which can be employed at a fraction of the cost of hiring western staff.

However, these advantages are frequently eclipsed by Africa’s patchy reputation as a politically unstable, financially corrupt and natural disaster-prone region, where governments rely on international aid to prop up pitiful GDP figures.

A lack of home grown skills, rudimentary infrastructure and a perceived hostility to international operators who fail to offer local people a fair cut of the profits garnered from Africa’s mineral assets, has prevented the continent as a whole from achieving its full potential as a mining destination.

But the continent’s mining landscape is changing.

South Africa, which has long been a trailblazer for African mining, has seen its dominance of the sector begin to wane under cost pressures, tougher regulation (see p23) and falling commodity prices (see p51).

In North Africa, political upheavals in Egypt, Morocco and Tunisia, important sources of phosphate and bentonite, have shaken international confidence in these countries and cast doubts over their sustainability as raw materials suppliers.

Into the void have stepped new players such as Sierra Leone, Malawi, Mozambique and Madagascar, where the exploration of previously undeveloped mineral resources are offering these countries a chance to build up an export profile in the resource industry.

National governments looking to ease the passage of this ambition have provided mining businesses attractive tax rates, investment incentives and state co-operation to develop assets.

Although many countries are now coming under pressure to raise mineral royalty rates and increase the transparency of mining deals, the message both miners and host countries are keen to stress is clear: Africa is open for business.

Madagascan graphite

Dwindling productivity in Africa’s precious mineral mines, coupled with price volatility and associated criminal activity, have meant that countries that previously relied on these resources are looking for more sustainable sources of mining revenue.

This is being sought principally from industrial minerals and metals, though the continent’s particular prowess lies in iron ore - as a whole, Africa has a growing market share of 6-7% of global iron ore production.

More latterly, minerals such as rare earths in Kenya and Malawi, fluorspar and chromite in South Africa, phosphate and vermiculite in Uganda, and graphite in Mozambique, Tanzania and Madagascar, have come to the fore as potential sources of export revenue.

Although the extraction of African minerals has been underway for centuries, the arrival of industrial scale mining will be a first for much of the continent.

Madagascar, a 587km2 African island country in the Indian Ocean with a long history of mineral extraction, has seen the transition from artisanal mining to industrial operations only in the last decade.

“Up until 10 years ago, Madagascar had not been exposed to ‘modern’ exploration techniques,” Craig Scherba, chief operating officer for TSX-V listed graphite junior, Energizer Resources Inc., which is developing the 124m tonne (indicated and inferred) Molo graphite deposit in eastern Madagascar, told IM.

“As such, the country represents one of the last places in the world to be exposed to modern geophysical and geochemical techniques. It is therefore an untouched jewel box of mineral wealth, and it is in the best interests of the country to try and unlock this potential through the promotion of mining project development,” he said.

According to the World Bank, the unlocking of Madagascar’s jewel box, which includes extensive reserves of coal, iron ore, tar sands, and rare earths as well as graphite, is already well underway.

The arrival in Madagascar of major mining companies such as QMM and Sheritt International has facilitated the rapid development in the country’s resource sector and allowed smaller companies, like Energizer, to take advantage of new road and port infrastructure.

In looking to export graphite from the country, Energizer will be joining an established network of producers including Establissements Gallois and Stratmin Global Resources (see table).

“Madagascar is strategically positioned in the Indian Ocean, close to Asian, Indian and African economies, so it is geographically in an enviable position to translate its mineral wealth into monetary wealth for the country,” Scherba explained.

The government is also doing its bit to encourage mining development, having introduced a number of investment incentives, such as export processing zones (EPZs), for companies exclusively exporting goods from Madagascar, offering a reduced profit tax rate of 10% as well as exemptions from customs and export duties.

Other mining-specific initiatives include the Major Investments in the Mining Sector (LGIM) regime, where qualifying companies benefit from reduced taxes on internal rates of return below 20%, as well as VAT exemptions and reduced rates for taxes on buildings and interest.

Depending partly on mineral prices and export volumes, the World Bank estimates that mining’s contribution to Madagascar’s national revenues could increase from their present level of 1% to 18% by 2018 and may catapult the country into the ranks of “resource rich nations” in the medium term.

Rutile from Sierra Leone

The end, or at least suspension, of national conflicts in hitherto war-torn nations such as the West African state of Sierra Leone, has opened up fresh opportunities for foreign mining companies to move in on mineral deposits that were previously too dangerous to access.

A former British colony, Sierra Leone became independent in 1960, but its first decades of self rule were marred by a string of military coups and civil conflicts. A brutal civil war raged in the country from the late 1990s until 2002, with UN peacekeepers finally leaving the country in 2005.

Since then, the country famous for its diamonds, has sought to profit more sustainably from its other mineral reserves, including iron ore, coal, mineral sands, bauxite, kaolin, limestone, bentonite and garnet.

Sierra Rutile Ltd, a mineral sands miner with its headquarters in the country’s capital, Freetown, spotted the potential to mine rutile, a titanium dioxide (TiO2) feedstock, in Sierra Leone, from a mine first operated in the 1970s.

“Sierra Leone is a stable and investor friendly country within a sector which is exposed to many higher risk jurisdictions,” Derek Folmer, Sierra Rutile’s chief marketing officer told delegates at the 2013 TZMI Congress in Hong Kong last November.

Located in the south west of the country, Sierra Rutile’s deposit has a JORC resource of over 600m tonnes at 1.29% rutile (measured, indicated and inferred), making it one of the largest natural rutile deposits in the world.

In order to operate its dredging and processing operations successfully, the company built its own infrastructure network to support the mine and has also invested in educational facilities to generate skilled labour in the future.

“People were hired from outside for their skills and ability to train other people, so we expect head count from outside to decline as the local population is trained up,” Folmer said.

Another issue for the company is an unreliable power supply, a continent-wide problem that has hampered the productivity of many mining companies.

In the fourth quarter of 2013, Sierra Rutile entered into a memorandum of understanding with Smol Pawa Sierra Leone Ltd. to become a cornerstone purchaser for its Moyamba hydro-electricity project.

Moyamba is an 11-14MW run-of-river hydro-electric project located at the Singimi Falls on the Gbangba River, within 20km of Sierra Rutile’sÊexisting operations. The project will be developed as a public-private partnership with the government of Sierra Leone and will serve the communities of Moyamba and Njala University as well as Sierra Rutile’s mine site.

Rare earths in Malawi

Despite having escaped the ravages of all-out civil war, Malawi, a landlocked country in East Africa, has experienced little in the way of formal industry in the past and relies heavily on aid to alleviate the effects of food scarcity and poverty.

Now, the national government is keen to expedite an economic shift from aid to trade with mining high on its development agenda.

In January 2013, the Malawi government launched the Mining Governance and Growth Support Project (MGGSP) in order to review and improve the efficiency and transparency of the existing mining act.

The project also initiated an airborne geophysics survey to geologically remap the whole country and identify possible targets for mining.

This accommodating business climate, coupled with the country’s proven rich mineral deposits, has attracted the notice of TSX-V listed rare earths explorer, Mkango Resources Ltd.

Mkango is looking to develop the Songwe Hill rare earths project, located in the Chilwa Alkaline Province, a world class geological region notable for the abundance of large carbonatite intrusions (a host rock for rare earths).

“There is a strong initiative led by the Malawi government, World Bank, EU and the French government, to ensure that Malawi is viewed as an up and coming and viable mining jurisdiction with a vast amount of exploration and development opportunities,” William Dawes, CEO of Mkango, told IM.

“The strap line ‘open for business’ would absolutely apply to Malawi. It has been under the radar, but it has plenty of potential to quickly progress as a premier African mining destination,” he said.

“The MGGSP, supported by the World Bank, EU, and France will help facilitate development of the mining sector and hopefully reduce the risk profile for investors. We are confident that continued stakeholder support will enable Malawi to develop into one of the world’s leading rare earth producers,” Dawes said.

As for local involvement in the project, one of the key measures generally required to keep governments and communities on the side of mining companies, Dawes said that Mkango is making concrete efforts to give local people a role in developing Songwe Hill.

“We train and employ as many Malawian nationals as possible. Since 2010, we have employed and trained Malawian graduate geologists from Chancellor College in Zomba; some of whom are now working as full time senior geologists. As we move the project forward we will look to employee further qualified Malawians, in addition to providing skills training and jobs for local villagers,” he said.

South African fluorspar

In contrast to the rise of nascent mineral exploration in many less developed African nations, South Africa’s once mighty mining industry is struggling against subdued commodity prices, increased operating costs, constrained infrastructure and poor levels of productivity.

On top of this has come the burden of regulatory uncertainty with the proposed introduction of new mining laws, which is making it difficult to attract foreign investment for both expansion and greenfield projects.

Modifications to the 2002 Mineral and Petroleum Resources Development Act, proposed by Jacob Zuma’s incumbent ANC government, which include a mandate for greater national ownership of mining projects, raising mineral royalties and setting minimum prices for minerals sold to local industries, has angered the domestic mining industry and spooked international operators.

In September 2013, officials including the mining and energy minister, Susan Shabangu, said that it was in negotiations with mining companies, unions and other stakeholders regarding the impact of the bill, but the final form that the legislation will take is still unclear.

At the heart of the industry’s instability lies the difficult labour-management relationship.

In addition to high profile eruptions of violence at South Africa’s platinum mines, the industrial minerals sector also saw unrest last year at both Lanxess’ Rustenurg chromite mine and mineral sands miner Richards Bay Minerals’ titanium slag facility in KwaZulu Natal, over pay and employment policies.

Under pressure to appease mining workers’ unions, the government has pledged to make a concerted effort to engage with labour groups, including the Association of Mineworkers and Construction Union (AMCU), over the coming year.

Despite the country’s troubles, mining companies are continuing to pursue industrial minerals projects in South Africa, including rare earths, chromite and fluorspar.

Locally-based explorer, SepFluor Ltd, is one of the companies seeking to tap into the potential in the South African fluorspar sector.

SepFluor is at various stages of development with its Nokeng, Wallmannsthal, Wiltin, Welgelegen and Kruidfontein projects, but it has felt the pinch of declining prices and weakened investor interest since embarking on these developments.

“The global economic recession and the fall in fluorspar prices from the end of 2012 have meant that SepFluor’s capital raising programme has had to be pushed out. This, in turn, has meant the same for Nokeng’s development timetable,” James Duncan of SepFluor told IM.

However, the recent stabilisation of fluorspar prices at historically elevated levels is giving fresh traction to SepFluor’s financing drive, which Duncan says bodes well for the development timetable of the company’s planned mines.

For the Nokeng site, SepFluor has tabled a construction period of 21 months and is anticipating production of 185,000 tpa acid grade fluorspar (acidspar) and 30,000 tpa metallurgical grade fluorspar (metspar).

The company is also planning to construct a processing facility, the Ekandustria chemical plant, in anticipation of the South African government’s minerals beneficiation agenda and the South African Fluorochemical Expansion Initiative (FEI).

SepFluor said the building of Ekandustria is dependent on the development of Nokeng, as this mine will be the plant’s source of fluorspar.

Challenges remain

While there is no shortage of opportunities for resource development in Africa, operators in the region still face challenges.

Politically, even the most stable African countries, including South Africa and Madagascar where general election campaigns are presently in full swing, face uncertainty when it comes to law making which can affect business taxes and royalty rates.

Pressure for greater transparency in mining deals is promising a more level playing field, but could equally result in less generous terms for foreign resource companies and a less attractive environment for investors.

Another barrier in some areas is community opposition to mining development on environmental grounds.

A recent notable example came in August last year, when TSX-V listed Pacific Wildcat Resources Corp. had its exploration licence for the Mrima Hill rare earths project in Kenya revoked by the country’s government due to the concerns of local people regarding displacement, radiation and damage to woodland.

Cortec Mining Kenya, a subsidiary of Pacific Wildcat, is currently waiting for a decision from Kenya’s High Court regarding its challenge to the licence revocation.

In its appeal to the authorities, Pacific Wildcat argued that it was working to promote the protection of biodiversity as part of its project development, as well as providing local employment opportunities, schools and fresh water wells.

Shortly before going to press, the company’s CEO, Darren Townsend, announced that he would be stepping down as head of Pacific Wildcat, although there was no indication that this decision was prompted by the firm’s Kenyan difficulties.

Pacific Wildcat’s legal battle, while not unique in Africa or indeed anywhere in the world where mining projects are proposed, serves to highlight that satisfying competing stakeholder requirements is a tricky business.

According to John Dean, business improvement coordinator for UK listed First Quantum Minerals Ltd, which is presently developing nickel and copper mines in Zambia, running a successful project in Africa requires significant groundwork.

“[There is] a lot of early stage development work, particularly on the infrastructure side. [It’s not a case of] showing up first thing with a bulldozer!” Dean told IM.

A World Bank conference hosted in November last year highlighted the need to make sure mining contracts “are sensitive to local people”.

According to experts in risk mitigation for the mining industry, companies with effective and well-communicated corporate social responsibility (CSR) strategies deliver both higher income and equity performance when compared to those who fail to report on their social initiatives.

A report compiled by McCormick covering the financial performance of the 26 development companies covered in the PricewaterhouseCoopers (PwC) 100 Junior Mine 2012 index showed that between 2011 and 2012, a period of investment crisis in the resource industry, the six companies reporting on their CSR programmes lost just 13% of their market cap compared to 69% for the non-CSR reporting junior miners surveyed by PwC during this period.

Dean stressed that, despite perceptions surrounding Western mining companies operating in Africa, unethical deeds at the expense of local people are not the norm in business.

“People support the projects and livelihoods will be improved,” he said, noting portions of foreign-run project investment are almost always dedicated to resettlement and community engagement programmes for people affected by its mining operations.