Africa’s mining sector viewed as attractive investment proposition, despite problems

Clearly from an attendance of close to 6,000 delegates at the just-ended African Mining Indaba in Cape Town, one can gauge the level of interest within the mining space in Africa. The main objective of the annual investment conference is to assess and showcase mining activities across the continent as well as initiate and cement deals.

However, the key takeaway from the conference was that a number of negative factors are stifling growth. These relate to factors such as corruption with regards to awarding and transferring the ownership of mining claims and leases, the talk of nationalisation and “indigenisation” of the mining industry and the lack of a universal application to the rule of law. These factors, combined with deteriorating geopolitical environments, have the effect of driving away capital to safer haven areas and inherently damaging the development or maintenance of a resource economy.

However despite the setbacks, Africa’s mining potential is unfolding as a number of economies are increasingly becoming more important in terms of global mineral production. The DRC for example, has enormous high-value reserves of copper, cobalt, gold and diamonds and offers an opportunity for mineral exploitation activities. The IMF recently praised the DRC’s economic progress and approved the release of US$77 million as part of an existing loan facility. Generally, the West African greenstone belts have seen strong investment which has transformed countries like Mali, Burkina Faso and has the potential for so doing in Cote d’Ivoire, Senegal and Sierra Leone.

Other emerging mining economies include leading gold producers; Ghana and Tanzania. In addition, Namibia may become a leading resource economy due to the enormous uranium potential. Zambia on the other hand is experiencing a revival of its major copper industry with new mines being developed. Copper production in Zambia, Africa’s largest producer of the metal, is likely to rise to 850,000 tonnes in 2011 from just below 750,000 tonnes in 2010. Zambia’s copper output may continue increasing with production expected to reach 2.0 million tonnes in the next 5-7 years. While perceived contract insecurity and uncertainty over indigenisation issues in Zimbabwe continue to hang over its mining sector, we believe that there is scope for enhanced mineral development.

Judging from the mining names that are operating in Africa today such as Anglo American Plc, Rio Tinto, First Quantum Minerals, Vedanta Resources Plc, Equinox Minerals, Glencore International AG and Metorex, one can not rule out that Africa is offering and exciting investment proposition as far as the mining sector is concerned.

Article written by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.