Dealing in the downturn
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.”
BIG BOYS CAN CHOOSE
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.
GREED, OR JUST DESERTS?
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?”
Everyone knew the gold price bonanza would not be a bottomless lake – and now it’s sink or swim
Konkola Copper Mines in Zambia has been hit by President Lungu’s new tax regime at just the wrong time