Hogan Lovells Publications | 15 November 2017

Investors and mining companies face significant challenges in Africa - remain optimistic

One of the questions most frequently asked by both existing investors and potential investors is whether the African mining and natural resources sector is becoming uninvestable. This question may seem strange within the context of the recent "scramble for Africa", and the large number of global companies that have pursued their interest in establishing a presence in Africa. It may also seem strange to ask this question within the context of positive sentiment, that is often expressed, about the African continent, including that Africa is a continent of endless possibilities and opportunities, Africa has significant untapped natural and human resources, and that investability of many African countries has improved, for various reasons, including mature banking, finance and legal institutions, investment-friendly policies and regulatory frameworks, and national development plans which demonstrate governmental support for sustainable infrastructure and development.

There are probably two main reasons for this question being asked. Firstly, positive views of investment in Africa don’t always extend to the mining and natural resources sector. While it is often acknowledged by stakeholders that the mining and natural resources of a country can contribute meaningfully to growth, development and transformation, there is a growing questioning of the impact of mining on the environment, host communities, social structures, tourism, and other industries (such as agriculture), versus the benefits that often flow from mining and beneficiation operations. As the voices of concern increase and develop, the benefits that flow from mining and beneficiation operations are likely to be questioned, even further.

Secondly, there remains significant concern about policy and regulatory uncertainty, and the growing perception that investors are at the mercy of the politics of the day in the relevant countries and from time to time, those in power. The recent examples of mining legislature change in Tanzania and South Africa have brought into sharp focus the fragility of investment decisions relating to so-called "frontier markets" such as Tanzania, and emerging markets, such as South Africa.

Tanzanian President John Magufuli signed into law the Natural Wealth and Resources Bill 2017, and the Natural Wealth and Resources Contracts Bill 2017, on 3 July 2017. These laws, which were fast-tracked though the Tanzanian Parliament, in a matter of weeks, have far-reaching consequences for foreign companies with investment in Tanzania. Tanzania is one of Africa's largest gold producers (depending on the figures used, Tanzania is either the third or fourth largest gold producer in Africa).

There has been extensive investment in Tanzania's gold mining industry, with a large percentage of this, focused on prospecting operations, which are, of course, critical in the creation of a pipeline that can later be converted into mines. The uncertainties flowing from the new laws are likely to dramatically impact junior mining companies, who are focused on exploration, and it will make capital raising exercises, extremely difficult, if not impossible. Where ownership of mining assets in a company are put at risk, this is likely to scare off potential investors, and make existing investors exercise extreme caution.

On 15 June 2017 the South African Minister of Minerals, Mosebenzi Zwane published the "Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016". The response was immediate, dramatic and far reaching. It is estimated that mining stocks lost approximately ZAR50 billion in value, following the announcement, with the Rand losing ground. The Chamber of Mines, representing more than 90 percent of the miners in the South Africa mining industry, has challenged Mr Zwane, through court processes. Whilst there was significant discord amongst various stakeholders, the most recent developments, where a group of NGOs has applied to the High Court, to join the court process initiated by the Chamber of Mines, is a further, significant positive step in South Africa's democracy. There will be a number of people who will criticise intervention at this late stage, because it is likely to delay proceedings, and the matter being heard in court. However, the applications to intervene must be seen within the context of South Africa's democratic and judicial processes. South Africa's commitment to the Rule of Law, enforced through the court system, is widely regarded as one of it's most positive attributes.

While the South African and Tanzanian examples are of concern, this does not mean that Africa is uninvestable. To the contrary, Africa has a significant and often thriving mining and minerals industry, providing millions of jobs and opportunities.

It is likely that demand for certain precious metals will continue to grow, and that the demand for the so-called "battery metals" will grow exponentially. All of this creates opportunities for investors, provided that the investors have a proper understanding of the various risks that are faced in these investment opportunities.

The investability of Africa is likely to depend, significantly, on balancing the growing need for mineral resources whilst addressing concerns that multi-national companies extract value without returning benefits for the host countries, and ensuring that the vast socio-economic benefits that can flow from mining operations, materialise.

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