* Below is a full transcript of the original Q&A interview published by 121 Group’s The Assay Magazine, as part of 121 Group’s African Mining Investment virtual conference, 1-3 February 2021. The original article can be found here.
How did the mining industry in Africa fare in 2020 as COVID-19 resulted in shutdowns across the globe? Where did you see swift action and re-opening, and which sectors are lagging?
2020 saw significant logistics and travel issues, and the effects are playing out now. But the market held up surprisingly well – thrived even – in certain commodity groups and geographies.
To offer some context on a macro level, we need to reflect on the past near-decade. Years of underinvestment during the downturn, compounded by other industries (mainly crypto and cannabis) draining liquidity previously reserved for junior mining companies, worsened the squeeze between 2016 and 2019. Add into that mix the supply and demand fundamentals and the green revolution, and it’s not hard to understand why mining is playing catch-up in meeting future demand by developing new or exploratory projects.
There is a famous Jim Watkins quote: “A river cuts through rock, not because of its power, but because of its persistence.” The last decade has seen this aphorism play itself out in a mining context; that persistent little stream gaining momentum and strength, having now become a river. The only question is how powerful a river will it become as the commodity market gains strength?
Mining Financier Robert Friedland often says that we’re entering the “revenge of the miners” era. The importance of mining, and everyone working in mining, can therefore not be overstated.
How has this affected investor confidence in doing business on the continent?
Typically, when the commodities market is on the up, new projects and M&A activity create a wave of investment and job movement. The majority of 2020 was more muted despite the noticeable tailwind in the mining industry over the last 18 months. We saw tight liquidity for the junior market for most of last year and some project funding delays. Despite talks of increased M&A, travel restrictions ended up curbing activity in this area.
That said, we have observed a material shift in activity since October 2020, evident across all barometers – equities, private placements, recruitment activity, and general market sentiment.
Preliminary findings from Stratum’s 2021 “Market Sentiment in Africa” survey (full report to be released in February), show that industry leaders are generally buoyant. Investor confidence for the next 12 months sits relatively high – 56% of respondents are either very positive or positive. In contrast, only 24% of respondents described 2021’s prospects as negative.
Private equity funds, for whom Stratum performs “talent due diligence” on new and existing investments, felt the impact of changing conditions. PE funds seemed to act faster on repeat investments than new deals in 2020, since due diligence was already carried out in prior investments, often eliminating or reducing the need to travel to site.
In general, companies have been forced to focus more on risk assessment in the supply chain, maintaining production guidelines, and evaluating whether greater integration of their operating centres makes sense.
A word of caution though: all boats rise with the tide, so due diligence on assets, including people, has become even more crucial.
In which commodities are some of the top countries currently attracting international investment, and why? Which regions have the biggest exploration opportunities?
For gold, Ivory Coast is at the top of the list due to it being so underexplored compared with its West African neighbours. We believe the country is on the verge of transformational growth in the gold sector. Of course, other West African countries are also seeing the benefits of the current market, and all the usual suspects seem to be doing very well. Ghana faces more headwind, as regulatory issues make it increasingly difficult for expatriates to operate there, likely discouraging international investment.
Data from Stratum’s “Market Sentiment in Africa” survey currently being conducted reveals that 68% of respondents think West Africa will offer the most significant exploration opportunities over the next 12 months. Central Africa is second on the list with 36% rating it favourable for exploration.
East Africa had a promising 2020, with issues being addressed in Tanzania between Barrick and the government perhaps paving the way for more investment. Eritrea and Ethiopia also have vast potential, but with Ethiopia experiencing conflict over the last few months, it is challenging to predict opportunities for 2021.
We believe another significant growth area in Africa is copper and the battery metals. In terms of iron ore, we think we’re on the brink of (finally) developing assets such as Nimba and Simandou, which are, of course, behemoth projects.
As for South Africa, it’s still too early to call how the government under President Cyril Ramaphosa, who has a mining background, will fare. However, South Africa might well surprise us all, particularly in the exploration space. After all, it’s one of the most diversely endowed countries on the planet and remains underexplored for the most part.
Which metals provide the best opportunities for investment and exploration?
Copper, cobalt, nickel (and other battery metals), and gold. As mentioned above, iron ore is also poised to make a spectacular comeback in Africa, although we believe that might be a few years away compared to other commodities.
Philip Clegg, Portfolio Manager at Orion Mine Finance, leads Orion’s strategy in materials connected to decarbonisation. He has commented that: “The momentum in clean energy and battery materials continues to build. Policies supporting the electrification of transport are gathering pace and the ‘net-zero’ club is expanding month by month. With investment from automakers accelerating globally, the cost of batteries falling rapidly, and the ongoing greening of energy generation, we see huge opportunities for investment in the raw materials that are crucial to the clean energy transition.”
How will changing regulatory rules impact miners’ abilities to get projects off the ground?
From a staffing perspective, the principal issue is the lack of data on local policy effectiveness in generating local employment. There is no one-size-fits-all formula for promoting direct local employment. The capabilities and level of development of each host government will be crucial in determining such outcomes. Local content requires a joint effort between governments and private entities to create an employment-ready workforce to match demand with the supply. Simply regulating demand is counterproductive without an adequate supply of qualified people.
With progress in automation technologies, the number and the nature of jobs will change, and both local governments and the mining industry needs to prepare for these shifts.
How will changing regulations impact investor ability to invest in projects in Africa? How will regulations impact investor sentiment towards projects in the region?
The mining industry is not capitalizing on the current push for clean energy, yet. Though it’s been practising stakeholder capitalism for longer than most industries, we are not sure how strongly investors are receiving that message. Consider that more copper has to be mined in the next 25 years than in all of history combined – a staggering thought.
Mining and metals will be two of the main catalysts in the transition to a low carbon economy. Miners that can produce the commodities that make the world a cleaner place have a chance to lead from the front and help overturn the negative image of mining.
What action is the mining industry taking to change perceptions about doing business in Africa?
We need to look at this through two lenses – mining today, and what mining will look like tomorrow.
With future mining, many jobs will be tech-heavy. AI, automation, quantum computing, etc., will transform the industry, making it more of a tech business and paving the way for new generations to show interest (and grow their careers) in mining.
Nearer-term, mining generally requires better positioning or “brand education”. It’s our responsibility to “sell” the industry. For example, perhaps once millennials or Generation Z and even younger generations learn that their iPhones and iPads contain more than 75 mined minerals, the sector might spark more interest for them.
One point to clarify is that we tend to look at the industry’s perception through a Western lens. However, in our experience, the developing world’s youth generally view mining positively, a career choice that offers well-paying jobs.
It’s also a question of perceived risk. Many investors, companies, or individuals will not consider certain countries. Sometimes it’s founded, sometimes it’s not, and ultimately, there is no single answer to this element.
Which jurisdictions are recruiting from abroad and where do you see the greatest boom in local talent?
Africa remains a mining powerhouse, which draws in both financial and intellectual capital from around the world. This will only increase as the commodities cycle gathers momentum towards the inevitable “supercycle” status that many leading industry voices and institutions agree is just about upon us.
Pressures arising from the pandemic, particularly restrictions in travel and having to maintain steady-state operations, mean that companies are looking again at the viability of regional operational centres. For example, a CEO at one of Stratum’s Africa-focused gold clients mentioned that the company is considering opening a West African centre for operational leadership or international hubs closer to assets instead of traditional locations like Australia, Canada, the UK, or South Africa.
“Africa remains a mining powerhouse, which draws in both financial and intellectual capital from around the world. This will only increase as the commodities cycle gathers momentum towards the inevitable ‘supercycle’ status.
How does ESG play into investor sentiment and decision-making when entering or staying in Africa? Which of the three criteria: environmental, social, or governance, provide the most compelling reasons and which are the most difficult to adhere to?
Over the last few years, sustainable investing has moved into prime position. ESG compliance will likely be the primary value-generator (but also blocker) for companies, in that they won’t be able to do anything unless they adhere. NASDAQ SEC filing requirements are also currently driving momentum behind ESG.
Amanda van Dyke, Managing Director of sustainable resources strategy at ARCH Emerging Markets Partners, commented: “Globally, legislation regarding the sustainability of raw materials is increasing by the day. From the EU-wide sustainable taxonomy to individual companies like Daimler Chrysler, no raw materials from non-IRMA compliant mines will be allowed into their cars. Sustainability has become as big a factor for determining the long-term viability and success in the mining sector as the quality of the resource and metallurgy.”
She further explained that: “From a long-term investor point of view, the amount of scrutiny and consideration of ESG gets stronger every day. Our baseline for development viability assessment includes IFC performance standards, IRMA certification standards and ICMM standards. We then consider any specific standards relevant to the country of production, the listing jurisdiction and the destination market. This is the new investing reality.”
For Africa, governance concerning country risk is a given. Outside of that, a company’s Social License to Operate is crucial (holding on to its number one spot in EY’s annual Global Mining and Metals Top 10 Business Risks and Opportunities report).
Concerns about the negative impact of human activity and resulting climate change and wealth inequality are only likely to be magnified through a post-pandemic lens. So, it’s the “social” factor that will continue to be front and centre. Social license to operate is essential, but an aspect of that – community engagement – can be subjective. Given the diversity of local communities’ needs across a region as large as Africa, addressing social issues requires bespoke rather than broad-brush solutions. The challenge comes in measuring those and conveying the success of these customized efforts.
How a company interacts on the ground, its workplace culture, employee wellbeing, and trust are all mandated from the top. In terms of hiring leadership teams, there is an increasing awareness to consider ethics and beliefs. We expect to see growing pressure to link broader sustainability and ESG performance to pay. Senior management diversity is perhaps the area in which the mining industry is most lagging in the “social” element of ESG.
When asked whether one of the three ESG categories carries more importance, Amanda explained: “No one is intrinsically more important than the other anymore. The truth is a fatal flaw in any of them can render a project unviable, but I would say the one most within a company’s ability to control and fix is governance.”