The 6,000 delegates at the recent Indaba Mining Conference in Cape Town were all loudly optimistic, almost to a man. Rumours swirled of Chinese envoys carrying suitcases full of bank notes. And one historian spoke of an “epic shift” that will drive mining for years – “the type only witnessed once every five hundred years”.
But even so, the mood was soured a little by talk of nationalisation. The big concern is South Africa. But many other African governments are talking tough too.
If you are invested in mining at all, you need to pay very special attention to these developments in the months ahead.
Could Africa revolt against Big Miners?
Tension between the world’s mining companies and the governments of countries in which they operate is mounting. Much as the industry’s leaders promise to engage with governments and support local economies, the fact is that they are making a huge amount of money but not many friends. Even in Australia, a persistent debate over a possible extra tax levy on the miners refuses to go away. But the real concerns lie with South Africa.
Mixed messages coming from the South African government caused Julius Malema, the strident leader of the African National Congress Youth League, to claim that nationalisation had in fact become government policy.
And President Zuma has hardly knocked this on the head. He recently described the country’s mineral wealth as a ‘national asset and a common heritage that belongs to all South Africans, with the State as the custodian’. Is this the beginning of a backlash against miners?
Where Miners are as unpopular as British banks
Last week I spoke to the director of a big coal project in South Africa. And he told me that Susan Shabangu, the South African Minister of Mineral Resources, had assured him that nationalisation would not happen. But things change and the very fact that industry leaders are talking about it reflects their concern.
When she was not entertaining Chinese customers at the Vergelegen wine estate, Chief Executive of the giant miner Anglo American Cynthia Carrol warned that ‘mining companies will simply not invest if they cannot be assured that the assets they create will be secure. In ignoring this truth the false prophets who argue for nationalisation are advocating the road to ruin’.
But will her argument carry the day? Across Africa, foreign mining companies have a similar reputation to British banks: too profitable, overpaid and not contributing enough to the economy. The temptation to sacrifice them on the altar of political expediency is strong.
Over in Guinea, the new president Alpha Conde who was sworn in just seven weeks ago is already setting about revising agreements with various international funds and companies signed by the previous government. There is talk that he will demand that the State hold a 33% stake in all ventures.
And the ructions in the Arab world, already spreading across North Africa, are only adding to the sense of mounting political risk. Africa has always been rich in resources, whether of the mineral or agricultural variety, but that has not lifted it out of poverty.
Will this latest mining boom be any different?
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Harvard Professor: ‘an epic shift is underway’
Only time will tell if African countries succumb to hostility and suspicion against miners. But for now investors are pushing such misgivings to the back of their minds, focussing on rising commodity prices and staying bullish.
Harvard Professor Niall Ferguson advised the Indaba Conference that an ‘historic and epic shift’ is underway. The era of western economic and political influence is waning and the economies of the east have reawakened. Central to the upcoming transfer of wealth from rich to poor is Africa’s $312trn (the Professor’s calculation) of mineral resources: ten times that of the USA.
Look to the ‘holy grail of mineral exploration’
So where should investors look? With South Africa under a cloud of political distrust, attention is turning to the Continent’s heartland. The Democratic Republic of the Congo, with its vast reserves of copper, cobalt, gold and diamonds is seen as ‘the holy grail of mineral exploration’.
The West African greenstone belt has attracted investment to countries like Mali, Burkina Faso, Sierra Leone and the Ivory Coast. To the east Tanzania has become a significant gold producer, Zambia is seeing the development of new copper mines, while mining investors have homed in upon Namibia’s vast uranium resources.
Since 2000 foreign direct investment into Africa has increased from an annual figure of $10bn to $60bn, and there is no sign of the tide turning. Economists forecast fast economic growth, urbanisation and an alleviation of poverty. Foreign investors want a slice of the action and the mining sector is the obvious place to look.
Amongst London quoted companies to make a good impression at Indaba were AVOCET (LON:AVM), NYOTA MINERALS (LON:NYO), AFRICAN AURA (LON:AAAM), FORTE ENERGY (LON:FTE) and PETRA DIAMONDS (LON:PDL). For the time being the picture looks rosy. But in the long run politics rather than commodity prices could determine the fortunes of foreign investors.
It’s a message that I have been telling my Red Hot readers for some time – when you invest in a miner, you need to pay very close attention to the political risk. And we’ve invested in some very promising mining prospects where I believe the governments are very unlikely to launch a surprise attack.
Safe regions, big deposits – and the chance of a very big payoff for us if it comes through.
The very best of luck in your investments.
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• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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