Threat of violence
The threat of religious, tribal and political wars plays a key role in keeping foreign investment away. Whereas manufacturers can erect a plant, manufacture for a few years and then pull out in the case of unrest, mining is a major long-term investment difficult to walk away from should war erupt.
The recent violent resurgence by Renamo in Mozambique, after more than 20 years of peace, is just one of many examples of the volatility of the continent.
Lack of good infrastructure remains a critical challenge throughout Africa. While South Africa generally offers excellent infrastructure, there are still major challenges. One of the biggest is the inability for foreign companies to move coal out of the country. Cartels own the rail infrastructure to Richard’s Bay and there is little allocation for foreign companies.
A challenge unique to South Africa is the unionisation of the mining industry.
“There is no doubt that our unions scare off foreign investors,” says Patlansky. “Companies need to take the unions into account when doing financial long-term calculations. For example, they need to take into account what possible strikes could occur and at what cost, over the next 10 years.
“The rest of Africa is not unionised and many investors choose to face the many pitfalls in other African countries, including political instability, rather than risk industrial unrest with its financial and reputational costs.”
While there has been a slowdown in foreign investment by the US and the European Union recently, China increased its global outbound foreign direct investment spend to a record US$87.8bn for the year to September 2013.
“China has a strong appetite to invest in mining in Africa,” says Patlansky. “Chinese state-owned enterprises have the funds available to withstand the risks of investment into Africa.”
Patlansky adds that the weak South African rand may further stimulate foreign investment interest and it will probably make the country a more lucrative destination for Chinese investors to consider.
Miners to exit the industry
In South Africa right now there are many smaller companies, some of which were never involved in mining formerly and looked to diversify, are now battling to secure funding for their exploration projects. Minerals are worth nothing under the ground, no matter how promising, and these junior miners who are nowhere near production are facing huge challenges.
“Five years ago, when mining was booming, many jumped into the industry with exploration projects,” says Patlansky. “They listed on the Stock Exchange and invested their own funds but are now struggling to raise the appropriate funding.”
The Global Mining Survey also reviewed miners internationally who are considering exiting the industry. The global research indicated that 12% of respondents expect their companies will be sold or taken over in the next 12 months, 17% state they will complete a partial sale or recapitalisation in the next year, 19% will sell a unit or division and a startling 27% will sell material claims or projects in the coming 12 months.
Approximately 12% of the South African mining executives surveyed indicate that a sale or takeover is likely, with 10% of miners expecting to go under administration while 16% are sadly likely to temporarily halt operations.
“In today’s economy, African mining companies would do well to remember that companies with capital seek more advanced projects that have less lead time and less risk,” she concludes.