Mining in Africa in 2020

• South Africa

• Energy and infrastructure - Mining

05-12-2019

South Africa has faced strident calls for the nationalisation of the Mining and Natural Resources sector, which, in my view, is the final step along the spectrum of resource nationalism.

Recent events across Africa including in Tanzania, Zambia, and the DRC, particularly with the amendments to the Mining Laws in these countries, are strong indications that resource nationalism is sweeping the African continent.

Calls for nationalisation (as in South Africa), and the measures that are implemented from time to time in support of resource nationalism (particularly, the changes to the Mining Laws), tracks very closely with two phenomena, namely upcoming elections (i.e. as part of the election rhetoric and promises to gain support) and the State of the economy at any point in time (the worse off the economy, the greater the socio-economic demand for jobs, services, commercial opportunities, and, ultimately, participation in the actual or perceived wealth generated by mining operations).

There are a broad range of measures along the spectrum of resource nationalism, including the implementation of trade and other tariffs, establishing restrictions on procurement (goods and services, indigenisation and ownership requirements, increased royalties, and restrictions on the export of certain minerals, or, at the very least, the export of raw minerals, aimed at encouraging local beneficiation. The most recent example of this, outside of Africa, was the announcement of Indonesia will enforce a complete ban on the export of raw nickel ore from 1 January 2020, two years earlier than initially planned. The purpose is to secure supplies of raw nickel ore for numerous smelters that are under construction, and the drive to increase local processing capacity. South Africa has stopped short of nationalisation, but has made provision (and created the mechanism) for outright State ownership if the State wants to do so (it can apply for and be granted prospecting and mining rights), and has actively created the legislative framework for resource nationalism is various forms including (a) changing the mineral ownership regime from private ownership to State custodianship of minerals of behalf of the citizens, with the right holder only being given a right to the minerals under the prospecting and mining rights, (b) implementation of a standalone Mining Royalty Act, which also casts the collection net a lot wider, (c) implementation of “windfall”, and “super” taxes which impact the Mining and Natural Resources Sector, and (d) implementation of Indigenisation Laws (in the case of South Africa this is Mining Charter 3, which requires compliance with specific targets relating to Black ownership, procurement of goods and services, and diversity).

Changes to Mining Laws in other African countries, including, most recently, Mali, are supportive of resource nationalism, regardless of the terminology that is used.

Most, if not all African countries that have significant mineral resources, face calls for outright nationalisation, and for more stringent resource nationalism as their economies fluctuate, and the political landscape and political players change. The reality of attracting investment often challenges this position – more mature governments typically implement the resource nationalism measures incrementally to ensure that investors are not scared off, but later become locked in by the investments that have been made.

Commodity cycles also impact on the implementation of resource nationalism measures – the better the cycle, and the better the price, the higher the demand from citizens to benefit from this, regardless of whether the uptick is sustainable or not. Increased calls for resource nationalism are also part of a broader anti-west / colonialist past. Fears that there is a new wave of colonialism through economic investment, are being explained away, on the basis that “this time it is different” (many African countries are however realising that the investment from countries such as China and Russia, are coming with its own “golden handcuffs”).

The China / Russia (and to a lesser extent, the other BRICS partners) investment potential and dynamic is being used to play off the “traditional” western investment / investors, and to (a) drive up the costs of acquiring prospecting and mining rights i.e. getting more, ostensibly to meet socio-economic demand from citizens, (b) induce more commitment to infrastructure development at the cost of the investor, including, for example, the “open access” use of infrastructure by multiple / ancillary sectors such as agriculture, and (c) obtain support for policy and regulatory change, desired by the relevant political party in power.

Representatives of various Africa companies have, on several occasions, indicated that “if you don’t like what we are offering, we will get Russia or China to invest”. Investment or potential investment from Russia or China seems to give the African governments a better perceived or actual bargaining position, when there are options waiting in the wings.

Resource nationalism is likely to continue as a trend in Africa in 2020, and may impact on investment decisions. There is also a trend towards cautious investment from all investors, including China, but the risk appetite varies, with China and Russia seemingly having a greater appetite for risk, probably to support the strategic intent to control the full value chain (in the case of minerals, this control would be from extraction and beneficiation, all the way to marketing and end use) and to develop geopolitical influence.

Resource nationalism is of course, not the only trend, but it remains, probably, the most important driver of recent changes to the Mining and Mineral Laws. With resource nationalism being a populist concept, over-enthusiastic implementation by African governments could backfire not only because this could impact on investment decisions, but also because the expectations that are created may not be met, and this could result in disruptive activism. Implementation of resource nationalism could also be impacted by poor governance and corruption, which, ultimately, contributes to the undesirable cycle of demand for resource nationalism, unfulfilled promises, and disruptive activism in support of further or more stringent resource nationalism measures.

In Zimbabwe, for example, it has been reported that approximately USD15 billion has been unaccounted for at the Chidzwa Diamond Mine, a mine run by Mbada Diamonds, linked to the Zimbabwean government and defence force).

Africa however remains attractive as an investment destination, to appropriate investors, and the investment patterns are likely to continue, particularly in those jurisdictions which support the global move to a “green economy” and those countries which have available reserves of the “battery minerals”.

The cautious approach adopted by investors, seems to be predominantly influenced by (a) regulatory and policy uncertainty, (b) security threats, (c) political instability, (d) increasing royalties and other taxes, (e) increased costs associated with employment, (f) commodity cycles and uncertainty and (g) political instability and risk. However, by far, one of the biggest factors has been the threat of enforcement (or actual enforcement) of Environmental Laws, and the environmental liabilities (rehabilitation and remediation). The associated reputational risk also plays a huge role.

The recent claims by Zambian communities against mining companies, including Vedanta, and the court cases in multiple jurisdictions (Zambia, South Africa and the United Kingdom), will have a sobering effect on mining companies, and could add to the cautious approach to investment.

There are several common themes and concerns regarding recent changes to the Mining Laws and the potential landscape in various African countries. These common themes include, (a) stabilisation arrangements which are generally put in place to attract investments and, theoretically, to support such investment, until the mine becomes profitable, (b) Indigenisation Laws, particularly where specific indigenisation levels are required in relation to strategic minerals (which often require higher investments), (c) increased royalties, (d) exchange control and the impacts that this has on procurement, particularly imported goods, and (e) currency fluctuation and the uncertainty that this brings to investment decisions.

One of the primary concerns faced by investors is the uncertainty which results from regular changes to Mining Laws and Regulations, often, because of the particular political climate and socio-economic drivers. Often, regardless of the wording of a particular Mining Law or Regulation, governments and the relevant ministries such as the Ministry of Mines, interpret and apply the Mining Laws and Regulations to suit the political climate at that time and socio-economic demands at a particular time. It is extremely difficult, in these circumstances, to do business, because often, by challenging the interpretation and application of the Mining Laws and Regulations, this creates an adversarial relationship between the miner and government. The reality is that the relevant governments hold the power and this power can be used to disrupt mining operations, impact export of the minerals, and repatriation of funds.

Indigenisation Laws, which are often linked to resource nationalism, remain a concern, because of the regular changes that are made to the Indigenisation Laws i.e. if they remain stable (no “moving of the goal posts”), investors can factor the requirements into the feasibility studies, and investment decisions. While there has been a generally positive response to the changes in the Indigenisation Laws in Zimbabwe (including in respect of diamonds and platinum), the concern is that positive changes may be short-lived, as demands are placed on the government of the day. This creates an extremely uncertain investment environment.

The global move towards a “greener economy” has started impacting on South Africa, particularly in relation to South Africa’s coal subsector. Conscientious investing typically means that certain investors, have taken the decision to divest from “dirty commodities”, and not to make any new investments in the “dirty commodities”. This, together with increased environmental compliance and enforcement is of concern to certain investors.

The global developing trend of enforcing the “polluter pays” principle may also be of concern. The most recent example is of the reported USD4.5 billion spend, to date, by Vale, following the tailings dam collapse at Brumadinho.

Historically, investors have required higher levels of certainty in relation to the various factors that are taken into account to determine the feasibility of a proposed investment, and whether to continue investing in a particular project or operation.

While certain investors still require high levels of certainty, there is a growing group of investors that are prepared to invest, despite uncertainty regarding certain investment criteria. However, most if not all investors require specific levels of certainty in relation to criteria such as the required levels of indigenisation, security of tenure, and a legal system which gives the investor an opportunity to challenge any adverse decisions of the government, in a fair, reasonable and transparent manner.

Regular changers to the Mining Laws and those laws which impact materially, such as exchange control, are probably where governments go wrong, particularly where changes to the Mining Laws and related laws, are made with little or no consultation or in complete disregard to bilateral or multilateral treaties, and without having regard to international conventions.

Investors cannot of course expect indefinite consultation, particularly in those African countries where governments are facing increasing pressure by their citizens to participate and benefit from natural resources.

The starting point, is always, for there to be policy certainty, because policies provide the framework for regulatory certainty. For African governments to increase investment, not only directly in relation to the Natural Resources Sector, but also for example, infrastructure development, policies which are clear, are necessary. Sometimes, for example, it is not necessarily about the percentage of indigenisation, but rather, that there is certainty around indigenisation requirements with the expectation, that those requirements will remain stable, for a particular period.

Transparency is critical – all processes, including applications for prospecting or mining rights and how those rights can be impacted upon, must be readily available and accessible to stakeholders.

Just as important however, is the need for fair administrative processes, where rights may be impacted upon or where the exercise of administrative discretion, can impact on or disrupt operations.

Lastly, the rule of law remains a critical factor, together with accessibility to a court system which is independent, unbiased, and which can determine disputes quickly.

A government which is willing to listen to all stakeholders and respond appropriately, is more likely to attract investment. The recently published new Mining Code in Mali, is a good example. Initially, stabilisation arrangements where not specifically addressed, but, shortly after publication, it was confirmed that stabilisation period would be limited to 10 years. There will of course be extensive debate on whether a 10 year stabilization period (down from the previous 30 year period), is appropriate – not all stakeholders will be happy with the 10 year period.

While there are significant challengers being faced by the Zimbabwean government, the announcement of the intention to repeal the Indigenisation and Economic Empowerment Act, in March 2019, and the changes to the Indigenisation Laws, is another example of an African government grappling with those challenges, which could present road blocks to investment.

The Indigenisation and Economic Empowerment Act was implemented by former Zimbabwe President, Robert Mugabe in 2008. It required that 51% of mines had to be black Zimbabwean owned, which limited foreign ownership. The Act was subsequently amended to limit requirement to platinum and diamond mining companies.

The initial amendments which limited the indigenisation requirements to diamond and platinum mining companies only, and the subsequent announcements that the Act will be repealed and replaced, were driven by concerns that the requirements were impacting on growth and development. The announcements by President Mnangagwa that Zimbabwe was “open for business” had to be supported by the implementation of meaningful change in the investment framework, including the Zimbabwean Mining Laws. The announcement that the Act will repealed means that the restrictions, including in relation to diamond and platinum mining companies, will be done away with, and hopefully open up investment opportunities, for Zimbabwe.

Zimbabwe will however also need to radically overall its Mining Laws, to attract further investment, including in respect of an aging and crumbling infrastructure. It can do so by amending its policy and regulatory framework so that this policy and regulatory framework, supports investment, while benefitting the Zimbabwean people.

African countries that can create a legal landscape with the least amount of “red tape”, are likely to attract more extensive investment. In Uganda, for example, there are no restrictions on foreign investment in mining, provided that the mining activities benefit the local communities. This has attracted large investment from companies such as Rio Tinto, and in the third quarter of 2018, Uganda recorded and all-time high in terms of its GDP from mining. Botswana is another example where, because of its legislative framework, mining companies believe that they are able to function effectively and efficiently. Around 40% of the GDP of Botswana is a result of mining, and this is substantially due to the relatively certain policy and regulatory environment.

Rwanda has more recently made amendments to its Mining Laws and Regulations in a bid to attract foreign investment, which is aimed at promoting partnership between foreign investment companies and local companies. The new Mining Laws were introduced in Rwanda in 2018, and it is still too early to tell whether the new Mining Laws will attract the expected investment.

The most important thing that mining companies can do, before investing in a country, and to mitigate the risks, is to have a proper understanding of the relevant landscape in the relevant country – there has to be a realistic view, and expectations must be managed accordingly.

What is absolutely critical to successful investment is to have a good understanding of the community landscape. Unless mining companies invest and develop mines in such a way that they are granted the “social license” to mine, investors and the mining companies can expect to face lengthy delays, and disruption to the implementation of the project, and, once the mine is up and running, disruption to mining operations, including getting the minerals to market.

Community activism is extensive, and potentially disruptive. This can be avoided by not only identifying the need to engage with communities, but also to understand the needs and wants of particular communities (social and socio-economic projects cannot simply be implemented without understanding what the needs and wants of the community are), and delivering on promises made. For example, it is not simply good enough to build a structure for a

school – everything that is required to make the school function properly, must also be provided, such as furniture, IT, qualified teachers, and proper administration and funding.

Recent cases in South Africa (Duduzile Baleni and Others, and the Minister of Mineral Resources and Others, and Grace Masele Mpane Maledu and Others, and Itereleng Bakgatla Minerals Resources (Pty) Ltd and Others) have also highlighted the importance of understanding decision–making structures within communities and the acknowledgement that, different communities have different decision making structures and requirements. These principles also apply elsewhere in Africa.

Hidden costs of implementing mining projects must also be considered. These hidden costs may come in the form of additional taxes, import and export duties, exchange control regulations, regulations around which minerals can be sold, and to whom, and the often, extensive costs involved in complying with a particular country’s Mining Laws. Investors and mining companies should also be mindful of the additional costs incurred as a result of delays, particularly where the processes contemplated in the Mining Laws, are not complied with, properly, or at all, because they are not understood properly.

Most, if not all of the African countries that are mineral rich, face the challenge of having a dual mining system namely a formal mining sector, and an informal (small scale an artisanal) mining sector. Often, the two are not aligned, and clash.

While formal or large scale miners cannot always be said to comply with the Mining Laws (including the Environmental Laws) in a country, it is often the artisanal and small scale miners that flout the Mining and Environmental Laws, essentially, making them illegal miners.

This must however be distinguished from the true “illegal mining” activities which are carried out, often, side by side with lawful mining operations at existing mines, where the illegal miners are facilitated by those employed in the formal or legal mining sector, and at abandoned mines.

This is likely to be a significant challenge to the Mining Sector, within Africa generally, and it is necessary to regularise the small scale and artisanal mining, and the true “illegal miners” by creating regulatory frameworks which facilitate easy access, administration and management. This may not be easy. In certain instances, the small scale and artisanal mining forms part of a greater corrupt and criminal network, often supported by members of government, protected by the defense force and police services in that country.

The reality is that Africa is a mineral resource–rich continent, including “battery minerals”, and there will always be investors who are willing to take the risks, regardless of the level of uncertainty.

Africa is therefore likely to continue seeing significant investment in the Mining and Natural Resources Sector and, as of necessity, infrastructure which supports, ultimately, getting the mineral to market.

2020 is likely to see further investments in countries such as Angola, Uganda, Rwanda, and Egypt, based on the view (and possible perception), that these countries still offer a good return on investment.

Growth and development of the Mining Sector in Africa is heavily dependent on exploration spend. Exploration is high risk, with low return and African countries will need to create incentivised frameworks which encourage investment on exploration.

The Mining and Natural Resources Sector in South Africa has faced significant challenges including a policy and regulatory landscape, which has been the subject of change, and challenge by stakeholders, the significant increase in costs of electricity, fragile infrastructure, increased costs of employment, and community activism.

While Mining Charter 3, which was published on 27 September 2018 was a significant improvement on previous drafts, it has still not satisfied all stakeholders, and discussions between industry representatives and government, are ongoing.

Some mines have not recovered from the economic downturn and the uncertain commodity cycles, and many mines remain on care and maintenance.

There has also been extensive corporate activity (mergers and acquisitions), which has added to uncertainty, in the short to medium term.

Restructuring, as a result of mergers and acquisitions, has impacted on the number of employees employed in the Mining and Natural Resource Sector, and the restructuring as also led to the reduction in the number of contractors that are engaged.

All of this, has a significant impact on mining communities, particularly with the “multiplier effect” i.e. the concept that, for each mineworker, up to another 10 persons, benefit.

The initial euphoria that followed the election of President Ramaphosa, has also been tempered by the state of the South African economy, generally.

South Africans are however extremely resilient, and there are indications that the Mining and Natural Resources Sector is improving.

Similarly, the optimism that followed the ousting of former Zimbabwean President Robert Mugabe, was relatively short lived, and it was soon realized that changing a president did not necessarily translate into substantial change, in the short term, or for that matter, a dramatic increase in the return of foreign investment to Zimbabwe.

The removal of former President Mugabe, did not, magically, restore the economy of Zimbabwe and nor did it detract from the significant challenges faced by Zimbabwe.

The primary challenges include the poorly maintained infrastructure, unstable and unreliable power generation and transmission, as well as currency fluctuations, particularly following the announcement that Zimbabwe would revert to the Zimbabwean dollar.

Further challenges include concerns regarding the ability to import and export goods and services, and pay for them based on exchange rates, which are uncertain, a potentially unstable political environment, and a policy and regulatory system, which is in desperate need of an overall.

Despite these challenges, because Zimbabwe is a natural resource rich country, investors remain interested in Zimbabwe.

Like most mineral-rich resource countries, the Mining and Natural Resources Sector can be the catalyst for growth and development and can provide the basis for a strong economy.

Both investors and the Zimbabwean Government seem to be mindful of the related benefits, which come from the Mining Sector, including broader revenue and taxes, infrastructure development, and an extensive network of services and goods suppliers and providers.

The mining landscape in Zimbabwe, like most African countries, is made up of both small scale and artisanal mining, and large-scale (formal) operations. While the extraction of minerals such as platinum group metals is suited to large-scale mining, there are other minerals in Zimbabwe, such as gold, that is more suited to small scale mining.

Both the small scale and artisanal miners, and large scale miners, will need to work together, to contribute to expedited growth and development in Zimbabwe. The role of the small scale and artisanal miners cannot be underestimated. However, small scale and artisanal mining must be carefully managed, to ensure that proper benefits flow to communities and the Zimbabwean Government, and that there is a strong compliance ethic, which is aimed at avoiding, for example, environmental harm. Regularisation of the artisanal and small scale mining, in an environment, which facilitates access, and management, is critical, in avoiding small scale and artisanal miners, resorting to illegal mining. Lawful mining must be made as easy as possible for small scale and artisanal miners. Illegal mining brings with it a host of challenges including environmental impacts, social and socio-economic and related impact, and losses to the fiscus.

It is therefore necessary for Zimbabwe to radically change and upgrade it mining laws. Historically, Zimbabwe separated its Diamond Laws from other Mineral Laws, and shortly after former President Mugabe’s removal from office, various groupings in Zimbabwe, began working on changes to mineral policy and Mining Laws. If this momentum can be maintained, and if it results in the implementation of laws which facilitates and encourage investment, Zimbabwe may become an investment destination of choice.

As was the case in South Africa following the appointment of President Cyril Ramaphosa, there was a wave of optimism with the appointment of Zimbabwe’s President Emerson Mnangagwa, in July 2018. The optimism that followed the ousting of former Zimbabwe President Robert Mugabe was however short lived, and it was soon realized that the ousting of President Robert Mugabe would not result in substantial change in the short term, or that there would be an immediate, substantial return of foreign investment to Zimbabwe. Former President Mugabe’s removal, in itself, also did not detract from the significant challenges that Zimbabwe faced, including poorly maintained infrastructure, which had not been maintained for decades, an unstable and unreliable power generation and transmission system, as well as currency fluctuations, particularly following the announcement that Zimbabwe will revert to the Zimbabwean dollar for trading. There are also challenges and concerns regarding the ability to import qoods and services, and pay for them based on uncertain exchange rates, the repatriation of funds from Zimbabwe, and a potentially unstable political environment and an uncertain policy and regulatory system.

In 2018, a substantial number of investors, financial institutions, service providers and conference organisers focused on investment in Zimbabwe. Only the most resilient investors are now seriously focused on Zimbabwe, both in relation to existing investment and new investments.

The reality however is that Zimbabwe has vast natural resources including the so called “battery minerals”, which are a key focus for many countries, and therefore, investors.

The natural resources sector of any mineral – rich country is not only an important barometer of the health of the economy of that particular country, but is also an important catalyst for transformation (indigenization), growth and development. It is also the source of revenue for delivery on promises made for redistribution of actual and perceived wealth. Zimbabwe is no different, and the Zimbabwean government has openly stated that Zimbabwe is “open for business”.

Investors and the Zimbabwean government also seem mindful of the ancillary benefits of the mining sector, including revenue and taxes, infrastructure development, a network of services and goods suppliers and providers, as well as the multiplier effect, which is the general principle that for each person working at a mine, up to 10 other persons can be supported.

It will be absolutely critical for the Zimbabwean government to implement an investment–friendly framework which supports the announcement that it is “open for business”. This includes a reviewed policy and regulatory framework for mining and minerals in Zimbabwe.

The announcement of the intention to repeal the Indigenization and Economic Empowerment Act by the Zimbabwean government in March 2019 was driven by various factors, including investor, political and legal motivations.

The Indigenisation and Economic Empowerment Act was implemented by former President Robert Mugabe in 2018, and required that 51% of mines had to Black Zimbabwean owned, which limited foreign ownership. The Indigestion and Economic Empowerment Act was subsequently amended, to limit the requirement to platinum and diamond mining companies. The initial amendments, limiting the requirement to diamond and platinum mining companies only, and the subsequent announcement that the Indigenization and Economic Empowerment Act would be repealed and replaced seems to support the general approach by the Zimbabwean government, to facilitate investment in Zimbabwe, including in the Mining and Natural Resources Sector.

Various legal and political groupings in Zimbabwe have been actively motivating for legislative and policy change. These groupings are supported by international organisations, such as the World Bank, and there has been a strong focus on redrafting Zimbabwe’s Mining and Mineral Laws. While this is a positive move, the Indigenisation and Economic Empowerment Act will be replaced by a new Act, which is unclear at this stage, and as is the case with most, if not all new laws, it will not satisfy all stakeholders, and there may be lengthy periods of disputes, which will contribute to investment uncertainty.

A sector–specific challenge that will be faced by Zimbabwe as it grapples with the creation of a new investment landscape, is the parallel large and small scale mining operations in Zimbabwe. While the extraction of mineral such as the Platinum Group Metals, is ideally suited to large scale mining, there are other minerals, such as gold, which is more suited to small scale mining. Both large scale and small scale mining will play an important role in Zimbabwe going forward and it will be necessary for stakeholders to work together to ensure that these large and small scale miners can work side by side. There is a critical role to be played by small scale miners in support of growth, development and transformation, provided that small scale and artisanal mining is regulated in such a way that it encourages small scale miners to mine lawfully, and makes it easier for them to do so. There are a number of examples in other jurisdictions (such as Ecuador and Peru) where small scale mining was not regulated appropriately, and the small scale and artisanal miners often resorted to illegal mining, with all the negative consequences that flow from this, including environmental impacts, social and socio-economic and related impacts, and losses of revenue to government.

It will be necessary for Zimbabwe to radically change and upgrade its mining laws to achieve the success of both the small scale and large scale miners.

Investors and companies that want to do business in Zimbabwe will need to have a proper understanding of the policy and legal landscape in Zimbabwe, and the political landscape. Proper investment decisions can only be taken with a detailed understanding of the in-country risks. There are substantial opportunities in Zimbabwe, and many investors will, with a proper understanding of the risk, regard Zimbabwe as a good investment destination.