Caveat corruptor! The potential perils of building resource projects in Africa

African nations are among the world’s most corrupt which makes resource companies operating in many African countries vulnerable to the UK’s draconian Bribery Act

Listening to a talk on the UK’s anti-corruption legislation at the recent London Natural Resources Forum from Richard Brown, a partner at lawyers Travers Smith, one must wonder how safe it is to manage a resource company operating in Africa, where nearly all countries fall high on Transparency International’s corruption index.  Paying inducements to grease the wheels of bureaucracy in some form or another has been something of a way of life right across the continent, but the prospective penalties for a UK company, or indeed for any company with operations or assets in the UK even if these are non-related to the resource sector, have become so severe that being caught out could result in massive fines, prison sentences or both.  There are many parallels here with the U.S. anti-corruption legislation – the Foreign Corrupt Practices Act of 1977, but the UK Bribery Act 2010, which came into force in 2011, is deemed to be the strictest of all.

What has to be alarming for executives, and investors in companies operating in Africa, is that the legislation does not just apply to the companies themselves but also to employees and ‘associates’ operating in the countries involved.  In the past companies which would consider themselves morally above reproach have sometimes employed, often at considerable expense, local fixers with purported strong government contacts, to help them through the local permitting and legislative maze.  How these local agents have achieved their results has been viewed with something of a blind eye.  But no more.  Should one of these agents fall foul of anti-corruption legislation, even totally unbeknownst to the company which pays them, then that company is as liable as if they had made the corrupt inducements themselves.

Under The UK Bribery Act, the crimes of bribery, being bribed, the bribery of foreign public officials, and the failure of a commercial organisation to prevent bribery on its behalf are all included.

The penalties for committing a crime under the Act are a maximum of 10 years’ imprisonment, along with an unlimited fine, and the potential for the confiscation of property under the Proceeds of Crime Act 2002, as well as the disqualification of directors under the Company Directors Disqualification Act 1986. The Act has a near-universal jurisdiction, allowing for the prosecution of an individual or company with links to the United Kingdom, regardless of where the crime occurred. Described as “the toughest anti-corruption legislation in the world”, concerns have been raised that the Act’s provisions criminalise behaviour that is acceptable in the global market, and puts British business at a competitive disadvantage.  But given the potential application of the Act to ‘companies with links to the UK’ it is more wide ranging than just applying to UK companies so needs to be taken into account by any company with any financial links to the UK – which would probably include most Western resource companies.

While it seems to have taken time for prosecutions to have come about, a recent successful case brought by the UK’s Serious Fraud Office, which administers the Act, demonstrates some of the penalties which may result.  The recent jail sentences imposed on directors of a UK company, Smith and Ouzman, convicted of bribing officials found guilty of two counts of corruptly agreeing to make payments relating to deals struck in Kenya where the company’s CEO received a three year jail sentence will have raised awareness of the potential seriousness of the offence.

Speaking at the recent Global Anti-Corruption and Compliance in Mining Conference 2015 in London, the SFO’s Joint Head of Bribery and Corruption, Ben Morgan, recognised that corruption-free mining is not a reality.  He commented that to really get to grips with compliance you do have to think about what happens down the line if something goes wrong. The sector needs effective enforcement of those who break the rules, and that’s where the SFO comes in, along with our sister agencies internationally. As the Smith and Ouzman case demonstrates, the agency does indeed have teeth!

Why should it be particularly relevant to resource companies operating in Africa?  Purely because of the widespread corruption throughout the whole continent.  Only one country, Botswana, is seen by Transparency International as coming in above 60 on its Corruption Perception Index (100 best and 0 worst) ranking as the 31st least corrupt nation out of 175 on the Index.  Even the continent’s most advanced economy, South Africa only ranks 67th out of 175 on the Index with a well below par score of 44.  Some other African nations rank right at the bottom of the global index.

And why are resource companies singled out as being among the most at risk?  In part because gaining mining and exploration licences can be particularly prone to complex legislative and bureaucratic hurdles making bribery to speed matters up and ensure fair treatment endemic in many African countries… For investors the prospect of unlimited fines, imprisonment of top executives and disqualification of directors makes it particularly important for investors to try and judge the ethical position of management and directorate.

So resource companies operating in Africa, or elsewhere for that matter, wherever they may be domiciled if they have any UK links at all, are potentially open to prosecution under the Act should they fall foul of the legislation and interpretation of what actually comprises corruption can be something of a legal minefield.  Caveat corruptor and caveat investor!

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Africa Could Mine Its Way to Prosperity if It Addressed Instability

Frank Holmes of U.S. Global Investors gives us his views on investing in African mining following his vist to Cape Town last week for the Mining Indaba and what governments need to do to help encourage it.

Last week I attended the Investing in African Mining Indaba in Cape Town, South Africa, as both a presenter and a student seeking opportunities. One of the highlights of the conference was former Prime Minister Tony Blair’s keynote address, during which he offered some crucial advice to African governments: To attract and foster a robust mining sector, a commitment to fiscal stability must be made.

Goods Trade with Africa in 2013

Since 2009, Blair has run the Africa Governance Initiative, which counsels leaders in countries such as Rwanda, Sierra Leone, Liberia, Guinea and others.

Simply put, without fiscal stability and predictability in taxation, capital will be unwilling to flow into any country—African or otherwise—for exploration and production. If a government changes its tax policy every three years or so, that instability discourages the inflow of financing. This is bad for Africa.

“The mining sector remains absolutely vital for Africa’s future,” Blair said, “and even with the sharp declines in [commodity] prices, there are tremendous opportunities and there will be, no doubt, an adjustment and reshaping of the face of mining within Africa over these next few years.”

I shared the following map last week, but it’s worth showing again, as it supports Blair’s point. Central and Southern Africa, especially, are extremely commodity-rich and maintain a large global share of important metals and minerals such as platinum, diamonds and gold.

In 2014, China Channeled Over $100 Billion into 156 Countries and Regions Around the Globe
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Fiscal instability is also bad for investors in Africa. If foreign investment is not respected by a government, if it is punitively taxed or arbitrarily confiscated, further investment will not flow into that country. Politically, African nations need to recognize that seemingly faceless investment institutions represent real people’s hard earned dollars.

In Zambia, for example, a huge 12 percent of the country’s GDP comes from mining, an industry that employs 10 percent of all Zambians. Yet its government has increased, rather than cut or at least eased, restrictive royalty taxes on mines. In the case of open pit mines, royalties were raised from 6 percent to a crippling 20 percent.

Speaking to Reuters, a mining industry spokesperson speculated: “Mining companies are not going to put another dollar in [Zambia]” if the government continues to be unreliable.

Less Friction, Fewer Disruptions

This is proof positive of what I frequently say: Government policy is a precursor to change. In the example above, the tax policy is leading to change that could very well hurt Zambia’s economy. With mining being such a strong contributor to its GDP, it seems the government would want to make it easier, not more challenging and costly, for international producers to conduct business there.

The less friction and fewer disruptions there are, the easier it is for money to flow.

But Zambia’s isn’t the only African government that’s placing roadblocks in front of miners. The Democratic Republic of Congo is in the early stages of hiking royalties on mines and revising its mining code. And in his recent State of the Nation Address, South African President Jacob Zuma announced that foreigners could no longer own land in the country, which raises the question of what implications, if any, this might have on U.S. and Canadian companies that own and operate South African mines. Zuma’s announcement comes at a time when persistent electricity shortages have stymied mining activity and rumblings of a miners’ strike similar to the one last year that brought platinum and palladium production to a five-month halt are intensifying.

At the same time, many governments in Africa are waking up to see that they’re going to have to provide the sort of stability and consistency Prime Minister Blair outlined if they hope to attract the capital necessary to fund and develop their mining opportunities.

Miners Giving Back

A strong mining sector doesn’t just benefit the native country, either. It’s a global good that benefits all. In another presentation at the African Mining Indaba, Terry Heymann of the World Gold Council convincingly showed that the economic output of the global gold mining sector far exceeds the collective aid budget of world governments. Gold mining, he said, created and moved as much as $47.3 billion to suppliers, businesses and communities in 2013, compared to governments’ $37.4 billion.

Many gold mining companies take a more direct approach to helping the communities in the countries they operate in, including Randgold Resources, which works primarily in Mali. In an interview during the African Mining Indaba, CEO Mark Bristow detailed his company’s involvement in the fight against Ebola and other epidemics that have hit the West African country:

Our doctors, the Randgold doctors, run a technical committee meeting every day where we coordinate with the [Malian] health authorities, and we help manage the deployment of energy. Now that we’ve eradicated the second [Ebola] outbreak, our big focus is on prevention and education.

Goods Trade with Africa in 2013

Bristow explained that the company had sponsored the development of an educational film about Ebola, before highlighting other company achievements:

We were part of the Neglected Tropical Disease Initiative rollout… We’re very big on the AIDS programs around the country. We brought the malaria incident rate around our mines down by more than four times.

Because Randgold is the largest employer in Mali, Bristow suggested, he feels a moral obligation to partner with his host country and make it a healthier, safer place to live and work.

During the same interview, he insisted that Randgold, which we hold in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), has a “solid five years ahead of us,” citing the fact that the company holds no debt and managed to replace all the ounces it mined in 2014 at $1,000 long-term gold price. It also increased its dividend 20 percent.

Despite bullion’s price hovering just above the relatively low $1,230 range, Randgold has delivered 16 percent year-to-date.

This is in line with gold mining stocks in both the NYSE Arca Gold Miners Index and FTSE Gold Mines Index, which are outperforming the return on bullion.

Gold-Mining-Stocks-Outperforming-Bullion-Year-to-Date
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As I mentioned back in July, when mining stocks do well, bullion has tended to follow suit. This also shows that producers are successfully adjusting to a $1,200-per-ounce environment by scaling back on capital spending, selling off assets, putting exploration on hold and engaging in mergers and acquisitions—which in the past has signaled that a bottom in spot prices might be reached. B2Gold Corp. closed on its deal to buy Papillon Resources in October; we learned in November that Osisko Gold Royalties is taking over Virginia Mines; and last month it was announced that Goldcorp would bepurchasing Probe Mines.

Weak Currencies, Low Fuel Prices

Speaking with Kitco News’s Daniela Cambone during last Monday’s Gold Game Film, I commented on some of the macro events aiding gold mining companies such as Randgold:

Mark Bristow has just hit the ball out of the park. He benefits from a weak Mali currency and he benefits from a weak euro because everything is priced in euros. He’s also benefited from weak oil prices.

Indeed, many miners not operating in the U.S. are the beneficiaries of a weak local currency. The West African CFA franc, Mali’s currency, is off 20 percent; the South African rand, 40 percent; the Canadian dollar, 15 percent.

Low energy prices are also helping gold producers, just as they’re helping companies in other industries, airlines especially. In most cases, fuel accounts for between 20 and 30 percent of gold miners’ total operating costs. Because Brent oil is currently priced around $60 per barrel, gold producers are seeing significant savings.

The Gold Demand

This Thursday marks the Chinese New Year, a traditional occasion for gold gift-giving. Chinese demand for the yellow metal was strong in 2014, as 800 tonnes flowed into the country. Over half of the global gold demand, in fact, was driven by the world’s two largest markets, China and India.

Chinese-and-Indian-Growth-Has-Spurred-Market-Infrastructure-Development
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Historically low real interest rates are also driving investors into gold and gold stocks. As I told Daniela:

When you look at real interest rates out of the G7 and G10 countries, the only one with a modest increase is the U.S. dollar. Any time you get this negative real interest rate scenario, gold starts to rally in those countries’ currencies. Now what’s really dynamite is the gold mining companies like Goldcorp, which pays a dividend higher than a 5-year government bond.