Picture: 123RF/TIMES 1111
Picture: 123RF/TIMES 1111

Global investor interest in Africa’s mining sector remains strong despite the challenges facing the sector. The continent has vast resources with sustainable future growth in the exploration and development of commodities, hence the growing demand for these strategic resources by foreign investors and commodity users worldwide in the long term.

To harness this interest, stable political environments, compliance with legislation, stable labour relations and regulatory certainty will be vital to ensure the continent remains an attractive destination for mining investment.

The regulatory environment must be certain and consistent from one year to the next, because mining is a long-term business, and from a bank’s view it is a three to five-year investment. Therefore, both banks and shareholders need consistency, be it in regulations or issues such as royalty taxes.

The regulatory environment across some African countries is improving for the mining and metals sector as governments realise the importance of providing certainty to attract new investment. Some investors have thus been considering greenfields projects, especially in West and East Africa.

There is renewed focus on battery minerals as well, evident in the drilling activity on the continent over the last two years. Increased capital expenditure is envisaged in gold, copper, lithium, mineral sands, cobalt and graphite.

Because mining is a capital-intensive business, factors such as rising production costs, infrastructure challenges and rising labour costs also continue to be of major concern to mining companies

There is a more collaborative approach between governments and investors to attract sustainable investment in the regions. The key to unlocking investments into Africa is for industry stakeholders to continue to collaborate responsibly to promote investment in mining and ultimately economic growth in the countries in which they operate.

Equally important will be the availability of reliable cost-effective power supply. SA power cuts have affected mining companies, which need certainty to manage their cost structures and plan production accordingly. Similar energy crisis situations are evident elsewhere on the continent, which is promoting investment in renewable energy sources to curb power interruptions and costs in the long run.

Because mining is a capital-intensive business, factors such as rising production costs, infrastructure challenges and rising labour costs also continue to be of huge concern to mining companies. These issues need to be dealt with responsibly. As costs rise and margins come under pressure, diversification will be important for the mining and metals industry to ensure companies remain competitive through volatile economic cycles and commodity prices.

Diversification is a key differentiator, not only in terms of various commodities but also geographically. Some mining companies are expanding into Africa and globally. Consolidation nevertheless remains a key theme, including large players forming one entity to increase efficiencies, or even selling off parts of the value chain.

Hedging solutions

Long-term sustainability depends on sourcing, developing and mining high-grade reserves. Change in reserve estimates or development prospects pose a risk to mining companies, but it is just as important to achieve efficiencies, particularly as the cost of extraction continues to rise due to the geology of some minerals, which is forcing mining companies to access more difficult reserves underground. Enhancing operational efficiency could mean automation and new technologies where applicable.

Equally of concern to mining companies is volatility in commodity and foreign currency markets, which need appropriate risk-management strategies to ensure financial institutional funding of investments in mining. Innovative hedging solutions to clients who have exposures to interest rate fluctuation, foreign exchange fluctuation and commodity variability are necessities for operational project success.

Signatories to the UN principles for responsible banking have an increasingly important role to play by funding not only commercially viable projects but also ensuring they comply with sustainability principles and align business strategy to society’s goals.

For Absa this now includes ensuring that where we provide funding, the economy and communities benefit. When considering funding of commercially viable projects that include natural resources and extraction, lenders will place additional focus on the positive impact of funding and whether it aligns with a country’s developmental goals, the environment and its people.

Non-compliance with environmental laws can lead to production interruptions, reputational damage and substantial fines or cleanup costs. Mining operations are subject to various stringent and complex environmental, health and safety laws and regulations. In this respect, capital providers can guide their clients and stakeholders in their requirements for funding by applying the equator principles, which include applicable International Finance Corporation (IFC) performance standards on environmental and social sustainability guidelines for various sectors and for funding natural resources and extraction transactions.

• Webber is coverage head: natural resources at Absa Corporate and Investment Banking.

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