2013 was a tough year for the mining sector in Africa. This was principally due to lower commodity prices, a drop in investor confidence due to lower returns over the last commodity super-cycle, and continued increases in operating costs. This was evidenced by a reduction in transaction deals and project and exploration funding.
So what does this mean for 2014 and where are we likely to see investment in Africa’s mining sector?
It is forecast that from 2010 to 2050, annual steel, iron ore and coal consumption will increase by 59.4%, 47.1% and 129.9%, respectively. With the continued expected growth in China’s demand for urbanisation, Africa with its abundance of natural resources will be at the top of most Asian investor wish lists.
African countries that will most likely benefit from investment in 2014 are:
Country Resource
| Namibia/South Africa | Uranium |
| Burkina Faso, Ghana, Guinea, South Africa | Gold |
| DRC, Zambia | Copper / Cobalt |
| Iron Ore / Magnetite | Cameroon, Guinea, Mauritania, Mozambique, Sierra Leone |
| Coal (Thermal and Coking) | Botswana (Thermal), Mozambique (Coking), South Africa (Thermal) |
Steel and construction sector: Demand for acquisition opportunities in iron ore, copper, cobalt, hard coking coal and manganese is primarily determined by China’s urbanisation and steel industry. In addition, Africa’s infrastructure development will also drive steel demand.
Power generation sector: A key developmental constraint for Africa is the lack of power security. Thermal coal could present significant potential investment opportunities for Independent Power Producers (IPP’s). South Africa’s coal industry is expected to experience large growth in the near future motivated by Eskom’s demand for regional electricity generation and thermal coal potentially being declared as a strategic resource. On a global level, uranium demand is also expected to increase due to a requirement for cleaner energy.
Investment sector: With gold currently trading at around US$1200 per ounce and uncertainty around the US fiscal crisis, gold mines in Africa could represent an attractive investment opportunity. However, gold producers in Africa do have some of the highest costs of production, which could represent excellent value where costs can be significantly reduced.
Despite a tough 2013, a number of opportunities may present themselves in 2014 as major producers look to divest out of non-core and / or high cost assets. However, finding a possible suitor for these assets will be directly linked to the attractiveness of future returns of these assets. A number of African countries, such as the Democratic Republic of Congo (DRC), have high yielding deposits, but investors need to recognise that these potential high return investments come with significant risks.
Author: Werner Jacobs, senior manager, corporate finance and metals & mining at KPMG
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