CONDITIONAL SUCCESS
Mining has a future in Africa if issues such as security, corruption and supply chains can be well managed and resolved
Photo by: Bloomberg
Africa is the most mineral-rich continent in the world and has the potential to become a mining mecca, says global consulting firm KPMG.
The firm explains that mining companies are attracted to Africa by the low cost of labour and encouraged by the developing regulatory framework for the mining industry. As Africa has minerals, such as coal, diamonds, gold, uranium, platinum, iron-ore, rock salt and potash available for exploitation, the opportunity for developing mines to grow is large.
KPMG mining global lead Jacques Erasmus points out that African countries such as Zambia, Uganda, Tanzania, the Democratic Republic of Congo (DRC), Sierra Leone, Ghana and Angola are all in the top lists of the fastest emerging economies in the world.
“This growth is because of their known mineral wealth and others, such as South Africa, Kenya, Rwanda and Botswana, are showing signs of continued business development and stability. This means that mining has a future in Africa if issues [relating to] security, corruption and supply chains can be well managed and resolved,” he explains.
There are several challenges that mines face throughout Africa. These are not exclusive to Africa and include the commodities down cycle and market volatility, which can affect countries that rely heavily on exports to other countries, Erasmus adds.
Some African mines are suffering from the consequences of manufacturing and production slow downs, which has led to the lapse in demand for commodities such as steel and copper from developing countries like China. However, the gold market has been bolstered by the finance community’s regard for gold as a safe haven, which is why the price has remained relatively stable.
“Copper can be regarded as a thermometer product, as it is one of the first to be impacted on by and recover from a recession, while other commodities respond later in the economic cycle,” he notes.
Meanwhile, many African countries, such as Zambia, Ghana, the DRC and Mozambique, which have significant resource bases, are still considered to have a high level of political instability and policy risk. As a result, these countries do not receive their potential share of foreign direct investment (FDI) or intra-Africa investment, which countries such as South Africa enjoy.
He explains that the lack of development in infrastructure, such as rail, road and ports, in countries that border African mining countries are also creating challenges for miners.
Consequently, there are a range of new intergovernmental, community and joint venture partner challenges which could delay the timely commissioning of projects and have an impact on future operations. He explains that this is caused by the slow development of infrastructure and unrest in countries.
Erasmus says in many African countries electricity supply has been under pressure, owing to underinvestment in new infrastructure and backlogs in maintenance.
“Mining operations are typically energy-intensive and located in remote areas, sometimes with limited grid connectivity. This has caused mines to resort to increased reliance on diesel generators, which are very expensive to operate at the current oil price. They are also considering investing in baseload power plants, which may be owned and operated by the mining company or third parties.”
The high cost of operating a mine using generators can also impact on the effective implementation of a mine’s cost optimisation plans aimed at reviewing and improving the efficiency of the asset portfolio and operation to reduce costs, as mines are generally capital-intensive.
The majority of a mine’s capital expenditure is allocated to mining equipment that is either owned or leased.
“A reduction in equipment costs can provide a competitive edge. In addition, contractors can help reduce costs and allow for significant savings by providing specialised leasing services for mining equipment,” Erasmus explains.
KPMG notes that Africa will prosper if the various countries across the continent ensure that they are politically and regulatorily stable, adding that investments in water, power and logistical infrastructure will attract further investment and promote growth.
A collaborative approach where government, business and labour partner to drive development is the key to success,” says Erasmus.