African miners dig deeper

With greater certainty that the global downturn will not affect all minerals as badly as was feared at the turn of the year, quite a few companies have returned to the business of raising money and trading stakes in their African operations. This is not to say that African mining will escape further turbulence, most especially in a a few resource-rich countries where the political outlook has been turned upside down since the beginning of the year.

In the coming months, the toughest times for companies will most likely be in Guinea and Madagascar, mineral-endowed countries where unconstitutional leadership changes suggest more uncertainty. In the Democratic Republic of Congo (DRC) too, although the overall political dispensation is relatively settled at last, the mining sector will be exposed to continuing intrigues in the award of contracts and operating permits.

A much more positive prospect for the mining industry is presented in the ongoing shift in the balance of power in Zimbabwe, where a government that preferred to keep mining investors at bay is slowly ceding ground to one that investors openly favour. Prime Minister Morgan Tsvangirai estimates that up to $16bn in mining investment could be forthcoming if the government manages to change policies of excessive government control and manipulation. But even as mines minister Obert Mpufo said in June that the government must now “restrategise” the sector, the president of the country’s Chamber of Mines, David Murangari, was still deploring the restrictive operating environment and the lack of working capital that had caused gold output to fall by half during 2008. He said the only way out of this “dismal and gloomy” performance would be to recapitalise the industry. He may not have to wait too long.

Gold, currently enjoying high prices, looks likely to be the biggest lure for companies seeking to enter Zimbabwe now that miners can market their gold freely and retain their earnings, whereas previously the central bank pocketed a percentage. No gold was lodged for sale in the first quarter of 2009, but the Chamber of Mines says miners brought in 600kg in April and May, while two Canadian companies have announced plans to produce a total of 25,000 ounces in the coming months. South African firms are keeping an especially close watch on gold and platinum assets in their northern neighbour. Just one among many possible deals is a $300m joint investment being planned by Patrice Motsepe’s African Rainbow Minerals with Brazil’s Vale.?

Mixed symbols in Namibia

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Gold indeed still shines brightest of all Africa’s minerals, allowing for continued life of the more costly mines in Ghana and South Africa, and the development of new ones such as Burkina Faso’s Essakane project, where Canada’s IAMGOLD plans annual output of 375,000 ounces starting in mid-2010. Even Nigeria is getting in on the act since the passage of a new mining law in 2007, and UK-based Savannah Gold Corporation has started exploration in the north, where it hopes rich seams to rival those of Ghana are present. The high gold price has encouraged exploration and development in Côte d’Ivoire, Mali and Senegal, where companies like Gold Fields and Randgold are actively deployed, with good prospects for several new mines starting up in 2010.

Taxing commitments?

A big challenge that urgently faces all African governments – those promising positive change as well as those facing newly uncertain political or economic prospects – is to establish tax and royalty arrangements that satisfy public opinion, civil society and local communities, on one hand, and keep companies operating and investing, on the other. The mounting pressure for a higher tax take has certainly kept companies on their toes as they try to revitalise their investment push, but most governments have been forced to withdraw windfall taxes that they were envisaging, and some were enacting only 12 months ago, as their room for manoeuvre has been squeezed by the downturn.

Pressure is mounting for deals to be held up to greater public scrutiny. A recent report by the Open Society Institute of Southern Africa argues that “mining companies operating in Africa are granted too many tax subsidies and concessions,” and that there is a high incidence of tax avoidance by means of “secret mining contracts, corporate mergers and acquisitions, and various ‘creative’ accounting mechanisms”. Governments, as much as companies, are complicit in the failure to communicate the agreements they negotiate, says the report, which urges the wider adoption of the Extractive Industries Transparency Initiative.

In defence of the bigger, and listed, mining companies, PricewaterhouseCoopers claims that the extent of the contributions they make to “the creation of prosperity and stability” of the countries where they operate “is not always recognised”. A new mining-industry tax study finds that companies are not always able to demonstrate the extent of their tax burden within financial statements that reflect only corporate income tax. On average, the study claims, the companies pay “an amount equivalent to 12.5% of their turnover to government in taxes and other contributions” – which may include people taxes, property taxes licence fees or rents.

Governments and chambers of mines rarely see eye to eye. The Tanzanian government has most recently upset the industry with a new plan to lift excise-duty exemptions that have long applied to the sector. And in Zambia, the authorities have now switched the emphasis of policy from a windfall tax to pushing for an increased government stake in any copper mines facing closure, saying that this would be the best way to prevent further job losses.

As the pressure for more transparency intensifies, companies in the mineral-rich DRC will remain of special interest. Its national and provincial authorities continue to woo investors of all sizes. Copper prices may be down from the dizzy heights of last year, but investors are pressing ahead on both sides of the DRC/Zambia border. The latest large transaction in the Copperbelt was the $400m purchase of Luanshya Copper Mines by China’s Nonferrous Metal Mining Corporation. This came at the same time as Glencore decided to reverse a decision to halt operations at Mopani Copper Mines and Central African Mining and Exploration resumed its copper production at Luita, DRC. However, DRC-based company George Forrest International seems to be having trouble raising the cash it offered for uranium assets in Namibia.

The business newswires have not stopped humming with speculation about changing fortunes in the mining industry, as giants like Rio Tinto, BHP Billiton, Anglo American and Xstrata circle each other under close shareholder scrutiny, as they all still hold valuable assets they are unlikely to relinquish voluntarily. Even amid the recent market downturn, some of the more-ambitious medium-sized groups like Lundin and Vedanta have been looking to enhance their continental presence.