The State of Mining in Africa 2009

From Botswana to Zambia, many mines will prosper while political missteps will inevitably dash the dreams of others

By Antonio Ruffini, E&MJ’s African-based editor

Africa’s broad transition from a collection of states undertaking largely disastrous socialist experiments to a more stable democratic continent is no more than two decades old. Many of its countries have adopted investor friendly mining codes. Mining and exploration projects are underway in the majority of countries across the continent, well beyond the traditional mining centres such as South Africa, Zambia and Ghana.

The 2009 version of an annual survey undertaken by mining consulting company Behre Dolbear ranking the suitability of countries for mining investment includes Ghana, the Democratic Republic of the Congo (DRC), Botswana, Namibia, South Africa, Tanzania, and Zambia. It used to include Zimbabwe, but has omitted it, like Venezuela, as the political situation there remains dire. Botswana is a recent addition to its rankings list and Behre Dolbear reports that Tanzania, Zambia, Namibia, Botswana, and Mozambique continue to see positive development and increased investments.

A few cracks, however, appeared across the continent’s mining sector at the end of last year. An obvious example was the coup that took place in Guinea at the end of 2008, where mining companies such as AngloGold Ashanti with its Siguiri gold project, and Crew Gold Corp, which owns and operates the Lefa corridor gold mine faced uncertainty. Operations at the Lefa mine were halted for a day in late December 2008 on order from the military which had undertaken the coup.

Companies, such as Alcoa and Rusal, have spent significant amounts in Guinea, the world’s largest bauxite exporter. More than a third of the world’s bauxite reserves are located in Guinea and the country produced 14 million metric tons (mt) of bauxite in 2007. In addition, Rio Tinto was looking to develop the US$6 billion Simandou iron ore project in that country. Rio postponed the project on the back of the economic downturn, but the uncertainty in Guinea will have made that postponement decision easier to make. Just after the coup occurred, BHP Billiton, which plans to develop an alumina refinery and bauxite mine in a venture with Global Alumina Corp. shut its Conakry office for a while.

Guinea has never been the epitome of good governance; corruption has been rampant in that country, but when coup junta leader Moussa Dadis Camara singled out the state’s contracts with mining companies in his first public indications of economic policy, it hardly raised confidence among investors. The new regime has since assured mining companies there will be no change in their mining contracts beyond reviewing them to ensure they are within the parameters of good governance and compliance.

The review of mining contracts has been a common theme with various governments across Africa. Some of the original mining contracts in countries such as the DRC were granted under dubious circumstances, but such is the lack of credibility achieved by most African governments that these reviews are seen by many investors as little more than an excuse to backtrack on previously established agreements.

It takes many decades of building a track record to create confidence and, even in highly stable countries such as Zambia, politicians have pursued policies that destroy such confidence. Boosted by a favorable copper price, Zambia’s copper mining industry had been resurgent in recent years following its emergence from nationalization. The path to that point had been rocky with investors such as Anglo American, a historical operator in the Copperbelt, replaced by candidates viewed by some including the then head of Glencore’s Mupani mines, Tim Henderson, as second rate for ownership of the assets.

However, that path was navigated successfully with Vedanta embarking on its Konkola Deeps project and new smelter projects being undertaken by it and China Ferrous Metals. In addition, large greenfields copper mines have been established, including Equinox Resources’ Lumwana project and First Quantum Minerals’ Kansanshi project. Others were lining up, the copper price was high, and it was predicted Zambia could produce a million tonnes of copper a year in the near future. Then the Zambian government shot itself in the foot.

To be fair, the Zambian government, at the nadir of the copper market and seeing majors such as Anglo American withdraw, and concerned by a lack of progress over privatization of key assets bent over backwards to create a more than favorable environment to attract investors. That worked, but when copper prices soared the government, seeing too little of the industry’s profits reach its coffers, passed ill considered legislation that effectively amounted to a permanent windfall tax which assumed copper prices would always be high. It also failed to take into account that quite a lot is asked of operators which to varying degrees take on quazi-state roles in providing infrastructure, health care and other facilities to the communities where they operate.

The result was predictable; it inhibited new investments. Some of Zambia’s legislators admitted privately that the legislation passed had been poor and the downturn has given them the excuse to reverse this while saving face. Perhaps of more concern is that Zambian politicians said government was looking to nationalize the troubled Luanshya project owned by a junior aiming for mid-tier status. Both the taxation and speed with which talk of nationalization occurred in a good mining destination such as Zambia, where authorities are approachable and amenable to discussion, illustrates some of the cracks in Africa’s mining industry governance and policy formulation.

While one could wish Zambia’s policy makers showed more wisdom at times, Zambia remains a peaceful country seeking to make the best use of its resources, and the policy debates must be seen in that context. These are mere cracks and should not be correlated with the deeper cracks represented by the kleptocracy that Guinea was under its previous ruler, where democracy is particularly shallow, and where a military led government says ‘trust us.’ And nor should it be compared with the continent’s hot spots where the cracks have turned into chasms; an obvious example being the failing state of Zimbabwe where a malicious dictator clings to power, aided by the dismal response by the region’s member states on issues of good governance. If any country represents the risks that Africa still poses, it is Zimbabwe, which once had one of the most diversified and successful mining industries on the continent, and which hosts the world’s second largest platinum resource. It is now a country where soldiers sent by Robert Mugabe and his cronies are reported to be managing forced labor mining of diamond deposits, a-la-Blood Diamonds.

However, while the latter is a bad sign for the continent and there was increasing enthusiasm for themes like dubious changing of the rules through the reviews of mining contracts before the economic slowdown put paid to some of that, Africa is diverse. One should not discredit Botswana’s diamond sector because of Angola’s more opaque and difficult environment. And even in a single country, the circumstances vary greatly. One should not disdain a large copper project in the Kantanga province of the DRC because of the strife affecting troubled coltan and gold projects in the north-east of the country which is overrun with warring factions. The past decades’ gains made by the mining sector in Africa won’t be reversed but individual countries and locations do remind us of the risk.