Africa Q1 2013


Africa has more than half the world's reserves of gold, chrome and platinum, and vast quantities of diamonds. Uranium mining should also become an increasingly important source of revenue, particularly for Namibia and Tanzania. Coal and iron ore mining will play a leading role in the Mozambican and South African mining sectors, respectively. Foreign investment, notably from China, has been rising rapidly, which has helped underpin the mining sector's rapid growth rate across Africa.

African states have a wide range of scores in our mining risk/reward ratings, with Botswana remaining at the top given its huge diamond reserves and political stability. We see little prospect of Botswana being displaced from pole position. This is in contrast to Zimbabwe, which is one of the lowest ranked of the Sub-Saharan African countries we cover. Zimbabwe contains a mix of substantial mineral reserves and political instability, the latter being a perennial constraint on development of the former.

African Government Intervention
Source: BMI
Country News
Guinea Government is seeking to increase its share of mining projects from 15 to 33%.
Mozambique Government is seeking to revise its mining code to ensure higher revenues from the sector.
Namibia Government intends to give future uranium, gold and copper mining rights to state-owned Epangelo Mining Company.
Sierra Leone Government plans to revise its mining lease in order to increase government revenues.
South Africa Persistent talk of nationalisation likely to worry investors.
Tanzania Plans to introduce a super tax on mining companies.
Zambia The president announced plans to increase state involvement in mining and raise taxes.
Zimbabwe Mining companies will have to be 51%-owned by indigenous Zimbabweans.

Elevated Prices Increasing Rewards, But Political Risks Lurk

Development of the mining sector in much of Africa has typically been impeded by a lack of infrastructure and low levels of investment. That said, in recent years there has been a plethora of exploration projects throughout the continent, encouraged by elevated metal prices. It is not just the quantity of resources that has attracted investment, but also quality. High grade copper deposits have been discovered in the Democratic Republic of the Congo (DRC) and Zambia at a time of falling copper grades in some of the largest copper mines in Peru and Indonesia. Accompanying these exploration projects has been a significant increase in infrastructure spending, largely by mining firms. This has helped address some of the impediments to investment.

However, one of the main themes in Africa's mining sector of late is increasing government intervention. Although this is an issue in much of the world, and governments in Chile, Brazil, Australia and Indonesia are pursuing policies of tightening regulation and increasing taxes on mining companies, African states have undertaken a far more intrusive approach. The governments of Namibia, Tanzania and Zimbabwe have proposed increasing state involvement in mining projects in order to benefit their booming mining industries. We expect this trend to continue as countries such as Liberia, DR Congo and Sierra Leone, which have relatively low taxes at present, rapidly expand mineral output. It is likely that the mining sectors will be seen as an easy target for greater state intervention and taxation.

Africa - Mining Risk/Rewards Ratings
Rewards Risks
Source: BMI. Scores out of 100, with 100 the most favourable rating.
Industry Country Rewards Industry Country Risks Risk/Reward Ratings
Botswana 75.0 48.6 65.8 79.8 58.2 69.0 66.7
Namibia 65.0 57.6 62.4 74.7 69.4 72.0 65.3
South Africa 45.0 63.5 51.5 75.2 68.9 72.0 57.6
Mozambique 52.5 50.4 51.8 55.4 42.4 48.9 50.9
Ghana 32.5 60.2 42.2 74.7 60.7 67.7 49.8
Zambia 40.0 61.8 47.6 57.6 48.8 53.2 49.3
Sierra Leone 62.5 28.3 50.5 46.1 45.1 45.6 49.0
Tanzania 42.5 44.9 43.3 60.0 50.8 55.4 46.9
Mali 42.5 33.9 39.5 66.8 45.4 56.1 44.5
Guinea 55.0 38.5 49.2 42.5 22.8 32.6 44.3
Côte d'Ivoire 55.0 28.0 45.6 46.3 34.2 40.2 44.0
Morocco 30.0 42.6 34.4 65.2 62.1 63.6 43.2
DR Congo 55.0 22.7 43.7 54.5 22.4 38.4 42.1
Zimbabwe 47.5 43.2 46.0 39.3 17.2 28.2 40.7
Angola 32.5 34.7 33.3 40.7 25.7 33.2 33.2

Botswana: All Round Outperformer

Botswana remains at the pinnacle of our mining risk/reward ratings and we see little prospect of the country being usurped in the near future. Botswana's impressive country risk scores are due to a strong legal framework and investor-friendly environment. It has some of the lowest tax rates in the region and there is little government interference in the mining sector. Furthermore, Botswana has some of the lowest rates of corruption in Africa. Botswana's mining potential is enormous, with huge diamond deposits and numerous successful exploration projects. There is strong potential for growth due to the government's focus on diversifying away from diamond production, with several copper, silver and gold deposits set to come online in the coming years. It is in coal production, however, that we expect to see the fastest growth rates, as the sector grows rapidly from its low base. Furthermore, whilst much of Southern Africa is undergoing greater resource nationalism, we do not expect this trend to reach Botswana as it has pledged to maintain its business-friendly outlook.

South Africa: Nationalisation Fears Overblown

Due to the country's vast array of precious metals, namely platinum group metals (PGM) and gold, South Africa came third in the region in terms of mining risk/reward. South Africa also benefits from well-developed infrastructure, a rarity in much of Africa. There are a multitude of exploration plans in the country, particularly in coal and iron ore reserves which should halt the mining sector's decline seen over the past decade.

With the expulsion of Julius Malema, the former leader of the youth wing of the ruling party, the African National Congress (ANC), the leading group within government seems eager to pursue a business friendly approach. However, it is likely that the government will increase taxes to appease the radical elements in the ruling party, especially with elections in the ruling ANC party in December and following the unrest in the aftermath of the Marikana massacre. Indeed, the government has stated plans to introduce a new environmental tax in an effort to address future eruptions of acid mine drainage. If these proposals are implemented, it could increase costs for the mining companies that have frequently been accused of environmental degradation.

Southern Africa To Remain Out Front
Africa - Mining Risk/Reward Ratings

Zambia: Investment To Continue Despite Higher Taxes

Zambia's mining sector is set to see substantial growth over the coming years, as the country reaps the rewards of more than US$8.0bn of investment in the past five years. We are optimistic about Zambia's mining sector, as several copper projects are due to come online in the next few years which will increase Zambia ' s importance in the global copper market and make the country one of the largest sources of incremental output growth in the world over the coming five years.

We maintain our view that the negative market reaction to the election of Michael Sata as president is overblown, as we expect a moderation in his stance towards foreign investors. While we expect Sata to raise taxes and increase government intervention in mining, Zambia's mining sector will remain favourable, given the country's high-grade copper and coal deposits and the sound regulatory environment.

Africa: Substantial Rewards, Plethora Of Risks
Regional Risk/Reward Ratings

Mozambique: Mining Sector Set To Boom

Mozambique is set to be one of the key frontier destinations for mining investment, as companies such as Vale and Rio Tinto develop the country's untapped reserves. We forecast that the Mozambican mining sector will grow at an annual rate of more than 20% as a multitude of projects come online, especially in coal production. We expect Mozambique to be a significant exporter of coal over our forecast period to 2017, with much of its exports feeding China and India's growing demand for coal.

However, there are some significant impediments to growth in the mining sector. Although Mozambique has seen many positive developments in terms of business environment and security over the last two decades, corruption and a lack of transparency remain significant impediments to greater investment. Despite the generally sound business environment, there are some risks in terms of state interference in the mining sector. This was evident in 2011, when the government took control of the Corridor Sands project from BHP Billiton, and other projects in Tete Province.

Sierra Leone, Mali, Guinea, Côte d'Ivoire: Massive Reserves But Uncertain Outlook

Sierra Leone, Guinea and Côte d'Ivoire, countries that have relatively undeveloped mining sectors, are set for rapid growth as world leading reserves of iron ore, bauxite and gold come online. On the back of these countries' growth rates, we expect West Africa to be one of the main centres of mining sector growth globally. However, the key risk to growth is the fragile political situation in these countries, most clearly shown by the violence in Côte d'Ivoire in 2011, which affected mines and delayed projects. We expect Mali, with the third-largest gold sector in Africa, to experience more modest growth, especially in gold output, but it could be set for double-digit growth in uranium and nickel.

All four countries are revising their mining codes to ensure greater state revenues, while reducing regulation to encourage investment. So far a lack of clarity has not been conducive to investment, but given these countries' substantial reserves, we expect foreign direct investment (FDI) to pour in once the regulatory environment is clarified.

D R Congo: Huge Resources, Enormous Risks

The DR Congo's vast mineral wealth, including copper, cobalt, diamonds and gold, is matched only by political instability, conflict and poor infrastructure. This is reflected in its ratings as the country comes one of the highest in terms of mining industry potential, but second last for country risk. Nevertheless, numerous large scale projects will come online over the next five years, with gold and copper deposits foremost among them. However, political impediments are likely to remain as conflict continues in the east of the country, where much of the mining occurs. The potential for political ructions will continue to pose downside risks to growth in the mining sector.

Zimbabwe: Uncertainty To Deter Investment

Zimbabwe remains near the foot of our mining risk/reward ratings as the political situation is not conducive to investment. The government requires all mining operations to be 51%-owned by indigenous Zimbabweans. While this is not necessarily an impediment to investment, given Zimbabwe's phenomenal mineral wealth, the uncertainty generated is not conducive to development of the sector.

Zimbabwe's mineral wealth is in direct contrast to the political scene. It has some of the largest reserves in Africa. It has substantial deposits of platinum and diamonds. With near-stagnant growth in platinum production in Russia and South Africa, the two largest platinum producers, Zimbabwe could become the most significant centre of increases in global platinum production. In addition, the Marange diamond deposits are some of the largest in the world. However, few countries have stated that they will buy Zimbabwean diamonds, despite recent approval by the Kimberly Process. India, which is the destination for around 85% of the world's rough diamonds, has stated that it will not purchase Zimbabwean diamonds due to concerns over human rights violations.