Top 5 infrastructure investment opportunities in Africa

By Kurt Davis

The 'Top 5 public private partnership opportunities in Africa' highlighted the best countries for PPPs in Africa. This article examines the best countries for infrastructure investment, if we assume all things to be equal in each country’s PPP system. 

Only one country - Nigeria - makes both top 5 lists, largely because it's government has made great strides in recent years to match its enthusiasm to develop infrastructure with the demand for infrastructure investment in the country. Over time, all political indicators point to a greater PPP environment in the other four countries on this list, and greater growth in PPPs across the continent. Still, in the short term, private investors should not be deterred by the challenges in the PPP markets, as officials in these countries have indicated that they are keen to bolster the PPP market, especially from a legal perspective, and participate with investors.

Angola

More than ten years after a 27-year civil war that left nearly 1.5 million people dead, Angola is taking off like no other country. Situated on the western cost of southern Africa, the country is home to a wealth of natural resources, most notably oil (making Angola the second largest oil producer in sub-Saharan Africa). A boom in real estate construction (including hotels) and financial services unsurprisingly accompanies the oil boom, making Luanda unrecognisable from 10 years ago.

On the surface, it is a perfect turnaround. But, as it goes in any other country, every boom has its challenges. The all-encompassing challenge in Angola’s growth story is infrastructure. New buildings, more people, and a deficit in power sums it up, says a major Lusophone private investor. Hydropower is an obvious solution and the government is making great strides in restoring its capabilities. Still the hydropower facilities and greater distribution systems for power remain a shell of themselves after their decimation in the civil war.

Fundo Soberano de Angola, the US$5-billion sovereign wealth fund for Angola, is targeting infrastructure investments across the country. Yet, despite the government’s pledge to transfer annual surpluses from the oil reserves account (with annual receipts as high as US$3.5-billion), greater investment will be required from foreign investors. The quality of the transport network, including airports and ports, is sub-par to support the country’s growth. Private investors will find an interested government partner and a lucrative return in connecting the resource-rich Democratic Republic of Congo with the Atlantic Ocean and partners in the transport-capable country of Namibia.

Mozambique

As the other big Lusophone country in southern Africa, Mozambique shares a similar story of civil war and decimation. Booming with gas reserves and the accompanying real estate sector, the country is in great need of a transport upgrade. Recent estimates by professional services firm, PwC, values transport projects in the pipeline at US$17-billion, including increased rail links to the ports and expanding port capacities. Yet, by all accounts and estimates, more money will be required to ensure that major ports, including Nacala, Beira and Macuse, reach full potential. Equally, transport networks from those ports to neighboring Zimbabwe, Malawi and Zambia require financing currently not available in the market.

A recent announcement by the Minister of Public Works Cadmiel Muthemba indicates an openness on the government’s side to erect more toll roads. The country currently has only one toll road - the N4 toll road connecting Maputo to South Africa - which is operated by South Africa’s Trans Africa Concessions (TRAC). Private operators see enormous return potential in several routes, including highways between Manica and Tete, between Nampula and the port of Nacala, and between Marracuene and Inhambane.

Speaking at the ‘Africa Rising’ conference back in May, hosted by the International Monetary Fund (IMF) in Mozambique, the Minister of Planning and Development Aiuba Cuereneia stated the country’s notable gains in paved roads and the projects in the pipelines. Equally, during Q&A, he conceded that more financing was required, specifically from foreign investors, to match the plans envisioned by the government.

A power deficit is also quite noticeable in the country. A changing environment for public private partnerships should breathe life into this sector in the near term.

Cote D’Ivoire

Talk of a country booming under the public radar. Cote d’Ivoire has made amazing strides since the assumption of power by President Alassane Ouattara in 2011. The economy expanded 9.8% in 2012 and 8.7%  in 2013, with an estimated 8.0% predicted in 2014, according to the IMF. Yet it remains a fragile state, especially with elections around the corner in 2015.

The country is the largest producer of cocoa as well a global player in the palm oil and cashew nuts markets. Cargill, Cadbury and Hershey’s among many others call the country an agriculture hub - yet the country is nowhere near its potential. Infrastructural upgrades in the transport sector, specifically ports and road infrastructure, will greatly boost the country’s capacity for moving agricultural products and growing its position as a food basket and trading partner to neighboring Sierra Leone, Liberia, and Ghana.

The arrival of energy companies, following the discovery of oil reserves, will help fill government coffers for spending on infrastructure. But the boost in cash, particularly in the short term, is not sufficient to jump the infrastructural hurdle left by years of civil war. The power necessary to buoy the energy, agriculture (including agri-processing) and manufacturing sectors going forward is simply not there, creating big opportunities for investors. But it cannot be ignored that Cote d’Ivoire did not make our list for public partnerships in sub-Saharan Africa, as the government will have to do more to appease investor concerns and mediate risk. More details around regulation should appear after next year’s election.

Nigeria

As mentioned before, Nigeria is the only country to appear on both the top five list for public private partnerships and top five list for greatest infrastructural opportunity. Nigeria has one of the greatest infrastructural needs on the continent, particularly due to its size and population, and its politicians recognize this grave infrastructural challenge, consequently enacting laws to promote public private partnerships across the country.

The estimated cost of infrastructure investment required over next 10 years hovers between $8-billion and $10-billion. The newly-established sovereign wealth fund for the country cannot pay the bill for everything. Thus private investors will have a wealth of opportunities to keep picking from in the near future, especially in Nigeria’s power and accompanying transport sectors. Recent laws and change in government approach has numerous private operators waiting at the gates to make a deal. Some parties do complain that the due diligence process is absurdly arduous but this should gradually change over time.

Ethiopia

Ethiopia has the highest spending on infrastructure as a percentage of GDP in Africa. The government is dedicated to delivering high quality infrastructure to the country as the impetus for investment in the country’s other business sectors, particularly manufacturing/industrial and agriculture. For a country with 90 million people and relatively un-urbanized compared to its peers, improved transport - specifically roads and rails - is critical to moving goods to disperse populations.

The country’s leadership currently envisions an energy surplus following the completion of its latest dam project. But this should not lead investors to think the investment opportunities are limited for the power sector. Power purchased at the borders with Djibouti and Somalia can go north of US$0.75 per kWh depending on the time of the year. Thus, Ethiopia's vast land mass - ripe with energy opportunities from geothermal to gas to wind - offers boundless potential for growth.

Power generation could solely justify Ethiopia’s ranking in the top five. But, it would be a failure to ignore the demand for increased investment in power distribution. Any opening to foreign investment in the telecommunication sector will offer investors access to a country desperate for improved telecom infrastructure. Creative operators are already considering opportunities in water and sewage treatment which will become a graver concern to the country’s population as it approaches and surpasses 100 million persons.

It is not about the potential return with Ethiopia, in the eyes of those investors currently looking at the country, but rather all about timing (as to when a sector is more liberalized or the project gets approved). Whether today or in a year, the country will remain very attractive for infrastructure investment.

This article is re-published with permission from Frontier's content partner, Ventures Africa.

Guide to investing in Côte d’Ivoire

Free download: Gain expert insights into the economy and investment opportunities in Côte d’Ivoire.

Frontier markets have garnered a lot of attention, as international investors continue to search for new growth opportunities. 

One frontier market with immense potential is Côte d’Ivoire. Situated in West Africa, the country is the top producer of cocoa beans in the world, and is one of the most diversified and fast-growing economies in Francophone Africa.

GDP growth of 9.8% is expected in 2014, from 9% last year.

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 Brought to you in partnership with Developing Markets Associates.

7 business trends to watch in Ethiopia

Trend #1: Investment in infrastructure 

Ethiopia’s economy grew significantly in the past decade, driven mainly by major activity in the infrastructure and construction sectors. Annual per capita growth could increase by 3.8% if the country can get its infrastructure up to the quality of facilities found in Mauritius or South Africa. The Ethiopian government has an ambitious infrastructure development plan that will see to the delivery of adequate power, road, air, rail and telecommunications facilities. The plan will quintuple power generation capacity (to 10,000 MW) by 2015, according to the Growth and Transformation Plan; triple the capacity of the road network to 136,000 km, build new 2,000 kms of railway and facilitate mobile phone operators’ quest to increase the number of subscribers. Additionally, the national carrier, Ethiopian Airlines, plans to expand facilities to become the largest airline in Africa. These programs and others such as the ones that were designed to enable the country fulfil the Millennium Development Goals (MDGs) present huge opportunities for private companies. The key to identifying the opportunities lies in understanding the inputs the government requires to implement various development projects.

Trend #2: An agricultural revolution

Agriculture accounts for 40% of Ethiopia’s GDP and 60% of exports. Despite the lingering perception of the country as famine-struck, there is immense unexploited agricultural potential. The varied agro-climatic and altitude differences allow farming of a wide variety of crops including coffee, tea, oilseeds, pulses, cereals, which are the traditional crops grown, and newer crops such as fruits, vegetables, sugarcane, and palm. Ethiopia is a big exporter of floricultural products, fourth largest sesame exporter in the world, and top ten in the production of oilseeds like linseed and a wide variety of pulses. The livestock sector has the largest base resources in Africa but is grossly unexploited. The high value horticulture sector is likely to overtake floriculture in the coming years as an export earner. Future growth in the agribusiness sector will be driven by improved production by small-scale farmers and further foreign investment in commercial farming and agriprocessing. Some foreign companies are already invested in agri-procesing, for example, beverage production. It is likely that the sector will attract more investment especially in agriprocessing.

Trend #3: Growing market for consumer products

Ethiopia’s population of 93.8m, a rapidly expanding economy (% figures), high urbanisation rates and a young population – 73% of population is under 30 years of age – supports the case for investing in the Fast Moving Consumer Products (FMCG) sector. Foreign investors have recognised this potential, with Diageo buying a minority stake in state-owned brewery, Meta Abo, in 2011 for $225m, while Heineken bought two smaller breweries for $85m and $78m respectively. Diageo is looking to complete the acquisition soon, as it seeks to increase its market share. UK company, Duet Group followed the beer giants in Ethiopia by acquiring a 41% stake in Dashen Brewery for $90 million. Interest in the beer industry has continued with greenfield investment projects such as Raya Brewery and Habesha Brewery taking off. The beer market is expected to grow more than 10% each year to 2015 amid the country’s rising economic growth, which is expected to reach 8% by 2015, according to the IMF.

South Africa’s Tiger Brands acquired majority stake in East African Holdings’ FMCG operations, which is the largest manufacturer of household goods in the country. With industrial parks under construction and government-focus on the development of the light manufacturing sector, the sector is set to take off.

There will be interesting opportunities for smaller companies who aim to supply products and services to big investors. In the barley-malt-beer value chain, for instance, one can see opportunities, from contract farming, distribution and marketing, to advisory services, packaging, and input supplies. In the broader FMCG industry, interesting opportunities exist for expansion of market outlets such as supermarkets, distributions systems, and wholesale/retail operations. The next drive in the growth of FMCG sector may see expansion into regional markets of Somalia and South Sudan.

Trend #4: Unparalleled regional trade expansion

Ethiopia’s trade with neighbouring countries is likely to present a major business and economic opportunity in the near future. This will be made possible by bilateral and multilateral trade agreements under the auspices of COMESA and IGAD. However, a more important factor are the planned transport corridors in the region. There are established road linkages with Ethiopia Djibouti, Sudan, Kenya and to parts of Somalia. New projects are on the way to link the country to the emerging market of South Sudan, which operators in Ethiopia can also reach via river transport on the Baro. Perhaps the most interesting project is the Nairobi-Addis Ababa highway. When complete, it will represent one of the largest business opportunities in Africa, linking Ethiopia’s over 90m population with 130m consumers in the East African Community. There are talks of building a rail transport network, which will link with West Africa, perhaps from Senegal to Djibouti.

Trade figures are growing despite the current inadequate infrastructure - in 2010, Somalia and Sudan were Ethiopia’s fourth and seventh largest export markets, registering more than $200m in value. Imports from the Sudan and Somalia have also reached significant values at 4.5% and 6.6% of total Ethiopian imports respectively. Ethiopia has started supplying power to Djibouti and the Sudan and with additional multi-million dollar agreements to supply Kenya and South Sudan. Kenya in the meantime is developing the port of Lamu, with the aim of supplying South Sudan and Ethiopia. This region is likely to benefit further from a planned railway project connecting Ethiopia and Kenya along with South Sudan.

People are moving freely between Kenya and Ethiopia, while trade between Djibouti, Sudan and Ethiopia is tariff free. Any FMCG business with a good foothold in Ethiopia is thus also in a good position to supply these countries. The emerging interconnection of the East African and Horn of Africa trading blocks will represent some of the best opportunities for investment and value addition.

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Five top investment opportunities in Ghana

Ghana one of Africa's high-growth markets. Real GDP is projected to grow on average 5.16% per annum over the next five years. The West African country has maintained positive FDI trends in the recent past and has immense investment and business opportunities.

Power generation and supply

Ghana’s power sector has close to 2,500MW of installed capacity. Demand could exceed 5,000MW by 2016, driven by strong economic and industrial growth, population increases and government’s goal to be a major energy exporter into the West Africa Power Pool. Independent power producers are contributing to the current capacity, and are important in government’s bid to achieve its energy objectives.

Demand for energy is growing at a rate of 10% to 15 % yearly, but supply is not catching up. The government is consequently diversifying  the energy mix to ensure security, and is reportedly looking for investment into renewable energy projects to the tune of US$1-billion in the next eight years.

The renewable energy potential lies in wind, solar and hydro resources. More than 50% of installed capacity is currently provided by the large Akosombo and Kpong hydropower projects. Biomass also makes a significant contribution to the energy mix. West Africa’s second-biggest economy plans to increase the contribution of wind and solar power to 10% of the capacity by 2020 and enacted a Renewable Energy Law to enable the investment goals. 

It is estimated that, about US$9-billion is required in the short-term to finance the numerous initiatives in the energy sector, including oil and gas activities, which alone require over US$5.5-billion.

Companies can find a number of opportunities in generation, transmission and distribution of electricity, and supply of street lighting, energy-monitoring equipment to meet increasing demand for power monitoring and tariff analysis, and solar energy products and systems to off-grid communities.

A few foreign companies are planning big power generation projects in the country.

UK-based renewable energy investment firm, Blue Energy, announced it would construct a photovoltaic (PV) solar power plant in Ghana at a cost of US$400-million. Installation of more than 630,000 solar PV modules will begin by the end of 2013, and electricity generation will start early next year, with sections coming on stream as they are completed.  Blue Energy expects to power 100,000 homes when the plant reaches full capacity by October 2015, and claims it will be Africa’s biggest PV solar power plant.

Another recent big investor in Ghana’s solar energy space is Canadian solar company Siginik Energy Ltd, which plans to build a 50MW ground-mounted solar power installation in northern Ghana. It signed a power purchase agreement worth over $280 million, for 25 years, with the Electricity Company of Ghana Ltd., Ghana’s second largest utility.

Meanwhile Chinese Energy Company, Shenzhen Energy, is proposing to build a 700 megawatts coal-fired power plant that will cost US$700-million. Shenzhen, through its local unit Asgoli Power, entered Ghana in 2006 to build a 200MW plant that provides affordable energy to consumers.

Mining

With its political and social stability and strong mining infrastructure and services, gold-rich Ghana is a high-class target for mining investment.  As one of the most important producer nations for the global market – it is Africa’s second-largest gold producer, behind South Africa – mining is a major source of revenue for Ghana.

The country has diverse mineral resources, but the revenue balance is skewed towards gold. 14 of the 16 major mining companies operating in the country are extracting gold. Gold fields, AngloGold Ashanti, Golden Star and Newmont account for more than three-quarters of gold production. Other resources that are currently being mined include diamonds, manganese and bauxite. Deposit of Kaolin, silicon, limestone and other minerals exists.  The government is promoting the potential in these other areas with the hope of drawing interest from investors.

Gold prices soared in 2012, attracting attention to Ghana’s  deposits from big and small companies. This has also significantly increased illegal mining, which is now encroaching on the territories licensed to the majors, and using harmful methods to the environment.  

The falling prices of gold  could shift focus to other resources like limestone and bauxite. Limestone production would be potentially lucrative – the rising demand for clinker by the manufacturing and mining sectors (one million metric tons per year) could provide a ripe market locally and internationally.

Investment opportunities in the sector include production of industrial minerals for local and international markets, processing, provision of support services, e.g. contract drilling, contract mining, laboratories and geological services, manufacturing plants to produce key inputs and machinery for the mining industry.

Real estate and construction

Ghana’s growing population, buoyant economy and favourable investment environment make its real estate market increasingly dynamic. In spite of complicated issues over local lending and land ownership, demand for housing spans the entire spectrum of the population, from wealthy Ghanaians and a growing number of expatriates through a rising middle class to lower-income groups.

The current housing market boom began in the early 1990s when the financial sector was liberalised, and the sector’s expansion has since gone hand-in-hand with that of the economy as a whole.  With Ghana as one of the fastest-growing countries in the world, investors and authorities alike are realising the potential of the nation’s real estate sector.

Ghana has an encouraging framework for real estate investment, with freely-transferrable capital and profits, but projects have generally concentrated towards the middle and the top of the market, where margins are bigger and demand has remained relatively stable. As a result, a shortage of affordable housing is one of the biggest challenges facing the country. While the gap between supply and demand is most acute at the bottom of the income scale, there is also rising demand in the middle- and high-income segments, in which local and international developers are showing increasing interest.

One of the most significant drags on residential real estate growth has been the difficulty of obtaining a mortgage. But there is a growing willingness among banks and other lenders to provide home loans, whether through traditional mortgage structures or other forms of periodical payment.

Agriculture

Despite the changing demographics due to increasing urbanisation and industrialisation, agriculture still represents one of the largest GDP contributors in Ghana. The country is a major producer of a wide variety of cash and stable crops, including cocoa (second largest cocoa-growing country in the world), palm oil, maize, rice and cassava. Though maize and rice are primary staple crops, domestic demand has outpaced local supply in the past decade. Increasing production is a key part of the government’s long-term development plan.

A number of government- and private sector-led programmes could help boost production in the coming years. The World Bank, IMF and several pan-African NGOs are actively involved in the sector. The government continually engages major financiers to secure easier access to credit for farmers, which should decrease the amount of funding needed from international aid organisations and government sources.

The country is a major exporter of fruit and vegetables to EU markets. Other leading processed agricultural export products include tuna, cut fresh pineapples and tomato paste.

There are many opportunities for investors to get involved in Ghana’s agriculture sector such as commercial farming of crops and flowers, processing of produce and dairy products, supply of inputs, equipment, agrochemicals, veterinary drugs and animal feed, manufacturing of agri-chemicals packaging materials, cold chain systems and factory building and irrigation technology. Other opportunities include  capacity building for management and market-oriented enterprises, market intelligence research and development of agricultural finance and insurance. 

Insurance

The insurance sector in Ghana has grown rapidly in recent years. The fast growth and low entrance requirements over the past decade have resulted in a top-heavy sector, dominated by a handful of large firms and brokers. Competition is fierce, with over 40 insurance companies and 42 insurance brokerages. Corporates bring in the most business firms, but Ghana’s rising middle class is expected to boost the retail side. As new segments open up and the market continues to mature, smaller, more undercapitalised insurance companies are merging with competitors. 

The challenges facing the industry include under-pricing of policies and bad debts, which has badly affected insurance companies, forcing them to make significant underwriting losses.

The opportunities for strong companies and well-positioned new entrants are many. Micro- insurance initiatives in particular are set to tap into a massive, previously untouched market. The oil and gas sectors are expected to continue bringing in substantial amount of new business to insurance firms. The underinsured agriculture sector is another area.

The overall penetration is currently at almost 3%, and Ghana could play a leading role in the West African insurance market where total penetration is less than 1% in most countries, according to a report by international re-insurer, Munich Re. There are opportunities for companies to expand into the region.

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Guide to doing business in Nigeria

Nigeria is one of Africa’s powerhouses with the potential to be a key player on the global platform, thanks to its huge population, a fast-growing economy (the second largest in Africa), an expanding middle-class that wants to spend money, substantial natural resources, and diplomatic influence.

As one of the largest producers of oil in Africa, it has attracted significant investment into the sector. Current policy initiatives indicate government’s commitment to overcome existing challenges and to diversify the economy. Experts say diversification, for example transforming the agriculture sector, can bring double-digit growth rates by next year, which would put Nigeria’s growth rate ahead that of Brazil and Russia, and slightly behind India and China.

The explosion of sectors such as mobile telecommunications and construction drove growth in the past decade, with many non-oil foreign businesses making profitable investments and often in partnership with reputable indigenous companies. Rapid economic growth is expected to continue; Nigeria aims to be one of the 20 largest economies of the world by 2020.

Crude oil exports dominate the economy and account for about 90% foreign exchange earnings and 70% of budgetary revenues. Other exports are rubber, cotton, cocoa, timber, palm oil, groundnuts and ginger. Major imported goods include machinery, chemicals, equipment, food and live animals. China is the largest import partner followed by the U.S., India, The Netherlands and South Korea. The top three largest exporters to Nigeria are the U.S, India and Brazil.

The country has many investment and business opportunities available to companies seeking growth in fast-growing frontier markets. There are generally no restrictions on foreign investment. However, a few areas are strictly regulated, for example, defence, supply of uniforms for officials of the executive arm of government, and narcotics. Various sectors, for instance, oil and gas, may have specific investment.

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• How to set up a business 
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Financial investors to be key players in mining M&A

A steady improvement in global market conditions should see a gradual return to deal-making in the mining and metals sector in 2014, off the back of a seven-year low in global mergers and acquisitions (M&A) volumes in 2013.

A report released today by professional services firm, EY, shows the deal inertia evident in the sector last year. The Mergers, acquisitions and capital raising in mining and metals: 2013 trends, 2014 outlook says excluding the all share merger of Xstrata and Glencore, deal volumes and value were down 25% and 16% year-on-year to 702 and US$87.3-billion respectively.

Africa-focused deals made up 3% of global deal value, a decrease of 16% in deal value and 2% in deal volume year-on-year. This represented US$3.2-billion across the continent, with South Africa accounting for US$1.6-billion of deal activity.

Sandile Hlophe, head of Transaction Advisory Services for EY Africa says, “In the context of emerging markets, activity slowed during 2013, with the value of deals targeting Latin America and Africa dropping 80% and 85% y-o-y, respectively. This trend has been consistent in most emerging markets mainly due to majors seeking to repatriate capital to the mature market headquarters.  This will help to optimise capital and strengthen their balance sheets for expansion when the market turns and investor confidence returns.” 

Globally, capital raising followed a similar trend, with a 9% decrease in the total volume of issues to the lowest level seen since the 2008 global financial crisis, and a 9% increase in total proceeds to US$272b, largely due to some exceptional loan refinancing.

From an Africa perspective, capital raising proceeds dropped by 54%, while deal volumes remained relatively flat with a total of 11 deals for 2013.

EY Global Mining & Metals Transactions Leader, Lee Downham, says the third quarter of 2013 is widely seen as the bottom of the market.

“The extreme price volatility and rapid changes to the global economy in 2012 and into 2013, combined with large impairments and senior management changes across the sector, meant the risks in doing deals in 2013 were just too great given the moving base on which decisions needed to be made,” says Downham.

“Although there were successful divestments, there is also strong evidence that price volatility continued to create a price expectation gap between buyers and sellers.”

Downham and Hlophe agree the foundations have been laid for a gradual return to M&A in 2014.

“Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital raising,” says Downham.

Financial investors will be key drivers of M&A

Financial investors and equity-backed alternative capital providers will be particularly active in the M&A market in the first half of 2014, driven by anticipated longer term commodity price recovery and the ability to leverage management ability.

“A number of private equity funds have raised resources focused funds and we expect increased deployment of these funds into resources assets in 2014. We estimate these investors have more than US$10-billion deal capacity for the sector, thus we expect to see some big deals in the sector over the next year,” says Hlophe.

“They will be focused on low risk geographies and looking to leverage under-performing assets, using technical, operational and financial influence to generate better returns.”

This increased appetite follows a year in which financial investors’ share of total deal value in the sector increased from 5% in 2012 to 19% in 2013. In Africa, opportunity for capital investment lies with the juniors, particularly from financial investors.

“This supports the view that 2013 marks the tipping point for the sector, with many of the providers of such capital calling the bottom of the market,” adds Hlophe.

Capital raising outlook

EY expects to see a greater proportion of the sector’s funding to come from equity through follow-on raisings during 2014 and a stronger appetite from debt providers improving access to leveraged loans for quality mid-tier miners and developers.

“Risk capital for juniors is unlikely to be available on any large scale in 2014. While the best development projects will continue to attract funding from the increasing pool of private equity capital, it may take a longer period of sustained commodity prices and cost control discipline across the sector before we see strong investor confidence and IPO markets open for juniors,” says Downham.

Says Hlophe: “However in emerging markets, especially in Africa we have seen increased financial investor interest in the sector, thus we are likely to see a big focus on juniors by financial investors looking to build up sizeable resources platforms for exit to the strategic majors in five to seven years’ time when the market turns and the majors embark on acquisitive expansion.”

Key numbers: global mining and metals 2013 M&A and capital raising

• 703 deals globally with total deal value of US$124.7b. 70 deals across Africa and deal value US$3.2b.
•  Excluding the Xstrata/Glencore merger, 702 deals worth US$87.3b, down 25% and 16% respectively year-on-year.
• Switzerland, UK and Canada top three acquirers of African mining deals for 2013
• Copper and gold were the leading target commodities for inbound deals across Africa
• In South Africa though, coal was the leading target commodity with 49% of deals by value, due to increased demand for energy in South Africa and other emerging markets.
• DRC was the leading Africa country by value of deals at US$430m with South Africa coming in at US$397m

Business and Investment Opportunities in Africa

Access to finance is a major challenge for traders in Africa. But things are improving, as we report in this month's issue of FrontierInvest - banks are stepping in to fill the gap and are offering a wide range of trade finance products. 

Visit www.frontiermarketnetwork to view investment and business opportunities in various sectors and countries.

Six new sources of funding for mining companies

Traditional sources of capital for mining companies have dwindled in recent years. This has affected junior mining companies, forcing them to seek alternative sources of funding.

In its recent report Tracking the Trends 2014 - Top ten issues in mining, Deloitte,  said mining companies will continue to face challenging market conditions this year including rising costs, falling commodity prices, supply/demand imbalances, and decreased productivity levels. The key to success, according to the consulting firm, is innovation, which can help companies to lay firm bases for long-term growth and better position themselves for future success.

Many junior companies are struggling to find financing, even for strong projects. In an effort to survive, companies are seeking new sources of funding, including the following options.

Sovereign wealth funds

Although China dominates this market, other countries are entering the game. Indian investment houses are buying Australian coal to secure assets and supply
for both electricity and steel. Both Japanese and Korean investors are becoming more active in the sector. The Middle East also represents a significant source
of potential wealth. Although these investors have not yet committed, funding from countries like Qatar, Abu Dhabi and Saudi Arabia may not be far off.

Private equity

According to Preqin, a firm that studies private equity, eight mining funds raised US$8.5 billion in 2012 alone. Although private equity firms typically shy away
from the mining industry, interest may mount as valuations fall and competition from larger mining companies eases. That said, many analysts still believe the
sector is too big – and timelines too long – to sustain private equity interest.

Non-traditional stock options

As liquidity through traditional stock exchanges becomes scarcer, some miners are listing on non-traditional exchanges in Asia (including Singapore), the U.S.
and Europe. Hong Kong’s stock market remains open to miners with solid business cases.

Alternative financing

While major companies tap the bond markets with a range of high-yield and hybrid issues, others are seeking different sources of funding through royalty and streaming arrangements, off-take deals, joint ventures and equipment financing. Some Russian miners have had success tapping into the Eurobond market.

Pension funds

Pension funds typically have a long-term liability profile, which aligns nicely with the mining industry’s long-term assets and returns. The sector could see more
interest from this quarter as pensions look to mining assets as a potential hedge against inflation. According to Preqin, public sector pension funds accounted
for 18% of organisations with an interest in natural resource private equity in 2012, followed by endowment plans at 17% and private sector pension funds
at 11%.19 

Consolidation

By pooling their capital and resources, some companies may be able to lower their labour and equipment costs sufficiently to ride out current market
turbulence. Although transactions are down, companies that can present buyers with a strong rationale for their asset pricing are more likely to attract investor
interest. To position for these opportunities, companies must right-size their portfolios and ensure that key assets are capable of functioning as standalone
entities, both from a financial and functional perspective. They also need to better calibrate their balance sheets in preparation not only for sale but also
potential refinancing.

Top risks for African mining

Africa is considered the last great frontier for terrestrial mining. The continent holds over 30% of the world’s minerals, including 40% of its gold, 60% of its cobalt and 90% of its platinum group mineral reserves. Given that relatively little exploration has taken place, the true extent of the resources could be much greater.

The opportunities are vast, but there are significant risks associated with mining projects. Frontier interviewed seven experts from firms including PwC, StrategiCo and Core Consultants and asked them what they thought were the top risks facing mining companies in Africa.

Download this complimentary report now and you will learn:

• What the top risks facing mining companies in Africa are
• What countries present the most challenging environments to operate within
• How mining companies can mitigate against some of the risks facing them

Read the report to ensure you are reducing the risk when embarking on mining projects in Africa.

Top 10 trends to watch in Africa

The African Development Bank has projected a growth rate of 5.3% next year, from 4.8% in 2013. This growth, the bank says in its latest economic outlook, confirms Africa’s ‘healthy resilience to internal and external shocks and its role as a growth pole in a distressed global economy’.  

The robust economic growth, expanding market size and various reforms have improved the attractiveness of the continent to investors; foreign Direct Investment (FDI) inflows increased by 5% to US$50-billion in 2012, even as global numbers fell, according to the 2013 World Investment Outlook.  

So, what are the trends to watch if you are looking for growth opportunities in Africa in 2014?

Download our list of top trends for the year to find out exactly where the opportunities are.

Outlook for mining sector in Africa

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