01/04/2010 - 00:00

Small-cap operators lead the local charge into a competitive African environment

01/04/2010 - 00:00

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Australian companies are playing a significant role in Africa.

Small-cap operators lead the local charge     into a competitive African environment

TWO things that may surprise many readers are that: the landlocked southern African nation of Botswana has its own stock exchange; and companies from Perth make up 10 per cent of all companies listed on it, and a third of all foreign listings.

While there are only 30 companies listed on Botswana’s bourse, the statistic is nonetheless indicative of the pioneering role many Australian companies have played across the continent.

Big multinationals have long dominated economic activity in Africa, largely because until the 1990s few smaller companies had either the resources or gumption to take advantage of the opportunities in Africa’s relatively fluid political environment.

And it was arguably Perth-based explorers that really led the small-cap charge into Africa in the 1990s.

Perth-based gold miners such as the defunct Ranger Minerals and Resolute Mining, now one of Australia’s biggest listed gold miners, were trailblazers that helped to revitalise Ghana’s big gold industry as the government opened the doors to private sector involvement.

Resolute also effectively created a gold industry in the east African nation of Tanzania, when it developed the country’s first major gold mine at Golden Pride in 1999 and is now playing a key role in the revitalisation of Mali’s gold industry with the redevelopment of the $US300 million Syama gold mine.

Others such as Paladin Resources and Hardman Resources also helped establish entirely new industries in different parts of the continent. Paladin became one of the world’s biggest independent uranium producers when it commissioned its Langer Heinrich mine in Namibia in 2008 and has since founded the uranium industry in Malawi by developing the Kayelekera mine.

Hardman developed Mauritania’s first commercial oil fields with Woodside in 2004 and made Uganda’s first major oil discoveries in Uganda before it was taken over by UK-based Tullow Oil for $1.5 billion in 2007

Australian players also built early beachheads in the contracting and engineering sectors.

Southern Cross Electrical Engineering, founded by local engineering stalwart Frank Tomasi, was one of the pioneers, moving into Ghana’s gold industry in the early 1980s.

Others followed, including Peter Hutchinson and Peter Wade, whose early contracts in Ghana’s goldfields underpinned the growth of Forge Group and Mineral Resources respectively. Lycopodium and Minproc were also in the vanguard of the Aussie engineering invasion.

Ron Sayers’ Ausdrill group was another pioneer in Ghana, establishing the African Mining Services joint venture with fellow WA contractor Eltin to service the gold industry in the 1990s. Now wholly owned by Ausdrill, AMS has become one of the biggest and most successful mining contractors in Africa.

According to Australian Bureau of Statistics figures, Australia’s involvement with Africa has never been stronger, with two-way trade growing 8.5 per cent annually for the last five years to $6.7 billion in 2008.

Canberra estimates there are now more than 300 Australian companies operating in at least 30 countries, primarily in the mining and oil and gas sectors, with current and prospective investment valued at $20 billion.

The single biggest driver of that push is Africa’s vast reserves of oil, gas, copper, diamonds, gold, uranium, platinum, iron ore, coal, nickel, mineral sands, and alumina.

At a recent WA Business News roundtable on doing business in Africa, Sundance Resources managing director Don Lewis said opportunity was the obvious reason for Australia’s big presence. Sundance is currently planning a $US3.4 billion iron ore project at Mbalam in Cameroon.

“The issue is one of opportunity,” he said. “There is no doubt in my mind that... it will be the third largest producing (iron ore) region in the world. It’s similar for coal and uranium.

“And that’s where the opportunity lies for Australia, because we are very successful in going in, finding resources, and building things.

“So the growth in opportunity in Africa I think is going to be tremendous over the next 10 years.”

That is certainly reflected in recent investment numbers, with the United Nations 2009 World Investment Report showing that direct foreign investment in Africa has risen eight-fold since 1998 to almost $US90 billion in 2008.

The bulk of that funding has flowed into oil rich states such as Nigeria ($US20bn) and Angola ($16bn), and the mineral rich regional finance hub of South Africa ($US9bn).

More than 55 per cent of that investment came from the UK (21.2 per cent), US (19.4 per cent) and France (15.4 per cent).

What is perhaps surprising, given the widespread perception that it is becoming the dominant influence in the region, is that China only ranked as Africa’s 14th largest foreign investor in 2008 with a total share of 1.8 per cent. That puts it well behind its chief rival Japan, which ranked 11th (2.7 per cent), and ninth-ranked India (3.6 per cent).

But Peter Wade, whose company Mineral Resources pioneered contract crushing and plant operating services in Ghana, said the increasing influence of the Chinese government in Africa undeniably presented a major challenge for Australian companies there.

“They’re willing to go in there and put money in, provide aid and services and they get their quid pro-quo,” he said. “Australia doesn’t do that ... but it would certainly make it a lot easier if it did because it would give a better entrĂ©e for Australian companies to work in those regions.”

Against such heavy-hitting competition, it is little wonder that Australia does not even rank in the top 20 biggest investor nations.

African governments have also raised the bar by aggressively modernising their legal and commercial regulatory frameworks to ensure that they get a better outcome than in the past from foreign investment within their borders.

Consequently, foreign companies must use a greater proportion of local labour and expertise, and undertake increased direct engagement with local communities. It has also meant tighter financial scrutiny of foreign company activities, especially with respect to taxation.

Forge Group managing director Peter Hutchinson said those factors had forced major changes to the way Australian companies operated in Africa.

Forge has been a major player in processing plant construction since the mid 1990s in Africa, particularly Ghana, where its Webb Construction West Africa and Cimeco subsidiaries are among the biggest and best-known plant constructors.

The company has since leveraged off that early experience in Ghana to carry out plant construction contracts in Tanzania, Burkina Faso and Mali.

“It’s certainly getting more competitive than what it was 15 years ago,” Mr Hutchinson said. “My very first trip to Ghana was in the mid 1990s, and when we did a job in those days we’d fly half a jumbo jet load of expats over and employed a few locals.

“In more recent times, you go over with half a dozen expats and employ 350 Ghanaians to do the same job.

“So in many regards that’s a good thing. It’s a nice thing to be part of when you see that transfer of knowledge from a first-world country to a third-world country.

“The flipside of that coin is that it’s becoming less profitable and more competitive.”

It is a view shared by Frank Tomasi, the founder and controlling shareholder of Southern Cross Electrical Engineering, a specialist electrical and instrumentation (E&I) engineer that has been operating in Africa since 1981.

Mr Tomasi said the increasing employment of local workers was the biggest change, reflecting not only increasing indigenous skill levels but also greater regulatory requirements to hire locally.

He said the recent removal of the tax exemption for Australians who work more than 90 days overseas had also affected the competitiveness of Australian workers.

“We have had to change the way we operate,” Mr Tomasi told the roundtable. “The cost of Australian labour is now prohibitive.

“So there’s no way we can compete overseas unless we adopt a system of having a skeleton management crew, and supervision and trade skills from wherever you can get them.”

Mr Tomasi said Southern Cross typically now used only a small team of Australian engineers as supervisors, supported by a bigger team of skilled tradesmen from its South American base in Peru “because you can’t get them over there (in Africa)”.

“All the rest we employ locally,” he said. “The one important rule is you never deny a local a job if he has the skills to do it, that’s very important.”

Consultant Gilbert George, who secures mineral development opportunities to on-sell to explorers and miners, said direct community engagement was also vital, no matter how big or small your company might be.

Mr George has been especially active in Mozambique, where his team consolidated tenements containing billions of tonnes of coal that are now being developed by Perth-based Riversdale Mining.

“Developing a presence is not just going there and building a mine, it’s also good corporate citizenship,” he said. “So we do a lot of other things like drilling water holes for local villages or help repair a convent or police station. To do those sorts of things, which help establish a good community connection, is very important as well.”

Mineral Resources’ Peter Wade said there were sound economic reasons for such

engagement.

“Being a good corporate citizen means getting invited back,” he said. “The thing is to treat people the same as you treat people here ... and make sure you do the right thing. If you do that on any job, in any country, then you are pretty safe.”

But increasing international competition from other nations and establishing good relations with local communities and governments are not the only challenges to succeeding in Africa.

The two key issues for any company seeking fortune in Africa remain the perennial ones of dealing with the higher sovereign risk associated with investing in many African nations, and overcoming traditional investor unease at operating in exotic locations (see page 12).

Azumah Resources managing director Stephen Stone, whose company is planning to develop a million ounce gold project in Ghana, said risk levels varied greatly between countries in Africa but were always crucial to the bankability of a project.

“You go where you think the prizes are but the reality is that at some stage, if you are successful and you need to finance a project, risk is an important consideration the banks will have,” he told the roundtable.

David Reikie, managing director of Namibia-focused uranium explorer Avonlea Minerals, said the key was realistically assessing the risk of what you could actually achieve.

“You need to know what you are getting yourself into – you need to respect the culture, play with a straight bat and seriously consider the time line you are going to be there for the outcomes that you expect, because it will take longer,” he said.

Forge’s Peter Hutchinson said that, ultimately, African business was a balancing act.

“I wouldn’t discourage anybody from having a go – it’s exciting, it’s culturally intoxicating, it’s commercially worthwhile (but) risks need to be managed clearly.”

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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