Mining firms in West Africa would be well served to familiarise themselves with the phrase ‘a bird in the hand is worth two in the bush’, following the disclosure from an investment bank that funds will no longer be doled out on resource potential alone.
In a damning recent research note, London firm SP Angel made it clear that to secure future investment, mining firms will need to toughen up their due diligence and take account of a broad range of social, political and environmental factors when they come calling for cash. Highlighting the critical role of infrastructure, such as rail networks and access to power, the firm raised a number of current and upcoming projects which it believes will be disrupted by inadequate operating environments.
In the note, which focused on junior players in the West Africa iron ore market, the firm stated that it ascribes greater value to "potential development tonnages" than "tonnages in the ground". The message to firms being, "Don’t tell us what’s in the ground but tell us what you can get out of it and bring to market."
The detailed and comprehensive update of the bank’s market outlook on prospects in countries such as the Ivory Coast and Liberia highlighted "access to infrastructure", a need for small scale steel production close to mining operations and for the impact of weather to be better accounted for.
Developments delayed due to lack of railways
The notementioned Rio Tinto’s Simandou project in Guinea, which is slated to deliver roughly 2.4 billion tonnes of high grade ore, as a prime example of a mine that relies heavily on infrastructure. In order for the project to be bought on-stream, a new Trans-Guinean railway stretching 670km will need to be built to enable the ore to be transported to a deep water port.
The bank highlighted the rail infrastructure issue as one of the main factors behind the start date of the project being pushed back from 2015 to 2018. It also raised the Exxarro project in the Republic of Congo, expected output of about 3 million tonnes a year, and Sable Mining’s Nimba development in Liberia, as relying heavily on the refurbishment of railway lines.
After much uncertainty, Indonesia has finally enacted its ban on the export of raw mineral ores, as well as introducing an unexpected tax.
Another critical factor occupying the minds of SP Angel analysts is the potential benefits provided by the development of steel production in the countries where the mining activity takes place. Drawing on previous failed attempts to establish steel mills in Zimbabwe and the Republic of Congo, the bank proposed that improved availability of power could be a "game changer" and tip the balance in favour of attracting interest from industry.
It said: "The availability of iron ore and power to coastal steel mills could be an attractive proposition and could account for the interest of steel producers such as Jindal Steel and Posco."
Environmental issues must be accounted for
On the environmental side, the paper warned that issues relating to development and excavation need to be viewed within the context of existing policies with full understanding of potential legal challenges and any mitigating factors. In 2012, the WWF, Centre for Environment and Development of Cameroon and RELUFA launched an investigation into the granting of mining permits for land within National Parks and uncovered a number of instances where Cameroon law had been directly contravened.
To further substantiate its outlook that investment is becoming more closely tied to what’s achievable rather than what is actually in the ground, it draws on an imbalance between the mining sector and the investment community. It said: "Despite progressing projects through exploration to feasibility, share prices and re-ratings have not followed suit – the market is not willing to pay much for projects with development prospects dependent on large infrastructure investments."
Closer collaboration with government needed
In addition to infrastructure concerns, the bank also highlighted projects that require border crossings to deliver deposits as being viewed with scepticism and that firms need to work more closely with the governments of the country they are operating within. The importance of productive relations between firms and governments received added attention recently when Rangold Resources chief executive Mark Bristow suggested that changes to regulation and tax regimes by a number of African governments risked putting off investors.
Speaking at an industry conference, he said: "The mining code reviews of the past few years and those currently underway in a number of African countries have undoubtedly aggravated this uncertainty by creating the impression that their governments not only want a bigger slice of the pie, they want to take that before the pie is even baked."
In an indication that it will favour prospective projects over those currently underway the bank said: "Projects with potential for development coming in after the ‘glut’ in iron ore supply could attract more interest than large scale projects which are ‘stranded’ by high capital investment requirements for rail, port and power."
That an investment bank like SP Angel has decided to voice significant concerns about the feasibility of development projects in West Africa has significant ramifications for mining firms operating in those areas. But issues such as access to power and the quality and availability of railways have not arisen out of nowhere. They were there six years ago when money was free flowing, as they are now when SP Angel feels the need to tighten its belt.
That suggests that the move is driven not by a greater understanding of how infrastructure and mining interlink, but by a lowering of its appetite for risk. What’s driving that is also detailed in the paper. A slowing of growth and construction in China is reducing demand, and by extension the market price, for iron ore. At the same time, operations in Australia are stripping out costs to meet those lower prices. As a result, the cost arbitrage that has been common in African operations is being eroded and increasing the need for extra efficiency.
As a result, investment focus is shifting from bush to hand.