We are faced with a new macroeconomic landscape following the astounding turnaround in the mining industry that has resulted from the global economic crisis, investment banking collapse and credit crunch. Conventional wisdom was that the commodity super cycle of the past five years would last for an extended period of time, based largely on demand from China and India. Instead, over the past few months, we have been faced with decimated global commodity demand and volatile commodity prices.
Miners are having to react quickly to weather the storm. Many are simply in survival mode, focusing on conserving cash and cost management. Others are repositioning themselves to seize the opportunities that this new era may present, be it in expectation of the next boom, or through the acquisition of high-quality assets at heavily discounted prices.
There is no doubt that the African continent is rich in metals, minerals, oil and gas, and is relatively unexplored. This alone continues to attract investors notwithstanding the current economic climate. In addition, particular sub-sectors in the industry have proved to be more resilient, including those related to infrastructure development such as iron ore, energy (coal, oil and gas) and investment grade minerals such as gold.
M&A activity has always tended to take its cue from commodity demand, and the current depressed commodity demand and scarcity of debt funding has had a profound effect on deal activity. In addition, the risks and challenges associated with what is widely perceived as a troubled continent has seen some activity shift towards more settled climates such as Australia and Canada, where Chinese investment, in particular, is making its presence felt.
So what of China in Africa? Will its demand be enough to counteract commodity price volatility, revitalise the mining industry and ultimately drive demand for quality assets? The Chinese government has identified Africa as an engine for global growth, but notwithstanding the promise this may bring, much has been made, by Africans themselves, of "resource nationalism", exhibiting an inherent fear of re-colonisation.
Consequently, some view China's approach to Africa as predatory, manipulating weak states and trading infrastructure for significant mineral concessions. Others consider China's approach to be a refreshing move away from a typical Western approach of viewing Africa as a lost cause and nothing but a developmental burden. What China's interest in the continent unquestionably does is drive up the bargaining power of African states. Increasingly Western investors are going to be pitted against investment from the East in a global competition for scarce quality assets.
One of the keys to unlocking the potential of Africa is infrastructure development, particularly in respect of power, roads, rail, ports and telecommunications. If China is able to offer this to Africa, would it not be in Africa's interest to trade minerals in return? What is important for Africa is that these are not traded at any cost. The finite needs to be turned into the infinite, and it is for Africans to ensure that they create a strong regulatory framework governing investment, while simultaneously ensuring an attractive investment case.
The lessons learnt in addressing the significant challenges that South Africa has had to grapple with since 1994 may well play a key role in facilitating a win-win situation for all players on the continent and addressing Africa's concerns of being re-colonised. Land and mineral rights are held dear in Africa, and South Africa has learnt some hard but significant lessons in addressing the inequitable access to these resources in the past.
Over the past decade South Africa has had some significant success in introducing indigenous South Africans into its mainstream mining industry, while simultaneously preserving the integrity of the industry. Opportunities have been created for communities affected by mining operations to participate in, and benefit from, such operations, particularly with regard to employment opportunities and infrastructure development. Some communities, such as the Royal Bafokeng Nation, have been fortunate enough to leverage off of these opportunities and are now in a position where they are able to shift their focus away from relying on mining activities and reinvest in other industries that are not reliant on finite resources; thereby ensuring the sustainable development of the community, and the growth and prosperity of the country as a whole.
South Africa's neighbours have seen the benefits that have accrued from the policies adopted in South Africa, and a number of its neighbours are adopting similar policies, either formally or informally. There is no doubt that these policies will continue to find favour across the continent, and any investor into the continent, including China, would be well advised to take cognisance of this and seek counsel from those who have been to the school of hard knocks when considering an investment case and executing thereon.
By: Bruce Dickinson of Webber Wentzel