Risks and rewards in an emerging Africa

Cape Town, South Africa – A record number of delegates descended on Cape Town in early February to hear about new African investment opportunities as countries continue to stablize and open up, though risks remain.

The atmosphere among the record 5,700-or-so delegates at the 17th annual Mining Indaba conference was quite positive, as the commodities boom continues and more investment pours into the continent.

From 2009 to 2010 Africa’s share of global deal-flow tripled from 5% to 15%, with the bulk of the deals inbound. Rio Tinto (RIO-L, RIO-A) offered US$3.9 billion to buy Mozambique-focused Riversdale Mining (RIV-A), Xstrata (XTA-L) is paying US$514 for Mauritania-focused Sphere Minerals (SPH-A), and of course Kinross Gold (K-T, KGC-N) took over Red Back Mining in a US$7.4 billion deal.

Financial historian Niall Ferguson, in his keynote address titled “The ascent of Africa and her minerals”, noted that one would be hard press to find a more cheery room of people anywhere.

“For the first time in world history Africa looks rich,” said Ferguson.

Canadian-listed mining companies are looking to share in the continent’s ascent and are already well-represented. Between the Toronto Stock Exchange and the Venture there are about 180 companies working in Africa, holding 709 mining properties and mining in 34 countries.

Mineral-rich South Africa still attracts the most Canadian-listed companies at 23, with Tanzania and the Democratic Republic of the Congo, with 22 and 21 companies, close behind.

Highlighting the popularity of those regions, Robert Friedland made a brief appearance at the conference to theatrically announce that Ivanplats had made tier 1 discoveries in both South Africa and the DRC, while refusing, much like he did four years ago, to divulge any details.

He described the platinum-rich Bushveld region of South Africa and the copper-rich Katanga region of the DRC, where his mysterious discoveries are located, as “the world’s greatest mineral endowments.”

West Africa is also attracting increased attention thanks in part to Kinross’ major investment, and continued to be a popular topic at the conference. There are now 107 Canadian-listed companies in the region, with Ghana, Mali, Niger and Burkina Faso leading the way.

A number of Canadian-listed companies, however, are venturing into countries that are less popular, and often less stable, looking to get the ‘first on the ground’ advantage.

The strategy can prove rewarding, but some regions continue to present serious risk.

James Smither, a director at consultancy Control Risks, told a packed room at Indaba about some of the key risks facing African mining this year.

The top risk was corruption at all levels. Companies are sometimes forced to navigate through corrupt officials or bureaucracies, while anti-corruption enforcement on companies is getting stronger, especially through the United States Foreign Corrupt Practices Act.

Political change is also going to bring its own risk. No less than 20 countries are going to the polls in 2011. Last year, Guinea’s relatively smooth election provided a positive sign, while Ivory Coast showed how quickly an election can turn ugly.

More taxes and red tape continue to pose a risk, with sub-Saharan Africa rated as the most complicated place to do business. Zambia has abandoned its 25% windfall tax, but countries continue to tinker with royalty rates and tax structures.

Security remains a problem in parts of the continent, though more from lower-level theft, piracy and kidnappings than actual armed conflict.

And finally infrastructure on the continent poses a problem, as ports reach capacity, electricity supplies fall short, and road and rail routes prove inadequate.

Smither, however, also said that “the flipside of risk is opportunity.” Cluff Gold (CFG-T, CLF-L), Nevsun Resources (NSU-T) and  Centamin Egypt (CEE-T) provide examples for some of the possible risks and rewards of being the first into a country.

London-based Cluff Gold has operating gold mines in Ivory Coast and Burkina-Faso, and an advanced stage project in Sierra Leone.

The company’s 78%-owned Kalsaka gold mine in fairly stable Burkina-Faso has reserves of 5.6 million tonnes grading 1.7 grams gold for 298,000 oz. In 2010 the mine produced 74,000 oz. and largely funds the company’s development costs.

Cluff’s 90%-owned Angovia mine in Ivory Coast plays a much smaller role in the company’s portfolio, while still churning out 20,000 oz. in 2010. The mine has proven and probable reserves of 2.2 million tonnes grading 1.3 grams gold for 89,000 oz.

Ivory Coast, however, is currently a country in limbo after an electoral stand-off, with the declared loser refusing to cede power. Pete Gardner, Cluff’s finance director, said at Indaba that the mine was still operating but fuel and equipment supplies were not getting in due to the unrest. The near-term future of the mine remains unclear.

But the company’s efforts in Sierra Leone could pay off, which was itself a very unstable country until a few years ago due to civil war. Cluff’s wholly-owned Baomahun gold project in the centre of the country hosts a resource of 15.1 million tonnes grading 2.9 grams gold for 1.4 million contained oz., plus a further 12.2 million inferred tonnes grading 2.6 grams gold for an additional million ounces. A scoping study outlined an open pit mine producing 157,000 oz. per year at a cash cost of US$500 per oz.

The country has great geologic potential, but no modern gold mines in operation. There are two western-operated iron mines in the northwest part of the country, but the country is still very much emerging. Gardner, however, said he’s found operating in the country fairly straightforward.

On the other half of the continent, Nevsun Resources recently declared commercial production at its 60%-owned Bisha mine in Eritrea. The company expects to produce 1.06 million oz. gold, 9.4 million oz. silver, 734 million lbs. copper and 1.1 billion lbs. zinc over the 10 year mine life.

Despite bringing the mine to commercial production of over 1,000 oz. a day, and doing it on schedule and under budget, the company lost 55¢ on the day in announced the milestone to close at $5.64.

Company president and CEO Cliff Davis said that the popular uprisings going on in North Africa could have played a part, as otherwise the announcement was “one of the best releases this company has ever put out.”

“People have speculated if is there any carry-over effect regarding Libya and Egypt,” said Davis. “And, there really isn’t. They’re totally different kinds of economies.” Davis explained that the unelected leaders of Eritrea are quite different than the long-standing dictators further north.

“It’s a high high integrity group of individuals that fought for their independence,” said Davis. “There is no such thing as corruption in Eritrea.”

Further north, Centamin Egypt has felt the financial effects of the recent uprisings much more. The owners of Egypt’s first and only modern gold mine saw its share price drop from around $2.60 in mid-January to $2.30 during Indaba. There, Centamin’s chairman Josef El-Raghy worked to convince attendees that the mine was operating fine.

“Our operations remain unchanged,” said El-Raghy, adding that “we still see Egypt as a good place to operate.”

The stock rallied after Hosni Mubarak resigned, but then plunged to below $2 as Egyptian news reports surfaced of Centamin workers going on strike and demanding a change to Egyptian ownership and higher pay.  The company has, however, since clarified that the protest was minor and the mine continues to operate normally with a target production of 250,000 to 290,000 oz. gold this year.

Elsewhere, companies are pushing into Zimbabwe, Madagascar, Central African
Republic and other countries with a high political risk, looking for new opportunities.

But while the geologic potential is undoubtedly there, companies need to factor in the risks as well as the rewards while investing in this emerging continent.