Mining Indaba 2015 – Selected Articles from KPMG South Africa Blog

Listing in Africa – Extractive Industries

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The African continent continues to be viewed as an emerging high growth market with an abundance of natural resources and market development potential. Many investors still have little knowledge of the market and KPMG is delighted to launch the Listing in Africa: Extractive Industries publication.

According to Robbie Cheadle, Associate Director, Transactions and Restructuring at KPMG. The publication provides a country by country overview of the extractive industries and related stock exchange listing criteria, a comparison with developed stock exchanges that attract listings in the extractive industries as well as general insights around investment across the continent.

What does Africa have to offer investors as a listing destination?

The recent lack of growth in the developed markets coupled with perceived improvements in political and macroeconomic stability, policy certainty and legal systems in many African countries, as well as Africa’s growing middle class and rise in consumption is leading to increasing interest by foreign companies and institutions in Africa as an investment destination. Added to this, the USA Government is looking to strengthen its commercial ties with Africa through its “Power Africa” and “Investing in Africa Trade for our Common Future” initiatives and its “Doing Business in Africa” campaign.

The KPMG “Listing in Africa – Extractive Industries” supplement to the “Listing in Africa” publication attempts to answer questions and also to provide potential investors with an interest in the extractive industries in Africa with some further insights.

Africa, as a whole, did not score well in the 2013 Frazer Institute Survey of Mining Companies Policy Perception Index, which measures the overall policy attractiveness 112 jurisdictions globally.

Liquidity of the African stock exchanges and availability of local capital.

An increase in Foreign Direct Investment should naturally lead to an increase in listings, however, an analysis of the number of listed companies between 2010 and June 2014 indicated that the number of listed companies on these exchanges has either remained static or increased marginally.

In considering the market capitalisation of the various African stock exchanges, the inclusion of large, dual listed companies on a number of the stock exchanges needs to be considered, as well as certain dominant players.

The full publication provides a country by country overview of the extractive industries and related stock exchange listing criteria, a comparison with developed stock exchanges that attract listings in the extractive industries as well as general insights around investment across the continent.

If you are listing or investing on this exciting continent download this publication.

http://www.sablog.kpmg.co.za/2015/02/listing-africa-extractive-industries/

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Obstacles to growing African mining FDI

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There is increasing interest by foreign companies and institutions in Africa as an investment destination due to the recent lack of growth in the developed markets; perceived improvements in political and macroeconomic stability, policy certainty and legal systems in many African countries; and the continent’s growing middle class and rise in consumption.

Added to this, the US Government is looking to strengthen its commercial ties with Africa through its “Power Africa” and “Investing in Africa Trade for our Common Future” initiatives as well as its “Doing Business in Africa” campaign.

Is this perceived improvement in political and macroeconomic stability, policy certainty and legal systems in African countries really an actuality and, more importantly, is policy uncertainty and poor legal systems likely to curb foreign direct investment into Africa?

Frazer Institute Survey of Mining Companies

Africa did not score well in the Frazer Institute Survey of Mining Companies 2013 Policy Perception Index which measures the overall policy attractiveness of 112 jurisdictions globally. The top five African countries and their ratings were Botswana (25/112), Namibia (34/112), Ghana (43/112), Burkina Faso (46/112) and Eritrea (52/112). South Africa ranked 64th and Nigeria 75th, well ahead of the lowest three ranking African countries, namely Angola (108/112), Zimbabwe (106/112) and the Ivory Coast (103/112).

Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system and taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological database, security, and labour and skills availability.
While Botswana achieved the highest ranking in Africa and had high scores in most areas, it should be noted that Botswana’s ranking dropped eight places (it was 17th of 96 jurisdictions in 2012). The deterioration in Botswana’s ranking is a result of lower ratings in nearly all policy factors compared with the prior year, particularly regulatory duplication and inconsistencies, uncertainty concerning the administration, interpretation or enforcement of existing regulations, taxation regime, and uncertainty concerning disputed land claims.

In addition, Botswana scored notably lower ratings with regards to the quality of its geological database, infrastructure, trade barriers and availability of labour/skills.

Perceptions of corruption

In terms of the 2014 Corruption Perceptions Index prepared by Transparency International, which measures the corruptness of 175 jurisdictions globally, Botswana is perceived to be the least corrupt country in Africa. Botswana ranked 31st with a score of 63/100 (where 0 is very corrupt and 100 is very clean), followed by Mauritius (47th with a score of 54/100), jointly Lesotho, Namibia and Rwanda (55th with scores of 49/100 each) and Ghana (61st with a score of 48/100).

According to the United Nations Conference on Trade and Development (UNCTAD), subsequent to the 2012 slump, global FDI increased by 9% in 2013 to US$1.45 trillion. UNCTAD has projected that FDI flows should continue to rise over the next few years, however it cautions that weaknesses in some emerging markets and risks relating to policy uncertainty and regional instability could negatively impact on the expected FDI upturn.

FDI inflows focused on East and Southern Africa

Despite Africa’s far from perfect scores in both the Frazer Institute Survey of Mining Companies 2013’s Policy Perception Index and the 2013 Corruption Perceptions Index, total FDI flows into Africa increased by 4% to approximately US$57 billion in 2013 according to the 2014 World Investment Report. However, it should be noted that FDI inflows to Africa are being sustained by increasing intra-African investments mainly in the manufacturing and services industries, led by South African, Kenyan and Nigerian transnational corporations.

In addition, the main beneficiaries of the increased FDI flows were Ethiopia and Kenya in East Africa and South Africa and Mozambique in Southern Africa. FDI flows to North, Central and West Africa declined by 7%, 18% and 14% respectively, which decreases are partly due to political and security uncertainties.

The decline in FDI flows to North Africa is mainly a result of the political instability in Egypt which resulted in a decrease of 19% in FDI flows to that country. The decrease in FDI flows to West Africa is largely due to decreasing flows to Nigeria resulting from uncertainties over the petroleum industry bill and security issues. Central Africa has been negatively impacted by the political upheaval in the Central African Republic together with on-going armed conflict in the DRC.

The impact of the Ebola virus on FDI flows to West Africa during 2014 has yet to be determined.

Diminished role of mining in greenfield projects

The UNCTAD has also revealed that although the share of the extractive industry in the cumulative value of announced cross-border greenfields projects is still significant for Africa, at 26% the extractive industry’s share of the total number of projects in Africa has dropped to 8%. Ninety percent of the announced greenfields investments in Africa in 2013 related to manufacturing and services projects. This is in line with a worldwide reduction in investment into the extractive industries.

Mining companies have faced and continue to face difficulties resulting from commodity price fluctuations, global economic concerns, and supply/demand imbalances.

According to the October/November 2013 ResourceStocks World Risk Survey, there has been a significant shift in investment focus to the developing countries, with Mexico, Botswana, Chile, Peru, Burkina Faso, Brazil and Namibia all featuring in the top ten, despite these countries scoring generally lower scores than their peers in the developed world. This shift is attributed to the prospect of greater returns due to a lower cost base in terms of labour and the lack of red tape in these jurisdictions.

Based on the above it would seem that while many jurisdictions in Africa still have some way to go in order to achieve rankings that are in line with their peers in the developed countries, others are achieving better rankings. It is apparent that poorer rankings in certain African jurisdictions, particularly with regards to political and policy uncertainty, have deterred FDI flows to those regions.

FDI focused on rapidly growing economies

It does seem equally clear however that the higher levels of growth and increasing GDP, populations and consumption in many African countries is attracting increasing FDI inflows, both regional and foreign, into Africa, particularly in rapidly growing economies such as those of Zambia, Nigeria, Ghana and Uganda.

Those African countries that are making progress in creating a more investment-friendly environment resulting in increased FDI inflows could assist other African jurisdictions still working on improving their policies and regulations by collaborating with them and sharing best practices.

Find out nore about the 2015 Mining Indaba

http://www.sablog.kpmg.co.za/2015/02/obstacles-growing-african-mining-fdi/

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Overcoming Africa’s infrastructure deficit to bolster mining

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The biggest hurdle to mining development in Africa is the cost of road, rail and port infrastructure, which at present is problematically prohibitive. The buoyant project development mood at the height of the commodity cycle towards unlocking African resources seems now but a distant memory of good times passed. On reflection, how many of these large greenfield mining pit-to-port projects have actually materialised? The disappointing reality at the moment is very few.

There is little doubt that the continent has an abundance of both resource and market potential, yet it continues to struggle to deliver on these large projects. The prospect of an upturn in commodity prices pertinent to the continent also appears unlikely over the short to medium term and with traditional investors adopting an almost speculative approach to the industry it seems unlikely that funding for these types of projects will improve. Yet the continent sits on an opportunity that if unlocked would have a significantly beneficial socioeconomic impact on millions of people.

So why is this mining development not happening? Political risk and declining cost competiveness, due to a multitude of hidden costs, have invariably been key factors. At the heart of the problem however is the affordability of road, rail and port infrastructure.

Who should finance needed infrastructure projects?

Most mining companies no longer have the balance sheets to financially support these costly long-term infrastructure developments and, coupled with increasing pressure from investors to deliver short-term returns, they are unlikely to take on this risk. Many African governments are also simply unable to fund this type of infrastructure cost, the development of which is so vital for economic prosperity.

To deliver these game-changing infrastructure projects will require a different way of thinking and collaboration across governments, communities, producers, financiers, labour and suppliers. At the forefront of this thinking is the operationalization of the African Unions’ African Mining Vision.

Multi-purpose, multi-backed projects

Plans need to be turned into actions and governments and others need to hold each other accountable. In order for the development corridor concept, identified in these plans, to be operationalized, political will and the development of power as an industry enabler are imperative. There is also sound empirical research supporting the need for focusing on viable projects, enacting clear and consistent regulatory policy, establishing public-private partnerships (PPPs), and developing inter- and intra-government cooperation.

We see infrastructure funds as a key source of funding for PPPs and here we believe these funds can play an instrumental role in realising the corridor development concept.

Access to other developmental and donor-based funding could be sourced where infrastructure can be used for multi-purposes such as transporting agricultural inputs and outputs.

Lessening costs

A further area of opportunity is to bring the cost of infrastructure and operating costs down and this will require all parties to work closely with each other. An obvious area is to spend adequate time on pre-construction engineering to avoid costly mistakes. This invariably requires a clear set of objectives and an execution strategy that displays an understanding of where risks lie and who takes ownership of managing these risks.

If Africa is to realise its resource potential, the unwavering commitment of a collaborative group of visionary leaders prepared to take a long-term view is required.

Find out more about the 2015 Mining Indaba.

http://www.sablog.kpmg.co.za/2015/02/overcoming-africas-infrastructure-deficit-bolster-mining-2/

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The mining asset life cycle

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A combination of demand from the east, dwindling mineral resources and rising costs is reshaping the mining sector. As mining companies attempt to manage their asset life cycle in this new landscape, their three main strategic priorities are growth, performance and compliance.

Asset lc

KPMG has put together a report titled Growth in a time of scarcity. The report is the first in a series that discuss how mining companies can best navigate the asset life cycle, and covers the five key elements of the transaction phase: geographic expansion, financing and mergers and acquisitions, tax structuring, due diligence and integration. We believe that this publication will make a valuable contribution to the quest to optimize growth, performance and compliance in the industry. We are committed to being your long-term partner.

http://www.sablog.kpmg.co.za/2015/02/mining-asset-life-cycle/

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