Alec Hogg and Michael Rawlinson, Global Co-Head of Metals and Mining at Barclays had a chat about doing business at the Mining Indaba and why there is certainly room for optimism when assessing mining in South Africa and on the continent of Africa.Â
Day one of the Mining Indaba and you have been seeing clients, Michael?Â
Indeed, yes, and the mood is one of action. We’ve had a difficult year last year, where people who had money were a bit frustrated. There was nothing to buy because there were no desperate sellers, and I think they came into the year relieved they didn’t make any mistakes last year, but they’re ready to go.
Taking us back a year, how does the mood compare to this year?
I think people were a lot more optimistic about the Macro outlook and nobody saw oil coming. People were talking about iron ore but they thought that was a one-off, but you’ve actually seen the complex of commodities overall, really underperform in ways that have shocked people.
It’s been an extraordinary year, if you look back on 2014, starting-off with the oil price. Then you have the geopolitical issues, Ukraine, Middle East blowing up and I suppose, if you try to look a year out, who knows what’s going to hit us then.Â
Yes, I think that’s right. I’m not going to try and make any ‘crystal-ball’ decisions but the bets were all on for last year, the U.S. doing well, and they have. I think they will continue too. Further moderating growth in China that looks as normal, so your wild card is how events play out in Europe. We’ve hit deflation now. QE is coming in a bit late, for various technical reasons, there’s a possibility that it’s not going to be as effective in Europe as it will be in the States and in the U.K. That’s the difficult bit to read.
Underlying structural issues in Europe need to be addressed at some point in time, but let’s talk about Africa and particularly the hunger, or lack of it, for mining ventures on the Continent.
Yes, I think it’s become a more target rich environment, so people are being a bit more selective, so if you’re going to invest money in Africa, let’s go to the places where they just haven’t hiked up royalties or there are electricity problems or things like that.
You’re talking about Zambia and South Africa now, obliquely.Â
No, also DRC, they’ve got their electricity problems as well. It’s a pretty common thing throughout Africa but those are the things that are colouring people’s investments decisions.
What about the prospects, one hears that Africa is unexplored. That it has lots of potential but the potential just takes a long time to unlock.Â
Yes, sure the quality of the ore body is only one factor about whether something is going to get developed there.  Mining is an extremely capital intensive industry and for capital to be attracted to an area, it needs to be looked after, and that requires a strong regulatory environment, a stable Government, stable taxes, and some of the infrastructure that allows the capital to be brought to bear. Those are the things that have been lacking and the main the reasons why the riches haven’t been brought to account.
The point being that a strong regulatory environment and stability from a governance perspective are necessities for capital inflow. Has the penny dropped in Africa yet?
Not really, I think it’s cyclical. I think that all too often there is a cycle, the riches get generated when stability is offered, and then they are seen as piggybanks, these assets, and that scares away capital. The host Government learns from its mistakes and tries to make it a better environment again, and the cycle begins. I think, gradually over time, that cycle will smooth out, and that’s how a developing country transitions to a developed world. It gets to understand the rules.
Who’s doing it right, on this Continent?
It’s interesting actually, I think Senegal has got a great code and an emerging player coming through that’s looking very good, is Ivory Coast, so there are a few places.
Alpha Condé from Guinea, a couple of years ago, was saying how he’s putting all his mining bills onto the internet. Has he followed through on that? It was a promising start.
Yes, I think because of the controversies that have taken place in Guinea, from before the war, they are coming from a very, far way back, perception wise. I think it is also unfortunate that the minerals that they have is mainly bulk commodities, it’s the bauxite and the iron ore. There it is not like if you find gold you can develop a mine very cheaply, with a very cheap plant, and take the product out in a briefcase. If you find an iron ore mine you’ve got to develop a port or a railway system, so it is not 100’s of millions its billions, and the decisions around capital, they’re just so much more momentous and they just need a lot more confidence, so I think it is going to be really difficult to tell. Just a couple of years is a tiny amount of time, in terms of changing perceptions for something that is so capital sensitive.
Michael, I was with the President of South Africa yesterday, Jacob Zuma, and he was talking about people he met in Davos. Many of the mining leaders there and he said that there was a lot of excitement about South Africa. Now, I’m not sure if it is a politician speaking but he said that there was a view that the labour issues are now behind us in this country. Is this something that you are sensing as well?
I think, and we’ve seen today there’s some intimate issues at Sibanye, which is really unfortunate, which I think that they’re not behind us. That said the platinum strikes were so dreadful for everybody. Government lost. Labour lost. The company lost. The nation lost, in terms of international perception and then some of the people lost their lives, and their families lost as well, so no one came out of that winning. They are all vowing that they don’t want that to happen again. To the extent it’s taken something dreadful like that to say, ‘we don’t want to go back to that’. Yes, of course it’s got better.
So it could be a rock bottom, it could be a place to rise from, but not yet a magnet for capital?Â
It’s funny, I think those players, domestically, who’ve learnt to work the system, and are happy in it and are really happy investing here. You’ve got people like Sibanye, who are on the front foot. They want to invest more money. They want to buy more assets. You’ve got foreign capital coming in, from people like Glencore, who weren’t here before and they’ve bought mines and they want to buy more, so there are people who’ve ‘got the bug’ and they’re sticking with it, but others are ‘wow, South Africa is a bit far out’. ‘I saw it on telly and I didn’t like the look of that Marikana stuff and I’m staying away’. No, I don’t think it is nearly as dire as some would say and there is some truths as to what Zuma is saying.
The Chinese have been active lately, in South Africa. Are they picking up where Western capital, perhaps is lagging?Â
China is a bit of an enigma. You’ve got two things going on there.  One, you’ve got the Macro slowdown, where you are deemphasising the growth from being investment led to sort of consumption led. Some of these big SOE’s are heavily indebted and they, as a result, they just don’t have the capital to invest. Two, the sort of swash-battling entrepreneur types, a lot of them made money in possibly corrupt ways or maybe not, but it’s had a general suppression of the exuberance in business, that we’ve seen and some of the big investors, foreign direct investment, have either been sacked or even executed, which happened yesterday with the China, Hanglong’s Chairman. I think it was because of the way he bought shares ahead of a bid for an Australian company. It’s really made people think very carefully. If they are going to invest overseas what’s the basis they’re doing it on.
Overall, is there any room for optimism or is it maybe pragmatic realism about the African Continent and investing here?
No, I think there is. It’s always darkest before dawn and the time to buy is when all those abandon hope and there are some sectors where you’re getting to that point.
Which ones?
I think platinum is interesting. I think the margins, there aren’t really any margins, but the red numbers aren’t getting any bigger. We’re bumping along the bottom. Some of the structural changes are about to happen, as led by Amplats. The demand for the off-take is finally picking up with the European auto sector, so maybe there. I think gold will stay on the level. The labour intensity issues, as you’ve spoken about, I think we’ve seen the worst, so possibly there.
Michael Rawlinson is with Barclays.Â