01/04/2010 - 00:00

Africa remains a mystery to many

01/04/2010 - 00:00


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CHALLENGES abound for any company interested in pursuing opportunities in Africa, and must be clearly recognised, understood and addressed before taking the plunge, according to local business leaders with business dealings on the continent.

Africa remains a mystery to many

CHALLENGES abound for any company interested in pursuing opportunities in Africa, and must be clearly recognised, understood and addressed before taking the plunge, according to local business leaders with business dealings on the continent.

Heading the list are the intertwined concerns of sovereign risk and convincing Australian investors that the potential riches on offer in Africa are worth the punt.

The gaining of independence by most African states after World War II is rightly celebrated as a long overdue step in delivering self-determination to the one billion people now estimated to be living on the continent.

However, the flipside of a rapid transition to self-rule has too often been a slide into political and economic turmoil as new governments had to reconcile unrealistic expectations with decades of under-investment in critical infrastructure, education and legal and government institutions.

Stephen Stone, managing director of Ghana-focused gold explorer Azumah Resources, said investors needed to be educated that Africa was not a homogenous entity, and that risk varied greatly depending on where you were.

“We put a lot of effort into that because at one extreme you have people who think Africa is just one country, and at the other you have more informed views,” he said. “It’s very important because at the end of the day sovereign risk is critical to establishing a project, so your investors need to be taken up that learning curve.”

Sundance Resources chief Don Lewis said the biggest problem for Australian companies in Africa was overcoming the reluctance of Australian institutional investors to back projects in exotic locations. Instead, African-focused companies were generally forced to turn to the London or Canadian capital markets, which better understood African conditions.

“Ignoring small investors, the Australian market doesn’t get Africa,” he said. “You can go and raise a buck in the US, Toronto or London 10 times easier. And that applies to companies with a $10 million market cap or a $2 billion market cap; it’s not specific to size.”

Similarly, investor perceptions often depended on whether a country had a track record in the industry or commodity being targeted by the company in question.

Avonlea Minerals chief David Riekie said his company focused on uranium exploration in Namibia not just because of the excellent prospectivity of the tiny country, but also because it was an established uranium producer with a reputation for relative stability.

“If you are dealing in a country people aren’t familiar with ... and you have to explain to people the benefits of working in a particular country, it takes a bit of time and effort,” he said. “Sadly, if you don’t have enough money in the bank account ... you may not be around long enough to capitalise.”

One of the most common fears associated with African investment is the sometimes fluid legal framework, making a company’s grasp on its investments tenuous and subject to arbitrary government interference.

Such fears have been heightened by recent disputes such as the Guinean government’s threat to strip Rio Tinto of its prized Simandou iron ore reserves. Zambia’s government also frightened international investors with its 2008 move to impose a “windfall tax” on copper production before reversing the decision when prices crashed last year.

Numerous other governments retrospectively accused companies of avoiding taxes as commodity prices surged during the pre-GFC boom, in tandem with a widespread push to tax miners more and distribute more benefits directly to local communities.

Mineral Resources boss Peter Wade said the key was to learn as much as possible about a country before moving in, as his company had when it started work in Ghana in the 1990s.

“We were happy to do that because we understood it was English law, we understood there was a level of safety and security for our people and we understood that being a good corporate citizen meant we’d be invited back,” he said.

Forge chief Peter Hutchinson said assessing opportunities objectively also meant recognising that even in the most stable parts of Africa “governance is not as good as you might think”, especially with respect to property law.

“My advice is play by the rules, but even when you do that, the possibility of an ambit claim by government is a real risk,” he said. “You mitigate that risk by making sure your records are proper ... all your i’s are dotted, all your t’s are crossed, all your governance is in place because it can happen.”

Sundance’s Don Lewis said record keeping was especially important in French-speaking countries where the law was significantly different from English-based regimes.

“Keep on top of your paperwork,” he said. “French West Africa is more complex than English West Africa, so even more so, you have to keep on top of your paperwork and compliance. That’s the only way you can keep yourself clean,” he told the boardroom forum.

Yet sovereign risk very much remains a subjective issue.

Visiting Perth this week, South African gold giant AngloGold Ashanti’s Australian-born chief executive, Mark Cutifani, said he believed Australia was becoming a riskier place to invest than South Africa in light of proposed government initiatives such as higher royalties, new resources taxes and carbon emissions trading scheme.

“Australia in many ways is probably one of the most difficult jurisdictions, and on the basis of government policy discussions looks like it’s going to be even more difficult,” he said. “I would see more sovereign risk here than I see in South Africa, quite frankly.”

Nonetheless, he conceded the company’s heavy presence in South Africa was a key reason for AngloGold shares trading at a 30-50 per cent discount to its North American peers.

With the gulf often so wide between perception and reality, Azumah’s Stephen Stone said companies should trust their instincts, provided they have done their homework.

“I just think Africa is a continent with tremendous opportunities for people operating in the resources industries, and I reckon you should just go there, get on with it, and see what happens,” he said.



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