The Cost of African Instability

22 January 2009 (Last Updated June 1st, 2018 15:27)

Political instability, coupled with the global recession, is posing a significant threat to mining companies operating in Africa. As a result, the securing of tenures and mining rights is arguably the biggest cause for concern for companies working in the continent. Ozge Ibrahim explains why.

The Cost of African Instability

The economic coup in Guinea is the latest example of how political tensions can throw mining companies into a state of chaos, such as the death of President Lansana Conte in December, which saw contracts become open to question. The country, which is now under the control of the military junta, plans to cancel mining agreements, according to sources inside the country. Projects such as Rio Tinto’s planned $6bn iron ore project in Guinea are now hanging in the balance.

It is uncertain whether Alcoa, United Rusal and Anglo Gold Ashanti’s licences will be renewed. The world’s largest miner, BHP Billiton, which is building an alumina refinery with Global Alumina Corp, will also be watching closely to see how the political upheaval will affect its future.

"Whoever has concessions in Guinea will now be concerned," says James Smither, an analyst specialising in African issues at UK-based Control Risks.

African risk

Zimbabwe is arguably Africa’s most politically troubled nation. In December last year, it was revealed that Zimbabwe’s President Robert Mugabe was preparing to take over key businesses including mining companies. While large companies such as Rio Tinto and platinum producer Impala Platinum Holdings have been operating inside the country for many years, the move by the dictator could represent uncertainty for investors.

One of Africa’s most important mining countries, South Africa, has also suffered its fair share of domestic turmoil. The county, which neighbours Zimbabwe, has also been dogged by infrastructure concerns and continues to struggle to sufficiently power its mines. With electricity shortages and outbreaks of violent xenophobia, managing risk in South Africa must be at the top of the agenda for mining companies seeking to invest in the its mines and communities.

Referring to the some of the main mining regions across Africa, Smither says: "The community issues are still there and political instability is rife … as a result, re-negotiating mining rights and royalties is something companies must prioritise."

Economic strife and ongoing investment

Set against this backdrop of political instability is the global economic downturn. This has led to shortages in investment and will continue to do so in the short term. Investors and banks are set to claw back capital, restricting funds for fewer projects in 2009. The fall in commodities prices and lack of available finance is set to affect both senior and junior miners.

In order to survive the economic tide, financial mining experts are warning cash-strapped miners to act quickly to ensure survival. Mining companies have already started abandoning large-scale projects or putting them on hold. For instance, Canada’s African Queen Mines has abandoned its plans to develop the historic Braganza gold deposit in Mozambique, due to both disappointing exploration results and the financial crisis. But while the complexity of the situation means some projects are abandoned, other companies are continuing to invest. In the same announcement, African Queen said it will focus on diamond mining projects in Botswana and Namibia, which represent a more stable investment.

"The fall in commodities and lack of available finances is set to affect both senior and junior miners."

Another example of continued investment is French nuclear giant Areva’s foray into Niger to build a uranium mine. The mine, expected to be the largest uranium mine in Africa, will have an annual production of 5,000t for a period of 35 years and will employ 1,400 workers. In spite of falling prices, Areva says it will press ahead with the project which will begin in 2010. The mine could ultimately make Niger the world’s second biggest uranium producer after Canada.

The economic downturn may also signal the emergence of more Chinese investment, according to analysts. With the price of commodities falling, particularly in copper, Chinese companies are set to find smaller miners an attractive option. Problems can arise, however, when local communities reject incoming mining companies, which may have a different philosophy and ethic to the communities living in the region.

According to Smither, Chinese mining companies in particular have not been popular among some African communities, who feel they get little back in return from the companies, which largely only employ Chinese workers. This can result in little financial gain for the community in the area. Due to cultural differences and community tensions in some African communities, "the Chinese investment model does not work long-term," says Smither.

The solution to the problem of assessing and tackling political risk across Africa is to work to get the balance right, according to Smither.

Risk management, incorporating both economic conditions and political tensions, must happen if mining companies, of all sizes, are to make a long-term success of mining in Africa. Social development work with local communities must take precedence to ensure residents of mining communities work in harmony with both new and on-going operations. As a result, tension between miners and local residents may be eased, helping achieve a more fruitful relationship.