Investors will always gravitate towards good orebodies and, owing to the quality of prospectivity in certain African regions, the continent still holds the interest of investors, says Nedbank Corporate and Investment Banking (CIB) mining analyst Arnold van Graan.
“However, with the increase in resource nationalism, increased tax and royalty burdens, as well as other challenges, investors may avoid certain high-risk jurisdictions.”
Subsequently, they favour higher-grade orebodies with low technical risk, low start-up capital expenditure and short payback periods.
He says investors are looking to fund the construction of mines and recoup their money, as well as earn a return, before a regime change, which could impact on their potential earnings.
“If the mine is still going after that, it is an added bonus.”
Investor sentiment is being influenced by resource prices, global risk, trade wars, Brexit and geopolitical tensions, among other factors, says Van Graan, who will speak for the first time at the Investing in African Mining Indaba, which will be held in Cape Town from February 3 to 6.
“The bottom line, however, is that investor sentiment seems to change quite frequently these days, with the market going from ‘risk on’ to ‘risk off’ in a matter of days, largely owing to global geopolitical factors.”
This is not ideal for the mining sector, notes Van Graan, as the industry has long decision-making timelines and, therefore, requires long-term commitment from investors to fund new projects.
To improve investor confidence in the African mining sector, governments need to “stop seeing mining companies as cash cows that fund bailouts every time a financial crisis hits”, he adds.
Instead, governments need to provide a stable, business-friendly operating environment, and secure and clear mining legislation to attract investments from responsible mining companies, emphasises Van Graan.
Battery- and electric vehicle- (EV-) related commodities are on investors’ radar, as many believe that EVs and battery technology could play a major part in the global drive to reduce carbon dioxide emissions.
Some of the jurisdictions in which many of these commodities are found, however, are regarded as less investor friendly, including Burundi, the Democratic Republic of Congo, Zambia and Zimbabwe, notes Van Graan.
“As a result of the challenges in the majority of these jurisdictions, many investors perceive them to be high risk, making it difficult for some projects to attract capital. These jurisdictions also lack the infrastructure to support the mining of these resources.”
Consequently, mining companies need to construct the power stations and the road and rail infrastructure for the transport of resources in and out of these jurisdictions.
“This adds significant complexity and execution risk and, ultimately, inflates the capital costs of these projects. Investors want to be compensated for this additional risk, which essentially adds to funding costs, eroding the economics of projects even further,” states Van Graan.
However, the quality of the orebody is the primary deciding factor.
If the orebody is good enough to absorb all these costs and still deliver a decent return, it should attract the investment needed to transform a resource into a productive mine, explains Van Graan, adding that, when Western mining companies and investors are unwilling to take on this risk, Eastern investors have been more than willing to fund large mining projects in Africa.
The platinum-group metals (PGMs) sector is emerging from a decade of “trials and tribulations”, owing to advancements in fuel-cell technologies.
“PGM market fundamentals have started turning positive and remain sound, with producers having positioned themselves to benefit,” says Van Graan, who will focus his Mining Indaba presentation on PGMs.
Nedbank CIB believes that platinum producer Anglo American Platinum’s Mogalakwena expansion, the Platinum Group Metal-operated Waterberg project and Canadian mining company Ivanhoe Mines’ 64%-owned Platreef project, all in Limpopo, South Africa, are key.
They have the potential to replace lost production from many conventional underground shafts that are expected to reach the end of their economic lives over the next decade, says Van Graan.
“Although we do not expect these projects to come online quickly, they could become a major source of safe, profitable, mechanisable PGM production over the next decade.”
The developers of these projects are challenged by high start-up capital, owing to the availability and cost of key utilities; a shortage of mechanised mining skills; a lack of funding; ongoing regulatory uncertainty and the long-term fundamentals of the PGMs market, owing to the threat from increased EV market penetration.
In terms of funding, he emphasises the need to secure long-term investment from a dwindling pool of investors who are willing to invest in high-capital, long-lead mining projects.
To address these challenges, Van Graan says, government needs to provide regulatory certainty, as well as assurance around the availability and cost of electricity and water.
“Government, therefore, needs to urgently speed up resolutions to the crisis at State-owned power utility Eskom and ensure that water supply does not become the county’s next catastrophe.”
Van Graan believes that South Africa can take advantage of the impending demand for platinum in light of fuel-cell technology advancements, but highlights that everyone needs to play their part.
“Government needs to create an enabling environment, and mining companies and investors need to make long-term investment decisions,” he reiterates.
For more on this topic, read Don’t underestimate the importance and value of an experienced financial partner when mining in Africa.