EA faces low returns in mining as firms seek to invest in other sectors

East Africa could face a mining downturn as the shrinking global pool of capital is invested elsewhere.

Industry experts, however, urge partnerships with mining companies during the downturn and innovative solutions to attract investment.

Plummeting commodity prices due to China’s slow growth and uncertainty in developed economies coupled with rapid political and economic changes on the continent have made it difficult for the region to attract miners, explorers and prospective financiers.

Mining firms in East Africa are facing challenges of operating profitably as prices of iron ore, coal, copper and other minerals have declined in 2015. Gold prices have been volatile but remained relatively steady compared with prior years.

The price of gold declined in September by 15 per cent to $1,100 from $1,300 earlier this year. Copper’s average price in September was $5,400 per tonne down from $6,300 in January while tin dropped by 25 per cent from $19,500 to $14,500 per tonne. Iron ore declined from $65 to $52 per tonne.

The firms’ woes are compounded by rising resource nationalism as governments seek to maintain their mining revenues by increasing taxes and royalties, requiring in-country processing or value addition prior to export and imposing export restrictions.

In 2013, Kenya increased royalty rates for niobium, rare earths and titanium to 10 per cent from 3 per cent. The royalty rate for diamonds went up to 12 per cent, coal 8 per cent and gold and gemstones 5 per cent.

Tanzania passed a new mining law in 2010 that increased the rate of royalty paid on minerals like gold from 3 per cent to 4 per cent. The law requires the government to own shares in future mining projects.

Comesa Secretary-General Sindiso Ngwenya said governments are under pressure to redesign fiscal frameworks to attract investors given that mining firms are cutting down on exploration due a decline in mineral prices.

“Some countries appear to understand this better and are changing regulations to attract mining investments. Others are implementing measures to protect domestic industries and production,” he said.

For example, in August, President Yoweri Museveni lifted a ban on exports of unprocessed minerals such as cobalt, copper, nickel, coltan and phosphates. The ban had led to mining companies incurring losses after stockpiling minerals.

The Uganda Chamber of Mines and Petroleum (UCMP) said investment in exploration in Africa declined by 15 - 20 per cent between 2014 and 2015 with junior exploration companies bearing the brunt of huge losses.

“Most mining firms are in survival mode. Uganda has to compete globally for they are ready to commit that little exploration capital,” said UCMP chairman Elly Karuhanga.

“The current retreat in mineral prices or dissipation of the commodity super-cycle is expected to result in a further decline in global mineral exploration spending by an estimated 10 to 15 per cent in 2015 alone,” said Michael Blakiston of Gilbert + Tobin, a law firm specialising in mergers and acquisitions.

Exports of copper, tin, chrome and nickel in the form of ores, mattes, billets and concentrates by Comesa member states increased by 22 per cent from $3.5 billion in 2010 to $4.3 billion in 2014.

Standard and Mutual, a mining consulting firm, said East Africa is in the same boat as the producers although none of the countries in the region is as dependent on mineral production and export as Zambia.

Zambia’s downward review of royalties this year from 9 per cent to 6 per cent illustrates the pressure governments face in the current mineral price environment where profit margins have narrowed.

Kenya’s mining sector contributes less than one per cent to GDP compared with Tanzania’s 4 per cent. The sector in Uganda has averaged 0.4 per cent in recent years compared with the 1960s when extraction of copper, cobalt and gold contribute to over 30 per cent of the country’s GDP.

Burundi’s export of artisanal gold with tin, tantalum, and tungsten amounted to $1.2 million in 2012 and $976,000 in 2013, representing 0.33 per cent and 0.27 per cent of total fiscal revenues respectively.

The Comesa Secretariat said exports of niobium, tantalum, vanadium ores and concentrates from Rwanda increased from $18.7 million in 2010 to $103 million in 2014.

“The export of these minerals as billets, concentrates, matte and ores, represents lost opportunities along the mineral value chain as further processing would generate more local benefits,” said the Secretariat.

Kenya Standard’s director of mining and metals Cliff Otega said weaker revenues in the short to medium term will affect producer profits and government revenue in form of taxes, royalties and other levies.

“If the lower prices persist, it will hamper exploration and capital investment and may begin to affect jobs as companies seek to shore up their balance sheets,” he said.

Consulting firm PricewaterhouseCoopers (PwC), said lower commodity prices are impacting negatively on the operations of mining firms and the revenues the extractives industry pays governments.

“It will be interesting to see whether there will be a softer stance in future around resource nationalism and domestic protectionism,” said PwC’s global mining leader John Gravelle.

The Kenya Chamber of Mines said the appetite for new projects has declined because of the commodities price slump, which has made access to capital difficult.

In June, Kenya Fluorspar Company suspended processing operations for two months due to weak global demand forfluorspar, affecting about 120 transporters. The firm laid off 75 workers as it tried to sell a stock of 30,000 tonnes of fluorspar.

The global demand for fluorspar softened from 2013 to 2014 with benchmark prices for free on board averaging $280 to $300 per tonne.

Way forward

Analysts say East Africa needs a competitive tax regime, predictability of legal and fiscal framework and functioning and accountable regulatory institutions to attract investment tothe extractives sector.

Perth-based EY (Ernst &Young) mining partner Gavin Buckingham said Africa requires a new approach to attract investment.

“The dollar is going to be far more risk averse as to where it is going to find its home. African countries need to lower their risk profile in a lower commodity price environment to get funds there,” he said.

Saying that it was a rough time for the industry since “Africa was not on top of everyone’s investment lists,” Nedbank Capital head of resources Mark Tyler said gold projects were still managing to secure capital to get off the ground.

“For the bulk commodities, the lack of infrastructure makes those projects very difficult to develop but for easier developments, like gold, there is money available to do that and we are seeing projects developed,’’ he said.