Headed to Africa: Colin Barnett, Last to Board the Boat

Greater collaboration between Africa and Australia is forthcoming, but what is ignored?

JP Stevenson

Headed to Africa-BLOG
PERTH, AUSTRALIA – In the midst of the Africa Down Under conference, held at the end of August, West Australian Premier Colin Barnett declared that Western Australia is now prepared to extend its expertise in the development of regional mining law, tax structures, and environmental and safety standards. As highlighted in the Australian, “Barnett has made a landmark offer to work formally with African governments to help boost their mining industries, dismissing long-held fears that the continent’s emergence as a resources powerhouse poses a genuine threat to Australia.”

Though lauded by many, this announcement comes late. Africa, and West Africa in particular, has long been Australian territory. Yet it is only following the realization of the state of resource exploration in Western Australia has this dynamic gained public support.

Australia’s ASX is the largest supplier of mining capital to Africa, with 218 listed companies operating over 1,300 projects across the continent (the TSX follows closely behind in these measures, with 200 African-focused mining companies listed as of last December). These funds are predominately dedicated to exploration: 69% of total projects qualify as early-stage exploration. The ASX is also the single largest provider of secondary capital to mining projects in Africa, having raised over AUD 6 billion in the past five years.

Among those exploring, a strong preference exists for the comfort of well-established African mining jurisdictions. “Statistically, South Africa remains the hotbed of mining activity within the African continent. The bulk of projects currently under development are located in South Africa,” explains John Madew, senior trade commissioner with the Australian Trade Commission (Austrade) and head of Austrade’s presence in Africa.

This is changing, however, as explorers have sought to replicate the success of producers like Barrick, Anglo-American, GlencoreXstrata, and First Quantum in countries such as Tanzania and the Democratic Republic of the Congo (DRC). Even in emerging mining jurisdictions, Australia’s presence in African mining is reflected in the legal framework surrounding the industry: many Central and West African countries have modeled their mining code after that of Australia.

It has been in this way that, in spite of little official political support, those who once feared that African mining might supplant Australian mining have seen their fears substantiated. Fifty percent of new funds raised on the ASX have been earmarked for overseas projects. This has been coupled with a decline in real exploration in Australia. Alex Jones, partner at DLA Piper writes in the Kargoorlie Miner that, “although total exploration expenditure has increased [domestically], the focus has been on ‘brownfields’ resource definition work and near-mine activity. Worryingly, greenfields exploration expenditure has actually remained constant while drilling costs have increased, reflecting a significant reduction in greenfields exploration activity.”

Regulatory shortfalls have made resource exploration in Australia less attractive than in many other jurisdictions. Jones points out that these flaws exist in three forms: an inappropriate tax code and the need for development of an equivalent to a Canadian “flow-through” tax system; onerous, disjointed and opaque regulatory structures, such as an exploration permitting system that is contingent upon the assessment of the impact of a mine on the surrounding region; and inconsistent enforcement of expenditure conditions. It is therefore unsurprising that we have seen miners seek shelter in foreign markets and Africa become a focal point for Australian resource explorers.

While the implementation of newly-elected Prime Minister Tony Abbott’s exploration incentive scheme will undoubtedly reinvigorate domestic exploration, this should not be at the expense of Australia’s connection to Africa: a continent that boasts increasingly attractive mineral jurisdictions and one in which Australian companies have a first-mover advantage. Nonetheless, beyond appropriating Australian regulatory structures, more support is required to fill gaps between the regions.

The ASX is the world’s most important source of capital for mining projects in Africa, yet the risks of operating in Africa are not well understood by its investors, even for mines in production and particularly among those who have moved into less well understood jurisdictions.

Tiger Resources, an Australian listed mining company (ASX: TGS) with a copper-cobalt mine in production in the DRC’s famed Katanga province estimates that their market value stands at half of the net present value of their assets, in part because of investor misperceptions over the region.

Brad Marwood, managing director of Tiger Resources explains that in the case of their Kipoi mine, perceptions of regional violence have informed market sentiment, in spite of their project’s isolation from rebel groups. “The violence in the eastern DRC is 1,200 km away from Katanga, with no connecting road; there really is very little means for the M23 to reach Katanga, and in any case the government has the money to protect the 85% of its revenue stream that comes out of the province,” said Marwood.

These misperceptions begin with Australia’s press. Upon the kidnapping of 41 oil workers in Amenas, Algeria in January, the Australian asked Resolute Mining (ASX: RSG) of the “security measures” they had in place for their Syama goldmine in Southern Mali: a project located nearly 3,000 km from Amenas. This is not a new line of questioning for the company, who have long seen their share price impacted by activity in Mali’s militarized north, still nearly 1,000 km away.

While bad journalism is by no means unique to Australia, there are several implications to the generalized way in which African mining is spoken about. First, The fundamentals underscoring a strong project are often obfuscated. “The fact that all 63 international mining companies to have gone into the Copperbelt in the last seven years have been highly successful is missed. It is also missed that 50 cents out of every dollar spent on project development in Africa in 2010 was in the DRC, and five of the 10 lowest-cost copper companies in the world are based there,” explains Marwood.

Second, if taken on a regional level, investor ignorance challenges the competitive advantage that Australians have cultivated in African mining. Will the mining industry continue to turn to the ASX if the ASX’s investors do not understand the scope of these projects?

The value of what both Africa and Australia could lose as a result of investor ignorance is reflected in the case of Mount Burgess. An Australian diamond and metals explorer with operations in Botswana, Mount Burgess saw its extension application for its Kihabe project denied in May of 2013, in spite of having operated in the country since mid-1980s. Those unfamiliar with the state of Botswana’s mining industry might read this incident as another instance of an African government reneging on its commitment to a stable investment climate and, in effect, nationalizing a potentially lucrative project: an occurrence not unknown in neighboring Zimbabwe.

Yet this would both misinterpret conditions surrounding the event and ignore the track record of the government of Botswana. Mount Burgess saw its extension application denied for having failed to execute its previous approved prospecting program and to meet capital expenditure requirements. Botswana also lacks any precedence of resource nationalization. In fact, the Fraser Institute Survey of Mining Companies 2012-2013 named Botswana the most favored destination for investment capital on the African continent, placing the country’s ranking above that of many far more developed countries such as New Zealand, Spain, Russia, and many American states. On the back of this reputation the country has built the world’s largest diamond mine by area: the Orapa mine, a joint venture between the government of Botswana and De Beers. It is also through this reputation that the government of Botswana now seeks to open up the country’s tremendous coal and uranium reserves: projects that several Australian resource exploration companies such as Walkabout Resources (ASX:WKT) and A-Cap Resources (ASX/BSE: ACB) have been involved.

The Honorable Onkokame Kitso Mokaila, Minister of Minerals, Energy and Water Resources for the Republic of Botswana comments: “Botswana’s reputation as a destination for investment capital has been built upon the stable enforcement of the rule of law. In the case of Mount Burgess, the company clearly went against the legal framework that Botswana has in place to govern its mining industry. Were we to make an exception and wave the penalties associated with their violation, would it not in fact be indicative of the type of exceptionalism that have led many other African countries to have poor investment climates? Would this not undermine our credibility?”

It remains to be seen how the fallout from Mount Burgess might impact the country’s mining industry and those resource exploration companies operating within it: a question of whether investor misconceptions can be surmounted by a country’s potential. However, if these companies were to see their projects devalued as a result of this event, it would be a loss for Australia.

Western Australia is one of the world’s most important mining jurisdictions, as much as for its resource bodies as for its expertise, and a greater level of political collaboration between Australia and African governments is undoubtedly a good thing. Attention must first be placed, however, on aiding Australian explorers: both by rectifying structural flaws in domestic exploration and better supporting Australian miners operating in Africa through aiding the private sector in investor education. African issues are Australian issues. A more collaborative approach to industry building is a beginning, but it should certainly not be the end.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s