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Mining in sub-Saharan Africa

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World Coal,

Dr Elizabeth Stephens, JLT Specialty Ltd, UK, discusses mining challenges in sub-Saharan Africa.

Foreign direct investment (FDI) into the alternative frontier markets of sub-Saharan Africa has increased by 22% since 2007 – but strong FDI growth belies the high-risk nature of investing in the region. Certainly, given the over-reliance on the mining sector exhibited by most sub-Saharan economies, mine operators and their financial sponsors are exposed to considerable levels of risk, particularly those linked to political developments.

Worker grievances

With levels of political opposition and activism increasing rapidly due to the passing of a number of single-party regimes and the establishment of more open, democratic forms of government, the risk of losses resulting from strikes, riots and civil commotion has grown substantially in a number of mining territories. Moreover, given their large social and environmental footprints, it is often mining operations that are most severely affected.

The impact of industrial unrest on the mining sector is perhaps most disruptive in South Africa where strikes over pay and working conditions in the closing months of 2012 were accompanied by violence on a level unprecedented since the end of apartheid. The strikes signalled an end to the organised chaos of strike season with traditional unions losing their monopoly of influence over workers, leading to a rising incidence of wildcat strikes, which are more volatile and harder for employers to defuse.

Although this year’s strike season has been far less damaging compared to its immediate predecessor, as political tensions rise in the run up to the next general election in May 2014 and the unions attempt to exert influence ahead of the vote, the risk of industrial action will increase. Given energy parastatal Eskom’s dependence on thermal coal, the government will be keen to reach an agreement to avoid power outages. This reduces the risk of a sector-wide legal strike, but will not much dampen the chances of wildcat strikes.

Local content demands

A trend is evident, most notably in territories with an emerging middle class and a vibrant civil society, whereby governments are becoming increasingly concerned about sustainability issues, such as labour, social investment, environmental standards and the quality of infrastructure projects. Across the region, companies that are poorly regarded according to these metrics, even against the shortcomings of other emerging market companies, are facing serious headwinds as host governments seek to redress the situation. Chinese companies are coming under particular scrutiny in this regard and, if they fail to make amends, opportunities will open up for other foreign companies, such as those from Brazil and India.

Against this backdrop, local content demands are becoming more onerous. They are contractual requirements placed upon companies by host governments in order to extract greater benefits from the investment, such as clauses that commit the investor to undertaking infrastructural improvements or hiring a certain quota of local workers. They tend to be used as a way for governments to boost popularity and are particularly prevalent in contract negotiations with governments in newly democratised nations where political parties are seeking to solidify support and fast track development.

In Botswana’s mining sector, for example, all new mining contracts must comply with citizen empowerment and local preference policies that stipulate that preference must be given, as much as possible, to materials and products produced in Botswana and to Botswanan agencies, companies and citizens.

Infrastructure development

Stipulations that investors in the mining sector build and finance the infrastructure necessary to support mining projects represent a significant challenge. Given the integral role infrastructure plays in mining projects, investors must ensure that underlying contracts stipulate the nature, scope and timeframe in which the infrastructure necessary to support the project will be constructed, along with guaranteed terms of use. It may be the case that investors are not permitted to develop, operate or own infrastructure, in which case changes to legislation may be required. To prevent a breach by the mining title holder of its obligation to start activities within a set period, it is essential to co-ordinate a timetable for the infrastructure and mining projects. Bureaucratic inertia, environmental considerations and local objections to projects can impact timeframes and it is advisable that the host government has a vested interest in alleviating these impediments to project development.

Infrastructure constraints around coal mining projects were exemplified by Rio Tinto when, in January 2013, the miner announced a US$ 3 billion writedown of Rio Tinto Coal Mozambique (RTCM). Along with technical concerns about the quality and productivity of the Benga and Zambeze mines, purchased from Australian miner Riversdale for US$ 4.2 billion in 2011, Rio Tinto attributed the loss to limitations placed on exports by the slow development of rail and shipping infrastructure.

Domestic politics significantly disrupted the development of the necessary infrastructure. A number of state agencies are involved in the approval and facilitation process of infrastructure projects and are afflicted by weak capacity and co-ordination. Bureaucrats are inexperienced with commercial infrastructure projects, while the involvement of the state logistics parastatal, CFM, whose stake-holding is required by the government, can thwart the decision-making process. CFM is highly politicised and is an outlet for the political and commercial interests of President Armando Guebuza and the ruling FRELIMO party.

Mozambique’s coal infrastructure is also now facing increasing risk of civil unrest from the former guerilla movement, RENAMO, which is threatening to tear up its peace agreement with the governing FRELIMO party and again promote civil unrest, claiming it has received little benefit from the peace. The first targets have been the country’s roads and railways, disrupting coal export traffic. In the latest incident in early April, Vale announced a suspension of its coal shipments after a train carrying coal from its mines was shot at, injuring a conductor.

Risk mitigation

While challenges confronting mining companies in sub-Saharan Africa are significant, there is much that can be done to effectively manage and mitigate the risk. In reality, there is no such thing as a good or bad country: rather, it is just a good or bad investment. Much of this comes down to effective structuring and engagement with stakeholders at all levels of the project. When these risks are managed well, political risk insurance (PRI) can and does provide an effective safety net for investments in sub-Saharan Africa and can go a long way towards neutralising country risk.

The full version of this article appeared in the February 2014 issue of World Coal as: STEPHENS, E., “South of the Sahara”, World Coal (February 2014), pp. 16 – 19.

Written by Dr Elizabeth Stephens, JLT Specialty Ltd.

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