Andrew Lane: SA’s investor environment and the cyclical outlook for mining on the continent

Andrew Lane, Deloitte Africa’s Mining Leader joined Alec Hogg for a catch up at this year’s Mining Indaba, which is being hosted in Cape Town. 

Andrew Lane
Andrew Lane

President Jacob Zuma has said that in Davos, he had some interest from mining leaders, about investing in South Africa.  Is he being overoptimistic or are things turning?

I don’t think he’s being overoptimistic, but there are still some challenges remaining, in investing in this continent.  There are still a lot of interesting resources in the ground, but there are also risks with investing on the continent.  We look to our politicians to help us make an attractive investment destination for those investors.

He pointed out that last year we had dreadful strikes in South Africa, and that accords have been reached between labour, business, and government which are solid enough to get international investors excited again.

I certainly think that the atmosphere is different to what it was a year ago.  Certainly, what we hear from the new Minister is much more conciliatory and it seems as though there’s more of a spirit of ‘let’s engage on this thing together and let’s figure out how to take this industry forward’.

You sound a bit sceptical.

I think there’s still a long way to go.


It’s one thing to talk about engaging and it’s another to actually, engage.  Things are currently very tough in the mining industry.  Commodities aren’t quite where we want them to be.  It’s becoming more competitive and more difficult to compete.  Layer onto that, some of the regulatory uncertainties and the sovereign risks that investors need to take, and it’s still a tough call.

With regards to regulatory uncertainties – the MPRDA, which I’m sure you know backwards, was sent back to Parliament by Jacob Zuma.  He said it’s because the first run at it, wasn’t constitutionally sound.  People have been hoping that some of the more onerous issues – particularly oil & gas – would be changed.  What’s your reading of it?

I certainly think that they’ll do something on oil & gas.  The provisions weren’t clear and they are probably in need of their own legislation.  As an industry, we’d also like to see some more certainty around the issue of strategic resources and beneficiation.  We’d like to see some of the Ministerial discretion reduced.

Beneficiation is another point that Zuma raised yesterday.  How are you reading the developments on that front?

I think it’s a noble intent and I think there is an opportunity for us to use our resource endowment to industrialise the economy, to create jobs.  However, I think that laying that at the door of the mining industry is not going to get us where we want to be.  I really think that Government needs to focus on making the country an attractive investment destination for manufacturers.

What are they currently attempting to do on that front?

The prevailing ideology is that the mining industry must subsidise beneficiation.  The general acceptance is that that’s unlikely to create the industrialisation and the job creation that we’re trying to attain.

When you say ‘general acceptance’, it’s clearly not in the political minds yet.

Often, ideology gets in the way of business and I think we are dealing with an ideological point of view, which business may or may not agree with.

The clients that you talk to from all over the world, who are looking to invest in Africa…  What are the most exciting/appealing destinations for them, on the continent?

The Zambian copper belt in the Southern DRC is attractive.  There’s iron ore up in West Africa and of course, oil and gas in Southeast Africa.

You mentioned Zambia.  The royalty regime that has been introduced there has caused a few companies to get pretty hot under the collar.  Is that not causing your clients too much concern?

In a world where regulatory uncertainty is one of the big issues that investors face on a continent, Zambia and Zimbabwe are the only countries that have changed their royalty regimes twice in the last six years.  We’ve just published a report – the State of mining in Africa -, which compares investments in the Southern DRC to the investments in Zambia.  Although the DRC might look like a riskier environment, it’s actually getting more project investment than Zambia is.  To some degree, I would put that to the grade in the ground, as well as to the regulatory uncertainty that the Government has created in Zambia.

When you’re talking about mining, it’s generally a long-term investment.

Absolutely.  That’s why you need certainty about the regulatory regime.

With the changes in the law in Zambia, what are the implications of that, looking down the line?

I think it just makes it more difficult for investors.  At the end of the day, all of these things add cost and erode your return on capital.  It just means that you have to be choosier about where you choose to invest.  You can’t afford to go into marginal deposit.  That’s one of the reasons why we’re seeing the Southern DRC attracting more investment, than the Zambian side of the continent.

From a broader perspective: if the royalty regime in Zambia continues into the future, what are the implications likely to be for employment for new mines there?

Not good.  Investors will go to other places.  We’ve seen this before and I think we’ll see it again.

Andrew, the mood that you’re finding here at the Mining Indaba 2015…  No doubt, it’s very different to what it was in 2009 or 2010.  Where are we in the cycle?

I think things are still tough.  My sense is that we might be bottoming out and we might see some deal activity going forward.  Given that, this is primarily an event where investors and mid-tier miners meet; those conversations are going to be difficult because there’s not much investment going around.  The exploration investment on the continent is half what it was in 2012.

Who has the upper hand right now?  Bankers versus miners, or investors versus the operators.

The investors have the money and the operators want the money, so you work it out.

It’s pretty obvious, but has it been as tough as this for new projects, in your memory?

I don’t know…2009 wasn’t a good year.  I haven’t seen it this tough for a couple of years.

Are we at the bottom?

You have to believe that we’re at the bottom.  One of my colleagues said they are starting to see some deals starting to happen.  Private equity guys are becoming interested, so we might start to see a bit of a turn.

Just give us a sense though, of how things have changed.  For instance, in the past, for a similar project, would you have to give up more equity?  How much more equity or how much higher rate would you have to pay to the banks for risk capital?

I can’t really answer that question, other than to say that the riskier it is, the higher the rate and you’re going to pay for the risk that you’re offering to the bank.

No doubt, the rates have gone up.  The banks are the ones making the decisions right now and I guess, this is a classic case of meeting your bank manager when you’re on your knees.

On your knees, or flat on your face.

Looking ahead (five or ten years), is there still cause for optimism regarding mining on the continent?

I think so.  Mining is a long-term industry and we’ve been through cycles before.  It’s a cyclical industry.  Five/ten years from now, the commodities cycle will come back and things will be different.

From the way you’re reading it, Southern DRC seems to be a preferred destination.  Are there any others?

I say Southern DRC, mainly because we focus particularly on that Lufilian arc and looking at Southern DRC, relative to Zambia.  I see a lot of potential for gas, specifically in Southern and Eastern Africa.

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