Africa may be growing as an investment destination for WA resources companies, but the continent remains a risky target.
Africa may be growing as an investment destination for WA resources companies, but the continent remains a risky target.
WESTERN Australian resources companies continue to invest heavily in Africa despite the challenging political, economic and safety issues they face.
As the resources industry meets for the annual Indaba – Investing in African Mining conference in Cape Town, South Africa this week, WA companies are showing a growing commitment to building a presence in the continent, albeit increasingly outside of the country hosting the event.
Calls for nationalisation, economic uncertainty, and the introduction of tighter safety measures have affected companies operating in South Africa during the past year.
South Africa’s industry became a focal point in debate surrounding these issues and was increasingly regarded as a risky environment to invest in the lead-up to last year’s elections in the country.
In its 2011 mining survey, Canada’s Fraser Institute rated the country as the world’s 67th most attractive investment destination, well below other African nations such as Botswana, Burkina Faso, and Mali.
As other nations have become more accommodating to foreign investment, this has led to more than half of the top 10 transactions in value involving WA companies in Africa being directed outside of South Africa, according to WA Business News’ corporate finance survey.
South Africa’s mining industry was forced to react to calls for widespread nationalisation by Julius Malema, the head of the African National Congress’s Youth League, prior to the election.
Mr Malema has since been suspended by South Africa’s ruling party for five years and ordered to vacate his Youth League position, providing the country’s government with an opportunity to reiterate that nationalisation is not currently part of its policy and that it is ‘open for business’.
However, Ernst & Young believes the concern over nationalisation in South Africa is an ongoing concern.
“In 2012, the nationalisation debate will continue until the African National Congress policy conference later in the year,” Ernst & Young said in a report.
The appetite for nationalisation has also spread to some of South Africa’s neighbours.
Zimbabwe remains open to the idea and Namibia, one of the world’s largest producers of uranium, has flirted with plans for reform in the past year.
Away from the nationalisation debate, South Africa’s once-thriving platinum group metals (PGM) sector has struggled, with WA-based companies Aquarius Platinum and Platinum Australia among those affected by economic and safety issues.
South Africa is the world’s largest producer of platinum group metals, however output declined by 18.9 per cent between September and October in 2011 against a year earlier, according to data released by Stats SA.
Aquarius, the world’s fourth largest producer of platinum, has been hit by repeated application of the country’s Section 54 safety stoppages, which require a compulsory shutdown of operations to enable investigations into the cause of fatal incidents.
Combined with deteriorating economic conditions and falling platinum group metal prices, this led Aquarius to report a fall in production for the December quarter.
Platinum Australia, meanwhile, continues to struggle with personnel issues at its Smokey Hills mine in South Africa.
In the December quarter, the company’s output fell sharply following strike action by employees of its contractor at the site.
Aquarius chief executive officer Stuart Murray said that, in the short-term, the challenges facing the region’s platinum industry should not be underestimated.
The company operates or holds interests in seven mines in Africa, including in the Bushveld complex of South Africa and the Great Dyke in Zimbabwe.
“Platinum group metals are now low in both rand and dollar terms, and oversupply (relative to real consumption) coupled with poor economic outlook is likely to ensure that this remains the case, at least in the short term,” Mr Murray said in a statement.
However, a spokesperson for the company told WA Business News that the medium-term outlook for platinum group metals was more positive.
“Because of the current difficulties in the industry, it is unlikely that the sector can raise production meaningfully over the next decade,” the spokesperson said.
“It is therefore difficult to estimate a time frame within which the rosy medium-term will start, but my personal guess would be in around 18 months, absent some new global economic shock.
“In short, the platinum group metals market is presently at the mercy of macroeconomic factors rather than the fundamental supply-demand dynamics.
“Most of the issues facing the SA mining industry apply equally to all commodities, although the current margin squeeze is greatest in platinum as rand platinum group metal prices are only slightly above marginal cost at present, which is not the case for gold, coal etc.”
Despite the risk, companies listed on the Australian Securities Exchange raised $US1.69 billion for African projects in 2011, according to analysis of data by industry researchers at Intierra.
This compared with $US1.39 billion raised on the combination of Canada’s Toronto and Venture exchanges, and $US720 million on London’s LSE and AIM platforms.
Intierra executive director Glen Jones said the number reflected a strong commitment from companies listed in Australia.
“There was an especially positive trend in African resource activity from companies listed on the ASX, where capital raisings rose 25 per cent compared with 2010,” he said.
“This increase was helped by 19 initial public offerings on the ASX, with the newcomers being focused predominantly on exploration in Africa.”
ASX-listed junior Segue Resources even viewed the nationalisation debate as an opportunity and confidently moved ahead with a raising last year to help fund exploration at its Emang manganese project in South Africa.
Segue managing director Steven Michael described the nationalisation movement as politically motivated and a smoke screen.
“We took it as an opportunity for us to invest because there were very few people looking to do that at the same time,” Mr Michael said.
“In hindsight, it has proven to be the right bet because the nationalisation debate has fallen away and the people involved with that now have some significant issues within South Africa.
“We have moved the project ahead such a long way in the past six or seven months … if we were still sitting on our hands waiting for the political situation to stabilise we would have missed a good opportunity.”
Segue plans to raise further funds for the project as it aims to become a profitable and reliable medium-sized manganese producer in South Africa by 2015.