Reluctant Investors, Slumping Commodities: State Of Mining In Africa

Reluctant Investors, Slumping Commodities: State Of Mining In Africa

Mining companies around the world are encountering reluctance from investors and African companies face their own particular obstacles, but investment in African mining projects hasn’t stopped, according to a report in BusinessDayLive.

About 30 large-scale African mining projects are expected to be commissioned from 2015 through 2018, including four in diamonds, four in gold, three in platinum, two in uranium, and nine in copper, according to a Deloitte report. These projects alone will account for $18 billion in investment, Deloitte reported in its State of Mining In Africa report, published in February.

Some of the investor deterrents include a lingering perception that African governments may nationalize resources — resources that mining companies spend huge amounts on extracting, according to an article in Africa in Fact, a publication of Good Governance Africa. Others are insufficient mining data, corruption, unhelpful legislation, bad infrastructure, and insufficient skills. As a result, Africa’s mining sector has seen limited growth since the economic downturn of 2008.

In this economic climate of commodity slump and investor skepticism, mining companies need alternative methods to raise capital, says Nivaash Singh, the international mining finance head at Nedbank Capital.

Without traditional source of investment funding such as a large bank, mining companies can look to private companies such as a venture debt providers that will lend money under strict conditions, including a fixed repayment date, Singh said, according to BusinessDayLive.

Such a loan may involve a promise to let the lender buy shares in the company at a favorable rate if the loan is not repaid.

If a mining company does not want to risk a promise to sell shares in its business, it could raise money with other kinds of loans such as subordinated and mezzanine debt. These riskier for lenders — and more expensive for borrowers — because are only paid after other creditors have been paid.

Development finance institutions from developed countries are another possible source of funding for African mining companies, Singh said.

They may be willing to fund projects because they see a substantial developmental benefit or have an interest in the strategic nature of the commodity, BusinessDayLive reports.

African banks may have a larger appetite for mining risks if there’s a strong case for development. Their counterparts in the developed world may feel that their understanding of African funding is too limited to justify risks.

African banks can allocate more funds to mining than other areas because they understand the continent’s environments, said Wickus Botha, an EY mining and metals expert, in a BusinessDayLive interview. They are also more likely to operate their lending business throughout the commodity cycle.

But African banks will want to ensure that their criteria for financing are met, Singh said. That may mean higher rates. “Due to the economic climate, they may have to do so at higher rates and with fairly restrictive covenants,” Singh said, according to BusinessDayLive. “So the pressure is still on the mining companies to keep their cost of funding as low as possible in order that their returns still meet the investment return hurdles.”