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Mining: End of the supercycle

By Michelle Madsen
Posted on Friday, 12 February 2016 16:42

The deepest rout in commodities prices in more than a dec- ade has seen a fundamental reconfiguration of Africa’s mining sector. The past year has seen China’s growth slow sharply, driving prices down and prompting waves of mines across the continent to shut up shop, regardless of size.

The resource landscape has never looked bleaker for some – from the troubles of seemingly invincible Swiss commodities giant Glencore to the hundreds of exploration and development projects quietly disappearing from company prospectuses. Mine closures and project cancellations have also gutted the fortunes of currencies dependent on mineral exports.

With the commodity supercycle showing no signs of swinging back into a bull market, the short-term outlook for Africa’s miners given by international funding bodies and banks remains gloomy.

55% Drop in the market capitalisation of South Africa’s top 35 listed miners from June to October 2015

Some countries and companies are better positioned to weather the storm. And despite the risky environment, a clutch of investors is poised to step in to pick up potentially lucrative projects that cash-constrained owners have been looking to dump.

In this falling market, the profitability of even high-grade mines has been compromised, with miners large and small looking to rationalise their assets and strip businesses to the core. Swiss mining giant Glencore, which championed its diversified structure to investors at the time of its 2011 London listing as a safeguard against dropping prices in any one product, has emerged as one of the more unexpected victims.

Glencore saw its share price dive by 30% overnight in Septem- ber after a London-based analyst questioned the viability of the company’s huge balance sheet. In response, Glencore’s management team has sped up its asset rationalisation process, imposing cuts to loss-making arms of the business in a bid to reduce debt.

In September Glencore’s Katanga copper-mining unit in the Democratic Republic of Congo (DRC) and its Mopani copper mine in Zambia were suspended, knocking 400,000tn of copper cathode out of the market and cutting more than 4,000 jobs.

glasenberg lashes out Glencore’s chief executive officer Ivan Glasenberg, a South African himself, has said that the company remains committed to the continent and that it plans to reopen closed mines if they can be made competitive. Glasenberg has been outspoken against his rivals’ policy to keep loss-making mines open, suggesting that to do so will doom the entire sector to failure.

Some of Glasenberg’s harshest criticisms have been levelled against mining majors Rio Tinto, BHP Billiton and Vale, which have all raced to ramp up output in a bid to outpace their rivals as the lowest-cost producer of iron ore.

While BHP Billiton, Vale and Rio Tinto still retain a footprint in Africa, all have refocused towards their core businesses in the past three years. Amid the price slump, which has driven iron ore prices down to below $50/tn from 2011 highs of more than $180/tn, any projects deemed high risk have lost their lustre.

Rio Tinto sold its 78% stake in Zimbabwe’s Murowa diamonds in June after the government announced it would merge all local producers into one company that the state would hold a 50% stake in.

Rio Tinto has also been accused of dragging its heels over the development of its half of the Simandou project in Guinea, pushing money not into Africa but into Australia, where its iron ore business is on track to overtake that of Vale as largest in the world. It is not expected that the company will bid for the second half of the Simandou project when the Guinean government restarts a long-awaited tender process for the concession.

While major miners retrench to ride out the storm, high-cost juniors, many of which only started production at the top of the cycle, are foundering, if not sinking. In West Africa, Ebola outbreak, coupled with dramatically declining prices, practically halted the development of all new mines and saw operations at some more established projects grind to a halt.

African Minerals’ Tonkolili iron ore mine in Sierra Leone ran into financial difficulties and stopped production at the end of 2014. Its partner, Chinese state-owned enterprise Shandong Iron and Steel Group stepped in to take over Tonkolili as African Minerals went bankrupt in April 2015. Despite assurances given by Sierra Leone’s president, Ernest Bai Koroma, output from the mine is yet to restart and contractors are yet to be repaid outstanding debts. Best information from the whole web!

Close to Guinea’s border with Liberia, London-listed junior Sable Mining is stuck in an impasse with ArcelorMittal over a key rail line that would give its Nimba iron ore project access to a port.

Progress on the Nimba project has gone quiet and recently the company’s focus has swung back to chief executive Andrew Groves’s country of origin, Zimbabwe. The company signed a deal in September to develop a 600MW coal-fired power station with major Chinese state-owned enterprise CITIC.

SP Angel mining analyst John Meyer tells The Africa Report that while the perception among some in the market was that publicly listed companies were bearing the brunt of the slump, in reality the private end of the market was suffering equally, if not more.

“The shake-up has caused people who were developing projects to throw in the towel, so some people are picking up projects at bargain prices,” says Meyer, adding that exploration companies in particular were struggling to stay afloat.

The burning question is who is ready to invest? China has long been seen as the go-to partner for infrastructure-heavy, capital-intensive African mining projects. But with its government in the process of reforming the state- owned enterprise sector, China has adopted a more cautious attitude towards investment in Africa and greenfield investment has plunged in the past year.

Guinea assets

A number of privately owned Chinese companies continue to pick up assets, however. China Sonangol took over the Kalia iron ore project in Guinea when its partner Bellzone collapsed last year. Also in Guinea, China Hongqiao started mining bauxite from a joint venture project in March.

A more hopeful picture emerges from a handful of cash-rich junior gold miners. Aureus Mining in Liberia has stepped in to pick up three new gold licences adjacent to its New Liberty mine. South African Sibanye is also looking acquisitive, trading on its low overheads to pick up attractive assets at low prices. “Sibanye is the nimble up-and- comer and aims to maintain this as Randgold has done,” ananalyst who requests anonymity explains.

In the DRC, Australian-listed junior Tiger Resources received a $165m investment in the Kipoi copper project from the International Finance Corporation in October, allowing it to refinance and expand its operations. South Africa’s Industrial Development Corporation said in October that it planned to invest in Alphamin, a tin miner with operations in North Kivu province.

While some level of investment is still flowing into the mining space, the commodities slump has been seen by some as an opportunity for African economies to diversify away from the resources space and into sectors that guarantee higher returns for citizens of the countries themselves. ●

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