This article is written by Paul Schroder (partner).
All doom and gloom, or the year of preparation for post-super cycle sustainability?
The year 2015 has been tough for miners all around the world. Nowhere more so than in Africa. We tend to look at these issues through a M&A prism. From that perspective it's been a flat period for mining M&A.
Globally, depressed commodity prices coming off the back of the super cycle and capital constraints have triggered a priority shift - from capacity to efficiency. The result has been dramatic consequences for investment, employment and state coffers.
So we're generally happy to see the back of 2015 and look forward to 2016 with the expectation that new M&A opportunities will materialise from the massive infrastructure development so far.
Shrink to greatness
Seasoned mining executives have been through cycles before - they know the drill. Besides the rigorous pursuit of efficiencies to protect their income statements, they have responded by taking precautions to shore up their balance sheets.
Commentators speculated there would be distress M&A but the most popular approach for African mining companies has been "shrinking to greatness" through demergers of their second tier assets. The most high profile is of course BHP Billiton's spin off of South 32. It followed the Goldfields demerger of Sibanye and was followed by Glencore’s distribution of its 23% stake in Lonmin. “Popular” may be the wrong word because AngloGold shareholders recoiled against its combination rights offer and demerger of its non-African assets.
Similarly there have been sales of none core or less profitable assets. Anglo American has sold its platinum assets and AngloGold has brought in Randgold as a partner to redevelop Obausi in Ghana). There was also the less formal cutting of the umbilical cord between Barrick Gold and Acacia.
On a positive note this is all good for M&A as we have seen the demerged entities more open to M&A than their conservative parents. For example Sibanye has gone after platinum assets in a way that Goldfields would not likely have done.
Precautionary rights offers
First Quantum and more recently Glencore have shored up their balance sheet apparently as precautions in response to concerns from investors. Lonmin's hot off the press do or die rights offer sounds more ominous.
Too little, too late
Of course in some cases it was left too late or there was no hope of saving the company. The London Mining and subsequent African Minerals insolvencies scarred AIM investors.
From a legal perspective, all these dramas have played out on the TSX, the LSE/AIM, the ASX and the JSE underscoring the global nature of the African mining industry and how flexible we as advisers have to be able to respond quickly and effectively on a global basis.
Uniquely African Challenges
All that we’ve said above could be equally applied to non-African mining companies. Although iron ore miners in other jurisdictions have had a lot to deal with, they haven’t had to face Ebola which ultimately led to the sinking of London Mining and African Minerals.
Teasing out the other uniquely African legal developments of the year, South African uncertainty around Black Economic Empowerment requirements and the gold mine tax haven’t done much for confidence. There was also the unexpected, unconsulted and unknown leadership change in the South Africa mining Minister.
The United States’ SEC’s willingness to enforce the FCPA for mirky South African BEE deals (Gold Fields and Hitachi/Chancellor House) should ensure a heightened sensitivity in African deals, especially where there is a US nexus.
It is encouraging to note that resources nationalism has been relatively quiet in Africa despite all the pressures on Governments. In particular, sense seems to have prevailed following threats to raise taxes in Zambia.
As in the rest of the world, the much anticipated tsunami of private equity investment into resources failed to materialise this year. That said, one fascinating development was KKR’s recruitment of former chief executive of Africa’s biggest ports and logistics network as a senior adviser (Dominique Lafont, who headed Bolloré Africa Logistics)
Reasons to be grateful - the China factor
On the positive side, despite a significant drop in the value of Chinese foreign direct investment into African resources, the scale of construction contracts with Chinese EPC companies, and associated Chinese bank financing, remained steady.
The only major Chinese mining investment in Africa this year was Zijin’s 50% stake in Ivanhoe’s Kamoa copper project in the DRC. Shandong Iron and Steel took control of the Tonkolili iron ore mine in Sierra Leone following its collapse in the face of Ebola and the iron ore crisis – but that was protecting an existing investment rather than an outlay of fresh cash.
Consistent with the massive levels of investment of the past few years and the promised establishment of the New Silk Road to strengthen trade connectivity between China and its trading partners - again this year billions of Dollars have been committed to rail, shipping, power and other construction contracts. The model is not yet clear but there remains significant sovereign funding from Chinese policy banks with Chinese EPC contractors building the infrastructure.
This is literally paving the way for the import of Chinese goods and services. A particularly exciting deal was China National Materials subsidiary Sinoma concluding billion Dollar cement supply contracts with Africa’s wealthiest man, Nigerian businessman Aliko Dangote. This will go some way to address criticism over Chinese neo-colonialism in Africa – an African entrepreneur is leading a new way to the New Silk Road.
Importantly for the resources sector all this infrastructure investment allows the opportunity for landlocked African resources projects to be developed despite capital constraints, depressed commodity prices and over supply coming online from competing mining jurisdictions. This may make economically viable post-super cycle projects that would otherwise never have been developed.
Infrastructure investment is key to achieving efficiencies and other jurisdictions are already reaping dividends from their investment. Brazil’s Vale’s Valemax fleet of ore carriers allow Brazil to compete with Australia’s high quality iron ore from the Pilbara.
New Institutions to facilitate growth
Good progress was made this year in the adoption of frameworks and establishment of institutions necessary to support infrastructure and development.
This year marked the establishment of Africa50 by the African Development Bank (AfDB). Designed to help accelerate infrastructure development in Africa. Africa50 has two main initiatives: project financing and project development. With a strong public private sector approach in the development of its business, Africa50 is founded on high corporate governance, ethical, financial, environmental and social responsibility frameworks. Twenty African countries and the AfDB have provided initial finance of US$830 million.
New Development Bank
Each of the 5 BRICS founders of the New Development Bank have agreed to commit US$10 billion to it. This represents a massive pool of capital for the multilateral development bank operated by the BRICS states to function as an alternative to the existing Western-dominated World Bank and IMF.
The 6th Ministerial Forum for Chinese and African Cooperation (FOCAC) and second summit is due to convene in Johannesburg on 4 and 5 December. The theme this year is “Africa-China Progressing Together: Win-Win Cooperation for Common Development”. On the basis of the previous FOCAC ministerial fora and the Beijing summit, President Xi Jinping’s visit to Johannesburg promises to bring a flurry of deal announcements.
Among the goals of this year’s FOCAC, is the stated aim to promote three networks (high-speed rail, expressway and regional aviation networks) and infrastructure industrialization (production capacity co-operation).
The China-Africa Development Fund was announced by President Hu at the first FOCAC back in 2006 – it’s been conspicuously quiet this year, so let’s see if it makes an announcement at FOCAC Johannesburg.
Despite the tough year, we remain optimistic that 2016 will bring new investment and confidence with associated M&A opportunities. Infrastructure development is hoped to provide a solid base for growth and prosperity in the African mining sector.