Innovative mining finance lends African miners wriggle-room in challenged global economy
Despite escalating trade wars keeping commodity prices in check as well as increased regulatory challenges across the continent generally, the mining team at Standard Bank – of which Stanbic Bank Zambia is a member – anticipates that 2019 will see miners continue to cautiously pursue emerging pockets of opportunity across the continent.
Over the last 18 months, the focus in the mining sector has been on debt reduction and balance sheet repair. The results of this consolidation have been largely successful, with a few miners paying dividends for the first time in some years. As such, “efficiency improvements and portfolio and asset optimisation are expected to continue into 2019 as companies remain committed to moving down the cost curve in response to the 2013 to 2015 downturn,” says Mark Buncombe, Head of Mining & Metals at Standard Bank Group.
2019 is expected to see a renewed focus on mergers and acquisitions. The positive reception afforded the Barrick-Randgold merger in late 2018, for example, has encouraged other management teams to look more seriously at mergers and acquisitions as an option.
Optimism levels across the continent will ultimately, however, mirror the regulatory environment, “with more investment expected where policy makers have actively encouraged investment,” says Mr Buncombe. Ghana in 2018 was a case in point, “showing us that once policy makers build a business and investment-friendly legislative environment the market responds very quickly,” observes Mr Buncombe.
In South Africa, the finalisation of the Mining Charter and the shelving of controversial amendments to the Mineral and Petroleum Resources Development Act, for example, is expected to similarly accelerate corporate activity and the commitment of capital to the local mining sector in 2019. Other increasingly favourable legislative environments on the continent include; Namibia, Botswana, Mozambique and Ghana.
A supportive regulatory environment is, however, only one part of the story. Despite ongoing currency volatility and uncertain global macro and commodities outlooks, other options to maximise value and drive growth and investment are available for miners in Africa’s more favorable legislative environments.
These broader opportunities are expected to drive a diversification in financing practices in Africa’s mining industry. For example, in addition to corporate facilities, “Africa’s miners are increasingly seeking to optimise cost, liquidity and working capital requirements using additional products like asset financing, invoice discounting and inventory financing,” says Mr Buncombe.
2019 is also likely to see miners, “increasingly look to their bankers to meet the financing needs of their clients’ broader supply and partner networks,” says Mr Buncombe. This will require bankers to develop a much broader, detailed and altogether much more sophisticated view of value chain financing – including; financing the broader supplier, infrastructure, beneficiation and social ecosystems in which mines operate. This is also expected to extend to governments’ indigenisation efforts as, “locally-owned players tend to be more prevalent in the ecosystem,” he adds.
Access to cheap and reliable power is expected to remain a key success factor for mining companies in Africa, driving continued investment in captive power generation capacity. As the cost of solar power comes down and new storage technologies make solar more viable as a source of power for the mining industry in Africa, “we have seen several clients invest in or consider investing in solar power plants to replace more expensive diesel generators or unreliable grid power,” says Mr Buncombe. “This will have the additional benefit of improving miners’ environmental footprint while broadening investment beyond the mining sector,” he says.
Despite global macro uncertainty and slowed growth in China, 2018 saw an increase in Chinese mining activity on the continent. Whilst there has been a lot of debate around capital availability for Chinese firms, “the evidence seems to suggest that this activity will not slow down this year,” predicts Mr Buncombe.
A more upbeat view of the South African market is supported by an increased global appetite for bulks, especially coal, chrome and manganese, as
well as the fact that after almost a decade of cost cutting, miners now have ready cash to invest. The availability of equity cash, combined with a policy environment much more favourably disposed to the public-private partnerships that South Africa will need to establish if it is to benefit from the cyclical upturn in bulks, is not only likely to see an increase in production but will also see new investment in South Africa’s bulk export infrastructure. “This is likely to drive capital formation, jobs and growth beyond the mining sector,” says Mr Buncombe.
Given more favourable legislation in a number of African jurisdictions, sustained Chinese interest in the continent, the improved balance sheets of many African miners, an increased global appetite for bulks and the broader range of ecosystem-financing options available to miners, “we remain cautiously optimistic that Africa’s mining sector offers real opportunity for expansion in 2019 despite the challenging global macro environment and uncertain commodity prices,” says Mr Buncombe.