In Search of El Dorado in Africa

Image: Flickr, CIFOR
Image: Flickr, CIFOR

MINING in Africa appears to be the lifeline for the viability and sustainability of SA’s mining giants, which are facing rising costs related to deep-level mining and ageing mines.

A recent survey by the South African Institute of International Affairs, conducted among South African mining firms on their African operations, has found that most respondents see the continent as a promising market.

South African mining firms have begun to position themselves as leading investors in Africa’s gold and diamond mining industries, founded on solid experience dating back to the late 1800s. They bring a level of mining knowledge, expertise and capital that rivals foreign investors from outside the continent.

According to the minerals and energy department, South African firms account for about 40% of African exploration and mining in gold and diamonds. They are involved in Mali, Burkina Faso, Senegal, Ghana, Guinea, Namibia, Botswana, Angola, Lesotho and Tanzania. In addition, they conduct exploration activities in the Democratic Republic of the Congo and Congo-Brazzaville.

In west Africa, South African mining companies now control more than 60% of the total investment in Ghana’s mining industry, the bulk of it going into the gold sector. In east Africa, they have targeted Tanzania because of its potential and favourable business climate, put in place by the government to attract foreign direct investment after years of unsuccessful socialist experimentation.

Ethiopia is another country in that region that has attracted SA’s interest. In the Southern African Development Community region, South African mining involvement predates 1994.

These companies have expanded into Africa for strategic reasons and high profit margins. They see African mines as some of their most lucrative ventures, offering the highest returns despite the high risks associated with political turmoil, civil unrest and economic upheaval.

In comparison with the mining sector in SA, profit margins tend to be higher in the rest of Africa due to the lower costs of mining, at depths of about 1000m and less, against the South African norm of 3000m. The survey outlines a clear consensus among South African mining companies that their investments justify the risks of doing business in Africa.

With a few exceptions, SA’s gold and diamond miners confirmed their intention of maintaining, and in some cases expanding, their African operations in coming years. They are optimistic about mining prospects on the continent due to the development of more investor-friendly legislation, most notably in the Democratic Republic of Congo, Namibia, Ghana, Tanzania and Botswana. Mali, Senegal and Angola also offer important opportunities after discoveries of new gold and diamond deposits.

But South African companies face challenges when operating in Africa.

Most South African gold and diamond miners have encountered a number of risks and impediments associated with mining regulatory regimes, legislation and business practices in the countries where they have operations, especially in those that have recently emerged from conflict. They have also been roundly criticised by some countries for the social problems and ecological destruction associated with mining.

Continued unfavourable conditions — linked to corruption; a lack of application, or partial implementation, of mining legislation; poor infrastructure; political and security uncertainty; weak legal systems; and the cost of finance — constitute the biggest business constraints facing South African gold and diamond mining companies in Africa.

In some instances, such as in Angola and Guinea, the governments have not passed sufficient legislation protecting the assets and rights of foreign investors.

In places such as the Democratic Republic of Congo, laws are not enforced by the courts, which are run by state-placed judges who enforce the decisions of government officials in opposition to many foreign and local mining investors. This happens in many other African states.

Nevertheless, most South African mining companies have found the business environment in which they have operated in the past decade has slowly improved with the spread of democracy and increasing good governance.

In the long run, South African companies are poised to remain strong contenders for a large share of Africa’s gold and diamonds. Experience in dealing with the risks of doing business in Africa is a clear advantage. As diamond and especially gold mining and exploration become less viable in SA, companies are likely to penetrate deeper into Africa to help retain their competitive advantage and maintain profit margins.