Deal­ing in the down­turn

The Africa Report - - CONTENTS - By Gre­gory Mthembu-sal­ter in Cape Town

The gold price plunge is putting the squeeze on min­ers’ bot­tom lines, forc­ing them to sell their non-es­sen­tial as­sets

Apro­longed, steep drop in the price of most min­er­als has hit African min­ing op­er­a­tions hard, com­ing at a time when many are al­ready heav­ily debt-laden. At the same time, firms have to re­spond to de­mands for a ris­ing share of their pro­ceeds from African gov­ern­ments and com­mu­ni­ties. The gold price has fallen steeply, driven down by ex­pec­ta­tions of a hike in in­ter­est rates in the US. This is tempt­ing in­vestors and emerg­ing economies to stop hedg­ing in gold and put their money in US stocks, bonds and cur­rency. In late April, the gold price was$1,183/oz, down from $1,679.50 on 3 Jan­uary 2013. Cop­per and iron ore prices have also dropped sub­stan­tially from their 2011 highs. Any com­pany pro­duc­ing 500,000oz (14.2tn) of gold per year or more – prefer­ably at costs of less than $800/oz – is still at­tract­ing in­vestor in­ter­est. One such com­pany is Jer­sey-based Rand­gold Re­sources, which mines gold in Mali, Côte d’ivoire and the DRC. Rand­gold’s to­tal an­nual pro­duc­tion was a record 1.1m ounces in 2014, up from 920,428oz in 2013, and was pro­duced at an av­er­age cost of $637/oz. Rand­gold’s strong re­sults en­cour­age out­spo­ken chief ex­ec­u­tive Mark Bris­tow to be­rate his in­dus­try peers: “We en­joyed an un­prece­dented boom up till 2011, and what value have we man­aged

The dra­matic fall in the gold price has ex­posed just how many min­ers did not save enough dur­ing the boom years. They are now look­ing to sell off non-es­sen­tial as­sets, while new tax regimes and com­mu­nity ac­tivism add to their pres­sures

to store? Not enough. At the peak of the boom, the min­ing sec­tor was val­ued at $2.3trn. To­day it is less than half of that. A golden op­por­tu­nity to cre­ate last­ing value has been missed.” Ac­cord­ing to Mark Tyler, an in­vest­ment banker at Ned­bank Cap­i­tal, more value de­struc­tion is com­ing as mar­kets work out which of the min­ing projects at which they blindly threw money dur­ing the boom years were duds. Tyler notes that the 2014 decline in the gold in­dex, which tracks the value of gold min­ing com­pa­nies, was far more marked than the fall in the price of gold. “For years, eq­uity mar­kets masked the un­der­ly­ing value of stocks, just go­ing up and up, whether they should have done or not. That meant many projects were fi­nanced that should not have been fi­nanced, and all this will take a long time to un­wind,” Tyler says. The bear­ish sen­ti­ment is mak­ing the go­ing tough for all the ju­niors. Toronto and Australia-listed En­deav­our Min­ing Cor­po­ra­tion mines gold in ghana, mali, burk­ina Faso and Côte d’ivoire, with out­put to­talling 466,000oz in 2014. It projects that pro­duc­tion will rise to 500,000oz in 2015.


En­deav­our’s se­nior vice-pres­i­dent Doug reddy tells The Africa Re­port that the com­pany, though still a ju­nior, has risen to be­come West Africa’s “num­ber two or three” gold pro­ducer. Its Ag­baou gold mine in Côte d’ivoire pro­duces gold at just $650/oz, but En­deav­our’s av­er­age pro­duc­tion cost for 2015 is pro­jected to be $930-$980/ oz – un­com­fort­ably near the cur­rent global gold price and one of the fac­tors caus­ing the com­pany’s share price to lan­guish at around Canadian $0.6 ($0.5). “We are look­ing for in­vestors. Given what we are pro­duc­ing, our mar­ket cap is too low. Our share price is too low,” says Reddy. Seek­ing to re­as­sure po­ten­tial in­vestors, En­deav­our chief ex­ec­u­tive Neil Woodyer says that the com­pany will slash cap­i­tal ex­pen­di­ture in 2015, from $300m dur­ing 2013/2014 to just $20m. Woodyer also prom­ises that the com­pany will re­duce its net debt of $250m.

A big ex­cep­tion to the neg­a­tive trend is the Switzer­land-based trad­ing and min­ing gi­ant Glen­core. While the com­pany’s min­ing di­vi­sions are less prof­itable than in pre­vi­ous years due to fall­ing prices, and Glen­core caused a stir in Fe­bru­ary by an­nounc­ing the sale of its 23.9% hold­ing in be­lea­guered plat­inum pro­ducer Lon­min, Glen­core is do­ing bet­ter than its com­peti­tors. Ac­cord­ing to Wickus Botha, leader of the Africa min­ing and met­als sec­tor for global con­sul­tants Ernst & young: “even when min­eral prices are down, Glen­core’s trad­ing di­vi­sion still makes money on ar­bi­trage – all the more so, in fact, be­cause it is the only trader that ac­tu­ally owns its own mines. All the other traders just have mi­nor­ity stakes in other peo­ple’s.”


Prof­itable com­pa­nies like Glen­core and Rand­gold are now well placed to con­sider ac­qui­si­tions, but only if the as­sets on of­fer and their price are right. Strug­gling com­pa­nies are fran­ti­cally sig­nalling their will­ing­ness to off­load non-es­sen­tial as­sets, but th­ese are not nec­es­sar­ily the as­sets those with stronger bot­tom lines wish to ac­quire. “Ev­ery­one wants to sell their non-core,” says Botha, “but who wants to buy them? Why bother at th­ese com- mod­ity prices un­less you re­ally can achieve syn­er­gies? Of all the po­ten­tial deals that come across our desk, only 10% are ac­tu­ally get­ting done.” Com­pa­nies have cut back on their ex­plo­ration bud­gets, and less ex­plo­ration now means fewer mines later to re­place the ones that are cur­rently in op­er­a­tion. When pro­duc­tion falls, com­mod­ity prices will surely pick up once more. In­vestors’ money will the nonce again pour–via eq­uity mar­kets – into new min­ing ven­tures, some of which an­a­lysts like Tyler will later condemn for their poor qual­ity. Such is the com­mod­ity cy­cle. But that is for the fu­ture. Right now, min­ing com­pa­nies are fo­cused on how to be prof­itable when costs are ris­ing, rev­enues are shrink­ing and their African host gov­ern­ments are busy chang­ing the rules to en­sure a big­ger slice of the pie for them­selves. The most no­table case is Zam­bia, where the gov­ern­ment of the late Pres­i­dent Michael Sata rad­i­cally changed the min­ing tax­a­tion regime in 2014, scrap­ping the cor­po­ra­tion tax and dramatically hik­ing taxes on rev­enue. Lead­ing the case for higher gov­ern­ment rev­enue from min­ing, Zam­bian com­merce min­is­ter Mar­garet Mwanakatwe says: “We are a well-mean­ing gov­ern­ment, open to well-mean­ing in­vestors. But we are un­der pres­sure to re­spond to popular con­cerns.” Af­ter bat­tling with com­pa­nies, Pres­i­dent Edgar Lungu’s gov­ern­ment reached a com­pro­mise in April and de­cided to in­crease min­ing roy­al­ties to 9% across the board in­stead of im­ple­ment­ing the planned 20% rate for un­der­ground mines. The higher taxes in the new regime will not help com­pa­nies al­ready fac­ing prob­lems. Konkola Cop­per Mines (KCM) vice-pres­i­dent David Pater­son tells The Africa Re­port: “KCMIS at a cru­cial point. We have had de­clin­ing profit for the past few years due to fall­ing pro­duc­tion. Our unit costs have gone up. Vedanta [Re­sources] has been lend­ing to us and we have debt with the bank. We have also paid a lot of tax, $830m over the past 10 years […] but the sit­u­a­tion now is that you can be mak­ing losses and still have to pay tax.” Other coun­tries are fol­low­ing suit. In South Africa, the gov­ern­ment is con­duct­ing a drawn-out re­view of its min­ing char­ter that will see a rise in the share of min­ing com­pa­nies that must be owned by black South Africans. In the DRC, the gov­ern­ment is set to re­launch talks with com­pa­nies over a re­vised min­ing code that would im­pose higher roy­alty taxes for min­er­als and larger shares of min­ing projects for the gov­ern­ment. African min­ing com­pa­nies are also un­der grow­ing pres­sure from lo­cal com­mu­ni­ties di­rectly af­fected by min­ing, who are in­creas­ingly or­gan­ised and press­ing for bet­ter deals. Co­in­cid­ing with the Fe­bru­ary Min­ing Ind­aba in Cape Town was the much live­lier Al­ter­na­tive

Min­ing Ind­aba, which fea­tured com­mu­nity or­gan­i­sa­tions, lobby groups, trade unions and churches from all over the con­ti­nent. They all ar­gued that min­ers should spend more on com­mu­ni­ties af­fected by their ac­tiv­i­ties andthat they should pay more tax.


There was dis­cus­sion at the main­stream Ind­aba, too, about how min­ing can con­trib­ute to so­cio-eco­nomic devel­op­ment. The few min­ing com­pa­nies that par­tic­i­pated in the de­bate seemed to ac­cept that they can do more and bet­ter. But min­ing com­pa­nies are gen­er­ally more hos­tile to­wards gov­ern­ments’ changes to min­ing leg­is­la­tion. “There is a creep­ing re­source na­tion­al­ism,” Rand­gold’s Bris­tow ar­gues. Gov­ern­ments, he says, “are want­ing to cash in quickly and to reap what they have not sown.” Côte d’ivoire’s mines min­is­ter Jean-claude Brou, mean­while, has bucked the con­ti­nen­tal trend, in­tro­duc­ing a new min­ing code in early 2014 that is very favourable to min­ing com­pa­nies. Ac­cord­ing to Brou: “Our new law is in­vest­ment friendly. We know there is com­pe­ti­tion for for­eign cap­i­tal […] so we did not mod­ify the fis­cal regime. In­stead, we added tax ex­emp­tions. The World Bank thought it too gen­er­ous, but we be­lieve you have to look at the whole pack­age: what will be the im­pact of the in­vest­ment on the econ­omy, how much tax will be gen­er­ated? The pri­vate sec­tor is happy, and we are see­ing ris­ing in­vest­ment in Côte d’ivoire.” But a min­ing op­er­a­tor in Zim­babwe, who spoke to The Africa Re­port on con­di­tion of anonymity, ar­gues that Brou was need­lessly bend­ing over back­wards to please for­eign in­vestors: “I op­er­ate in Zim­babwe, and 51% of my com­pany is in lo­cal hands. I don’t care. The mine is not go­ing any­where, and they need it to work as much as I do. In the oil sec­tor, none of the ma­jors have more than 20-30% of the big fields in Saudi Ara­bia or Kuwait or wher­ever. And no one bats an eye­lid. Why should min­ing be dif­fer­ent?”

Konkola Cop­per Mines in Zam­bia has been hit by Pres­i­dent Lungu’s new tax regime at just the wrong time

Ev­ery­one knew the gold price bo­nanza would not be a bot­tom­less lake – and now it’s sink or swim

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