When it comes to natural resources in Africa, coverage tends to focus on the problematic (see Rio in Mozambique), the awkward relationships (see China), the political risk (see Congo) and the collapse in labour relations (see South Africa).
But despite the setbacks, Africa still has vast untapped reserves and lots of potential. So what should investors look out for in the next few years? Research from Ecobank has identified six themes.
In its report Six top trends in sub-Saharan Africa’s (SSA) extractives industries, Ecobank sets out the scale of Africa’s potential:
Africa hosts 30% of the world’s total hydrocarbons and mineral reserves. It holds 12% of the world’s crude oil reserves, 42% of the world’s bauxite, 38% of uranium, 42% gold, 88% of diamonds, 44% of chromite, 82% of manganese, 95% vanadium, 55% of cobalt and 73% platinum.
That’s the opportunity. So what are the trends?
1) The emergence of private equity
It’s still early days for the private equity sector in Africa and many of the region’s stock markets remain relatively small and illiquid. But as Ecobank notes, “the tide has already started to turn.” Carlyle Group has built a team focused on energy investments in Africa, and other firms including Warburg Pincus are active in the region. Ecobank predicts:
With some of the world’s largest mining companies pushing to sell assets and cut costs, following high profile asset write downs at the start of 2013, PE funds may be more swayed to invest in African mining prospects, with its high risk-high reward curve.
However, Ecobank is not predicting a big rush and PE money is likely to remain scarce.
2) No exploration frontier is off limits
Where to go? The discovery areas to mark on the map are: East Africa’s Rift System and Rovuma Basin, West Africa’s Transform Margin, and the lower Gulf of Guinea pre-salt plays. As Ecobank notes,
East Africa has gifted two highly prolific exploration zones, the rift system and the Rovuma basin, while the Gulf of Guinea’s traditional prospectivity has yielded even greater appetite for more complex plays in its terrain such as pre-salt plays off the Republic of Congo, Gabon, Angola and Namibia. This unyielding appetite for new frontiers has been accompanied by a general rise in Capex expenditure for oil and gas across the continent, with Africa likely to register an increase by the end of 2013 of close to 15%.
3) The infrastructure is still missing
The potential returns from extractive industries are Africa’s best bet for infrastructure that would also benefit other industries (such as agriculture and manufacturing). But “Investors will be all too aware of the $93bn infrastructure investment deficit that is need annually over the next decade to plug the continent’s infrastructure gap.”
And the list of companies getting unstuck due to infrastructure problems is long, most notably Vale and Rio Tinto in Mozambique.
However, there is a new approach. Ecobank points out that African governments are looking at deals that involve simultaneous mining and oil investments and infrastructure. This is a move away from resources-to-coast type projects, instead looking to develop “resource corridors” that promote domestic and regional markets for Africa’s oil and mineral resources. One example is the Zambezi Valley Development Corridor, a coal project between Malawi, Mozambique and Zambia.
The downside of such corridor projects is that they are a harder sell to investors. However, new financing techniques, such as public private partnerships, should help spread the risk.
4) Local content policies are here to stay
African countries are pushing harder to create benefits from mineral extraction for local communities, through manufacturing jobs or local supply chains. Just don’t call it resource nationalism.
5) China: from resources-for-infrastructure activist to acquisition protagonist
The China in Africa story is well known. So what’s changing?
“Chinese engagement has undergone an observable and notable shift,” says Ecobank.
First, Chinese loans are not automatically tied back to access to oil and mineral equity for Chinese firms, and many negotiations on the latter are now being dealt as a separate process. Now Chinese firms have increasingly pursued direct acquisitions as a form of market-entry.
This, Ecobank says, has been more successful in moving from the extraction phase to production in the country.
In some cases, China has also embarked on joint ventures rather than sole ownership:
In the Democratic Republic of Congo’s (DRC) cobalt sector for instance, China Railway Engineering Corporation (CREC) and Sinohydro, have entered into an agreement to establish a joint Sino-Congolese venture, Sicomines.
6) The era of disclosure
Ecobank thinks that “2013 represents a potential turning point for the new era of disclosure in Africa’s extractives sector”. In 2012, Sierra Leone made the trailblazing move of creating an internet database for mining contracts that would allow public access to revenue data for the country’s extractives industry, and covering everything from license payments to “contributions made to local traditional leadership structures”. Guinea has also published many mining documents following the new mining code.
The Foreign Corruption Practices Act has implications for US-listed companies overseas, as well as any company registered with the SEC, and requires transparency on payments larger than $100,000; combined with the Extractives Industry Transparency Initiative (EITI), which several African countries have implemented, the global trend has “clearly swung in favour of disclosure. Whether such disclosure is adopted voluntary or as part of an obligatory process is a moot point.”
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