Indaba14: Africa’s industrial minerals reliant on foreign finance and markets

By Laura Syrett
Published: Wednesday, 05 February 2014

Projects have plenty of profit potential but lack of domestic consumers


The 20th Mining Indaba Conference is taking place in Cape Town, South Africa, this week.
Image: Abspires40/Flickr  

Mining for industrial minerals in Africa remains a profitable business proposition, but companies will have to continue to look elsewhere for finance and markets, industry participants at the 20th Mining Indaba Conference in Cape Town told IM this week.

The African continent plays host to several industrial mineral projects, including potash in the Republic of Congo (ROC), phosphates and vermiculite in Uganda, rare earths and mineral sands in South Africa and rutile in Sierra Leone, but presently lacks the capacity to process or consume many of the minerals it can produce.

"There is still good money to be made in industrial minerals, particularly in Africa," Ilja Graulich, investor relations manager for ASX-listed potash junior, Elemental Minerals Ltd, told IM.

"Potash is one of the easiest minerals to get returns on because it has clear uses and relatively transparent pricing," Graulich explained.

Elemental is developing the Sintoukola potash project in ROC, West Africa, which has combined proven and probable ore reserves of around 152m tonnes, and aims to be in full production by 2018.

Yet even with production at least four years away and international agreement on the evident need for investment in agriculture in Africa, Elemental does not envisage being able to sell its potash production within the continent.

"We would love to sell our production on our doorstep in Africa, but the market isn’t there yet," Graulich, who is a native South African, said, adding that Elemental is looking to ship its potash to China and Brazil as established consumers of fertiliser minerals with a keen eye for new supply sources.

At the moment, ROC’s economy is heavily reliant on its established petroleum industry. This has provided companies like Elemental with the necessary fundamentals, in terms of infrastructure and business ethic, to explore some of the country’s largely untapped mineral reserves, but has arguably held back the development of its mineral or agriculture industries.

The money to develop Sintoukola has also been sourced from outside Africa. As well as raising cash via a listing and share placements on the ASX, the company has received cash loans through its Hong Kong-listed partner, Dingyi Group.

"Investors on the ASX have an awareness and appetite for African mining projects, plus there is confidence that Australian-run companies can succeed in Africa, because many of the physical operating conditions are the same as they are back in Australia," Graulich said.

Turning the tide

Despite the premise of the Mining Indaba meeting, now in its 20th year, which is to connect foreign investors with African mining projects, local businesses and politicians alike admit that old habits, with regard to exploitation of Africa’s resources, die hard.

During a ministerial briefing, Peter Lokeris, Minister of State for Mineral Development in Uganda, told delegates that Uganda boasts vast reserves of minerals, including phosphate, vermiculite and silica sands.

But while there is plenty of interest in developing these deposits, and the government is extremely vocal about its "open door" policy with respect to mining investment, the country is struggling to ensure that it receives downstream value from mineral projects.

"Around 75% of our population is below the poverty line," Lokeris said, "so if you, as miners, decide to do some of your beneficiation in Uganda, we will be very pleased with you, because our people need jobs."

South Africa is also failing to get the best returns from its mining industry, particularly from a financial markets perspective.

The country is one of the world’s most important mining destinations, and is the sector leader within the continent as a whole with established mining firms, technology companies, professional services and a financial arena for fundraising.

But it has underperformed peers including Australia owing to a combination of factors including difficult labour-management relations, rising costs, infrastructure bottlenecks and policy uncertainty.

The Johannesburg Stock Exchange presently has a total of 67 listed resource companies, around 35 of which are dual listed. This compares to more than 1,000 resource firms listed on the ASX and over 1,600 on the TSX and TSX-Venture Exchange.

According to Patrycja Kula, business development manager for the JSE, the Johannesburg market is actively looking to grow, but is pursuing a different growth model to its competitors.

"We are not looking to challenge other commodity based exchanges," she told IM, "instead we are looking to promote the many advantages of multiple listings."

"If a mining company is listed elsewhere, and this is that company’s primary exchange, then the JSE is a very flexible option for a dual listing since we do not stipulate any additional requirements other than that the company must have a South Africa-based broker," she explained.

In a notable coup for the exchange, last year saw the newly formed mining-trading giant, GlencoreXstrata, list on the JSE, although even this, Kula admitted, did not act as a catalyst for other new listings.

"It is a pity that we do not have more African companies listed," she said, but pointed out that the IPO market has been difficult for mining companies globally, so muted activity in the JSE’s relatively young commodities market is unsurprising.

"We remain optimistic that we can increase the number of mining companies listed on the JSE," Kula added, stressing that "our growth will be African growth".

Fair deals

In common with, but to a lesser extent than Africa as a whole, South Africa remains something of a discount store for internationally-raised money to take away goods at bargain prices, meaning that the country can come away feeling short changed from mining deals.

As Steven Beresford, chief geologist for Canada-headquartered First Quantum Minerals pointed out, "international mining companies come to Africa because of the perception that it will be easier to develop projects here than it is in first world countries."

However, the government of South Africa, like many others across the continent, is attempting to reform its mining industry legislation to implement what it deems to be fairer and more transparent requirements that ensure African nations get an equitable cut of the mining industry’s profits.

"This year is the tenth year of continuous implementation of major regulatory reforms introduced through the Mineral and Petroleum Resources Development Act (MPRDA). The introduction of the MPRDA as mining law in 2004 took all of us into unchartered territories," Susan Shabangu, Minister for Mineral Resources in South Africa told delegates during her opening address to the 20th Mining Indaba.

Shabangu used her opening speech to assure investors about the prospects for mining in South Africa and to outline the strides made by South Africa over two decades of democracy to create “a far larger, more open, diversified and competitive mining industry”.

Her remarks received widespread criticism from analysts, however, who noted that she missed an opportunity to decisively address underlying labour relations concerns.

“The speech reflects a trend that is prevalent in the rest of the continent as various countries try to bring stability to their regulatory framework and give certainty to investors,” Tony Zoghby, partner and Southern Africa mining leader at professional services firm Deloitte, said following the speech.

He noted that such reassurance is unlikely to be forthcoming when mining in the country remains overshadowed by industrial action, although he considered that changing patterns of ownership being brought about by legislative review should not be a cause for uncertainty, if properly managed.

Others, including Lauren Patlansky, managing director of Grant Thornton’s Asia Business Services, pointed out that the Minister’s positive address failed to mention how labour costs continue to rise while commodity prices are simultaneously declining.

"This paints a clear picture that mines in South Africa are not even breaking even,” she said.

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