Few Winners As Regulation Tightens Across Africa


BMI View: We expect Sierra Leone, Mozambique and Ghana to be some of the few beneficiaries from the current swathe of tightening mining regulation and resource nationalism across Africa. Whilst we do not expect higher taxes to deter investment in countries such as Zambia and Ghana, we are concerned over regulation proposed in Tanzania and, in particular, Zimbabwe as well the prospects for greater government involvement in South Africa and Guinea . Looking ahead we expect some of the new African mining players, such as Liberia and Cameroon to seek to increase the government's involvement and benefit from rapid growth in their mining sectors.

  • We expect the wave of government intervention in the mining sector to continue as prices remain elevated by historical standards and governments seek greater benefit from their mineral reserves.

  • Investment into Tanzania and Zimbabwe are most at risk given the countries' push for punitive tax and ownership laws.

  • Mozambique and Sierra Leone will see investment continue as their governments pursue business-friendly polices while other countries seek more stringent regulation

The recent swathe of governments across Africa pursuing more nationalistic measures in their mining sectors will deter investment in parts of the continent, in particular in Tanzania, Guinea and South Africa. In contrast, countries such as Sierra Leone and Mozambique are well positioned to benefit from increasing regulation elsewhere as respective governments continue with pro-business policies to attract investment . Sierra Leone will gain from the continent ' s drive for greater resource nationalism. In line with our expectations, the incumbent Ernest Koroma won the election last month and has committed to maintain the country ' s business friendly approach that has attracted a swathe of investment over the past few years. Sierra Leone will particularly benefit from events in Guinea, its neighbour, which has similar resources but has a more nationalist government that is seeking sub stantial control over the mining sector though state ownership and higher taxes. In Mozambique, the government plans to submit a draft of a revised mining law by the end of the year in a bid to streamline procedures and attract more investment to its booming coal sector. The government has stated that its new mining code will not change royalties or mining taxes, and is purely to speed up the licence process and reduce bureaucracy for mining investment, a move that appears to be wholly positive for the sector.

Favourable Regulation To Drive Mozambique & Sierra Leone
Select Countries - Mining Industry Value Growth Forecast, % change y-o-y

Zambia's government recently announced plans to double mining royalties to 6% and increase regulation regarding environment practices. Ghana has also stated plans to raise taxes on mining companies to fund infrastructure projects and other social projects following similar plans in Guinea and Namibia. For the most part, we do not expect these measures to deter investment in Africa given that much of the world is enacting similar tax increases. Indeed, the doubling of royalties in Zambia brings the country in line with other major copper producers such as Peru and Chile, and thus it will not lose competiveness compared with its peers. In addition, Zambia's copper reserves, West Africa's iron ore deposits and much of the continent's gold and coal reserves are high-grade, thus providing miners with higher margins than elsewhere. Furthermore, under the previous administration in Zambia, there were numerous protests directed at mining companies that disrupted production, especially Chinese-run mines over the lack of contribution to the development of the country. Therefore, by raising taxes on mining companies, the government may assuage some of the local concerns if the sector is visibly seen as benefitting the country at large. It is also important to note that in many countries on the continent there are far greater impediments to investment than tax increases, namely political risk, lack of adequate infrastructure and security concerns.

Zimbabwe & Tanzania Pursue Most Punitive Path

Out of all the countries that have sought to raise the state's involvement in the mining sector, Tanzania and Zimbabwe look the most punitive. Whilst we do not expect the rest of the continent to see investment deterred by government policies, it is a different matter in these two countries. In Tanzania, the government has proposed an 'Australia-style' super tax on mining companies' profits in the region of 35%. Combined with low electrification rates and poor road and rail network, this could be the straw that breaks investors' backs and companies may looks elsewhere in the continent. Zimbabwe has thus far opted for the most punitive government interference with the ruling party forcing mining companies to be majority owned by indigenous Zimbabweans. With political risk on the rise, and elections next year adding to investor uncertainty, Zimbabwe is likely to miss out on much investment in its massive platinum and diamond deposits for the foreseeable future.

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


Worsening Outlook For South Africa

Following the massacre at Marikana in August we expect the government to impose greater regulation on the mining sector that will increase costs for companies operating in the country. This will most likely take the form of more stringent safety regulations and working conditions. Furthermore, the ANC elections later in December will likely see the incumbent, Jacob Zuma, challenged by Kgalema Motlanthe who has expressed support for nationalisation of the mining sector. Whilst we do not expect nationalisation to occur, it is likely that the government will seek to appease more radical elements within the party and electorate by adopting some form of resource nationalism such as higher taxes or a share of projects owned by the state that will make South Africa an even less attractive investment destination.

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

Potential For Further Tax Increases

We highlight Cameroon, Liberia and the Republic of the Congo as countries where greater resource nationalisation could be on the cards. At present mining taxes are relatively low in these countries, but we forecast strong growth in mining output will make the sector a significant component of their GDP in the coming years. The mining sector could therefore become a target for the respective governments to increase taxes and benefit from their mineral reserves and historically elevated commodity prices. In addition, on the back of rising trade union opposition to the foreign-dominated oil sector, Gabon's government could seek to appease opponents by increasing local ownership of mining projects in line with plans to enact reforms in the oil and gas sector. Furthermore, given Gabon's declining oil production, its booming, but nascent, mining sector could come to be seen as an easy source of revenue to replace the government's dwindling coffers.

This article is tagged to:
Sector: Mining
Geography: Africa, Congo, Mozambique, Sierra Leone, Tanzania, South Africa, Zambia