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.

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Off to the Cape Town Mining Indaba

Just a note to readers of LawrieOnGold.com, I’ll be flying to Cape Town this evening for this year’s Investing in African Mining Indaba conference, the biggest mining event in Africa. It also claims to be the world’s largest mining investment conference but we reckon next month’s PDAC in Toronto should carry that mantle, although this is perhaps a matter of semantics regarding what should be classified as a resource investment conference!

Nevertheless the annual Mining Indaba  is a major conference/exhibition by any standards and, as a measure of its success has spawned a batch of add-on events around it.

Thus I also plan to attend at least a part of one of these – the newly organised 121 Mining Investment Cape Town conference – a much smaller, and possibly more focused, event – which is taking place nearby on Monday and Tuesday next week.  (The Mining Indaba and its own complementary specifically mining investment focused event effectively runs from Sunday through to Thursday next week)

I have recently published a more detailed article on Mineweb looking at changes which are being made to the Mining Indaba as it evolves under the new ownership this year by the UK’s Euromoney group.  This article followed on from an interview with Jonathan Moore, the Mining Indaba’s Managing Director.  To read this click on Will this year’s Mining Indaba be changing for the better?

Thus due to travel, sleep deprivation and the delights of the Cape Town summer compared with the Northern Hemisphere winter, I may not publish anything on LawrieOnGold.com for a couple of days but, in the words of Arnold Schwarzenegger,  I’ll be back!

 

Cape Town Mining Indaba spawns competitive event

Is the Mining Indaba, being held early next month in Cape Town, beginning to become a victim of its own success?

Lawrie Williams

I suppose the success of a major mining conference can be assessed in part by its potential to spawn other events around it on the sidelines (or ahead and immediately after) and the big Cape Town Investing in African Mining Indaba, being held in three weeks time now, is a great example of this.  Over the around 20 years it has been existence, the Mining Indaba (www.miningindaba.com ) has grown from a small to mid-sized investment conference and exhibition to a mega event which now claims to be the world’s largest mining investment conference, although that obviously depends on exactly how you define ‘investment conference’.  Arguably Canada’s PDAC, which is far bigger in terms of attendance numbers, should carry that title, but it is both narrower (in terms of its concentration on mineral exploration) and broader in that it has been built out of an equipment/services trade show.

Nowadays the Mining Indaba attracts around 7,000 people to the annual Cape Town conference and accompanying trade show, and boasts a slate of highly regarded speakers – this year for example there will be a special keynote address from former U.K. Prime Minister, Tony Blair who may well know more about global mining issues than many realise given his involvement as an adviser to the Guinean government.  The conference programme itself is very much aimed at those companies looking at investing in mining and metals in Africa and indeed globally.

However one suspects Tony Blair’s involvement comes at a very high cost to the organisers suggesting that new Indaba owners, London-based Euromoney, are trying to pull out all the stops to counter some of the recent criticisms of the way the overall event has been progressing over the years.  Nowadays it seems to make a significant proportion of its revenue from the accompanying trade show which has very much been taken over by suppliers, many of whom have the money for big, very visual displays thus relegating mining company corporate exhibitors and African national government displays, who do not have the kinds of budgets of the big trade exhibitors and for whom the original trade show concept was developed, to an increasingly insignificant section of the exhibition.  These base exhibitors feel they are being completely overshadowed on the exhibition floor and indeed are now also unhappy about being subjected to sales pressures from delegates associated with the supplier section of the trade show.  It will be interesting to see how Euromoney handles the dilemma this poses – that of original concept against revenue.

But for several years now, the Mining Indaba has been big enough, and successful enough, to have spawned parallel events, mostly set up by brokers and financial institutions aimed at their own clients, but these don’t tend to impact on the main conference attendance – indeed may help add to it as long as the dates don’t clash.  There has also been, for the past five years or so, an ‘Alternative Mining Indaba’ in Cape Town which is mainly for NGOs, Environmentalists and their supporters but this is no threat as the relatively small number of attendees are not those who might be tempted to go to the main event anyway.

What has been a minor problem for the organisers is the seemingly ever increasing number of investors and institutional personnel from Europe and North America who descend on Cape Town to take advantage of all the networking opportunities on the periphery of the event without paying the high delegate fees ($1,900 for on site registration).  They also come to gain respite from the northern hemisphere winter weather of course.  Cape Town in February is usually a very pleasant place to be climate-wise.

But what has the potential to become more of a competitor to the Mining Indaba itself is a far smaller parallel commercial mining investment conference being launched this year by the 121 Group (www.weare121.com ) – a new event organisation, managed out of Hong Kong and London and set up by former Beacon Events/Mines & Money key personnel previously responsible for running the big, very successful, Mines & Money London and Hong Kong mining investment conferences.  With all their strong mining and mining financial sector connections they have come up with a two-day programme in a separate central Cape Town venue.  They have tied down a good number of major sponsors for their event, which clashes with the first two days of the Mining Indaba – Feb 9th and 10th – and developed a very strong speaker programme – pulling in, in several cases, some of the top speakers from the main Indaba event also – but not Tony Blair – one suspects he would be well beyond their budget!

121 says it is thus resurrecting a February Cape Town conference very much in line with the original Indaba concept for bringing mining companies into direct contact with investors and financial institutions without there being the distractions of the big supplier dominated trade show and supplier related delegates.  In their publicity 121 says what they have titled 121 Mining Investment Cape Town will be “an interactive two-day conference featuring investment strategies, market analysis and capital raising ideas, and a programme of 1-2-1 meetings matching investors with quality mining projects.”  Delegates, as at some of the other high quality mining investment conferences like the Denver and European Gold Forums, are being restricted to those meeting specific criteria deemed to be of interest to the participating mining companies.

In a note to Mineweb one of 121’s executives, Pablo Martin, said he reckons this brand new event will attract up to 100 highly focused delegates and 20 mining company speakers – maybe small in relation to the Indaba registration, but the idea is only to allow attendance from those directly interested and facilitate one-on-one meetings.  Martin comments that the format is more akin to that of the Denver Gold Group or the BMO events but it’s independent and cross commodity and allows for private companies too.  It is perhaps a small start but one which looks to have great potential for rapid growth although it seems unlikely to supplant the Mining Indaba event itself.

Meanwhile 121 Group already has two more similar mining investment events lined up.  The first of these will be in London from 20th to 21st April at a city centre location, and the second a return to Hong Kong – October 14th-15th – the location for the group’s inaugural event last year at around the same time and which has generated a whole host of favourable comment from participants.