As prices stage a modest recovery, are the bad times finally over for Africa’s metal exporters? Eleanor Wragg reports.
A devastating drop in metals prices has hit several commodity-dependent economies across Africa in recent years. 2015 saw prices slump to multi-year lows, with zinc lower than it had been since 2009, nickel at a 12-year low, and copper prices less than half their 2011 peak, mainly driven by slowing growth in China. The Asian giant consumes a large proportion of all of the world’s metals exports and its breakneck growth had driven copper prices up threefold and zinc up twofold in the five-year period up to 2007.
In 2015, Africa’s second-largest copper producer Zambia, which depends upon the commodity for almost three-quarters of its exports, saw companies such as Anglo-Swiss miner Glencore and India’s Vedanta Resources slash jobs and shutter mineshafts as the red metal’s price made continuing operations untenable. This led the country’s President Edgar Lungu to impose a national day of prayer for the currency, the kwacha, which was plumbing new depths. A similar scenario played out across the continent, with metals miners, anxious to cut costs and stay in business, working to streamline operations and reduce bloat.
But following a strong showing across the board in 2016, the World Bank projects an overall increase in metals prices of 11% for 2017, and optimism is growing amongst miners that the years of declines may be over. “The largest gains are expected in zinc (27%) and lead (18%) due to mine supply constraints brought on by permanent and discretionary closures. Double-digit gains are also expected for copper, nickel and tin,” says the World Bank January 2017 Commodities Market Outlook.
In some quarters, hopes are high that this growth could shore up much-needed investment. Indeed, Christopher Yaluma, Zambia’s mines minister, has already targeted copper production of as much as 1.5 million tonnes this year, double last year’s level, although there is some doubt among analysts as to the feasibility of the country meeting this goal.
Throughout 2016, growing demand from China led by credit stimulus as well as a reduction in oversupply drove prices higher. Added to this was the incoming Trump administration’s pledge to ramp up infrastructure investment in the US. Is it time to be optimistic about metals again?
Reasons for optimism
“We are beginning to see a bit more of an uptick,” says Rebecca Harding, CEO of Equant Analytics. “Although I think we have to be honest and say that this is about recovery from 2015. It is too early to tell whether or not it can be sustained. Certainly our outlook looks better, but we would have to say that at the moment there are uncertainties.”
In copper, for example, Equant Analytics research shows that although prices increased by 11% from 2015 to 2016, this was still not enough to make up for the 15% fall between 2014 and 2015.
Walter Vollebregt, global head of metals and minerals at Dutch bank Rabobank, is cautiously optimistic. “I am actually quite positive. I thought 2016 was a good year, in the sense that we finally saw, after five years, a relative bottoming out of most of the prices, if not a relative increase. I see relatively strong economic development in the northern hemisphere these days, although China remains a fairly large risk due to rising indebtedness, but all in all, I am quite positive about the business we can do,” he says.
In its September 2016 report, Spanish bank Caixabank struck a slightly more bearish tone, referring to the metals price recovery as “flimsy” and questioning the extent to which the world is witnessing the end of the adjustment in base metal prices or merely an upward interruption in a downward path.
That being said, there are signs of renewed vigour in the sector, with rumours that the annual Mining Indaba, held in South Africa in February, may spur funding for new mining ventures as some metals get back to a price level at which more mining companies feel comfortable producing and exporting.
Indeed, Diakaridia Dembélé, technical adviser at the Mali finance ministry, told Reuters in February that two gold mines, Fekola and Yanfolila, should open this year in the country as the industry picks up again following three sluggish years prior to 2016. Meanwhile, the Democratic Republic of Congo’s state-owned mining company Gecamines says it has agreed US$2bn of Chinese investment in a copper processing facility and will also boost production at copper mines it is involved in to over 100,000 tonnes in 2018, up from less than 20,000 in 2015.
“There are massive opportunities on the back of a potential increase in prices, but as always, as the opportunities and prospects rise, the risk also intensifies,” says Robert Besseling, executive director of specialist intelligence company Exx Africa.
In South Africa, for example, the nickel sector is vulnerable to contagion risks from industrial action and associated violent protests in the platinum sector. In Madagascar, while higher global nickel prices could in principle allow Sherritt International-operated Ambatovy Mine to ramp up production and rehire workers, the country’s continued political volatility makes for severe delays in licensing, while uncertainty over the regulatory environment is enough to make even the bravest investor think twice.
“African metal-producing countries need to attract foreign investment but they also have to balance this with the need for beneficiation locally,” says Besseling.
A lack of certainty
A cautionary tale is that of South Africa-focused platinum miner Lonmin, which missed production and sales targets in its fiscal first quarter ended December 31, 2016. Short on goodwill five years after the Marikana massacre, which started as a wildcat strike at one of its mines, it said in its earnings statement that, “the relationship between operational management and unions at this shaft is not working as effectively as we expected, and the yielding of results from the implementation of business improvement initiatives at this shaft is taking longer than we would have liked to see”.
It is also telling that Sibanye Gold, South Africa’s largest gold producer, chose the US for its latest acquisition, rather than buying at home as it had previously stated it would. It came out with a plan in December to purchase Montana-based Stillwater Mining Co. in a US$2.2bn transaction, a month after CEO Neal Froneman told Reuters on the sidelines of the Investing in African Mining seminar in London that South Africa’s mining industry was “on a knife edge” as a result of labour instability and governance issues.
In its most recent Global Metals and Mining Outlook, KPMG surveyed metals organisations and found that one-third of those with existing investments in Africa will likely reduce their investments over the coming years. Ongoing M&A activity in the sector seems to indicate that this is the case, with Canadian miner Lundin selling its 24% stake in DRC’s Tenke mine to Chinese private equity firm BHR Partners, months after Freeport-McMoran offloaded its 56% interest to China Molybdenum.
In South Africa it’s the same story, with Anglo American putting its Kumba Iron Ore division on the block, while BHP Billiton has already spun off its local operations.
Furthermore, the perennial problem of Africa’s creaking infrastructure makes mines in other regions that bit more attractive for investors. “I think it is very hard to compete with the likes of Brazil and Australia on that front, because I do not believe that Africa has that infrastructure in place yet to really produce tonnage at a very low price,” says Vollebregt at Rabobank.
Amidst uncertainty, mining companies are still holding back and delaying investment decisions, not solely because of a lack of clarity on where prices are going, but also as a result of their not having the same access to capital markets or finance as they had before.
“Even the very large companies are really picking their battles. What you see also with private equity is more existing assets and brownfields changing hands,” says Vollebregt.
He adds that he doesn’t yet see producers in Africa attracting needle-moving amounts of foreign investment to increase production levels, although he does foresee marginal improvements to mine layouts or additional investment in equipment to optimise production and make the most of any slight gains in prices, however long-lived those may be.
“If price growth is sustained, there will be more mining companies and smelters that are able to pick up where they left off. As long as the prices stay where they are, many of them will try to produce as much as they can to try and capture that windfall profit,” he explains.
If anything, as prices rise, opportunities for consolidation appear to be the major theme for the industry. “You could see some of the smaller companies who bought when prices were low then looking to sell to the majors to actually have operating production capability at times when prices are high,” says Besseling.
Indeed, Tanzania’s Acacia Mining, which also has assets in Kenya and Burkina Faso, and West Africa-focused Endeavour Mining Corp have confirmed they are in talks about a possible merger, which would create a new company capable of producing 1.5 million ounces of gold a year.
For banks, there are bright spots, as Rabobank’s Vollebregt points out. “We do see the occasional pre-export finance transaction, and I would expect to continue to see those. And in fact, I think with current price levels for relatively short to medium-term deals of one to three years, the cashflow forecast for corporate mining companies looks fairly healthy.”
However, much hinges on whether miners and banks alike can become more confident about the sustainability of a price rebound, as without sustained gains, a lot of the business case for additional investment falls away.
What is clear, though, is that after years of leaner times which have driven them to take efficiency measures, mining companies in Africa are in the best possible shape to benefit from a recovery in metals prices. Now, all they can do is wait and see if the only way for metals prices really is up.
