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By Clyde Russell
CAPE TOWN Feb 8 It should be a match made in
heaven. Developing Africa's vast mineral resources to meet the
needs of the resource-hungry economies of China and the rest of
But if there is one message to take away from this week's
Mining Indaba conference in Cape Town, it's that there remains a
large gap between hopes and reality, and that in much of
sub-Saharan Africa mining investment remains challenging, if not
in the too-hard basket.
In many cases, it appears that the various stakeholders in
mining simply talk past each other, with mining companies
pleading for regulatory certainty, preferably on favourable
terms, and government leaders pushing their agenda that the
industry must benefit all.
The main problem is that many African countries have what
are effectively incompatible goals when it comes to developing
their natural resources.
They want mining companies to invest billions of dollars to
provide jobs and tax revenues, but they also insist that the
same companies meet high hurdles relating to empowering various
groups in the host country.
South Africa, the continent's mining powerhouse, is a case
The country's mining charter calls for companies to have a
minimum of 26-percent ownership by investors from the black
In itself this is perhaps a sensible and justifiable
position for the government, given how black South Africans were
largely excluded from participating in the economy under the
white-minority government's policy of apartheid, which ended in
1994 with the negotiated transition to democracy.
However, in practice it means that any company considering
investing in South Africa will effectively be forced to
contribute 100 percent of the capital for only 74 percent of the
Obviously this adds to the cost of doing business, and may
just be enough to deter mining investment, especially when
companies have the option of taking their money to other
jurisdictions with less onerous terms.
The mining charter has prompted legal challenges in South
Africa, and much criticism from the mining sector, with some
company representatives at the conference this week privately
expressing fears that the 26-percent black empowerment rule is
likely only the beginning, and that the percentage that must be
held by black investors may rise to something closer to 50
percent in coming years.
It's not just South Africa that presents problems for mining
companies, with other countries also shifting goal posts as they
try to extract more benefits from their commodities.
The Democratic Republic of the Congo (DRC), the world's
largest producer of cobalt and a major producer of copper and
diamonds, changed its mining code in 2012, doubling royalties
and seeking larger free carry equity stakes, as well as local
But opposition to these reforms meant the DRC government
quietly abandoned them, but the fallout was that the country
tarnished its reputation as a mining investment destination.
Ghana, a model for mining investment after its 2006 mining
law attracted investors into its gold industry, decided in 2012
to raise a windfall tax on gold, but then didn't follow through.
Other countries that have or are planning to change their
mining laws include Zambia, Zimbabwe and Tanzania, reinforcing
the continent's image as a difficult place to do business.
The Fraser Institute survey of investor appeal tells the
story, with the 2015 rankings placing South Africa 66th out of
109 jurisdictions, Zambia 68th and Zimbabwe 98th.
It's not all bad news, with Botswana, a major diamond
producer, ranking 39th and Ghana in 31st spot.
But the point is that African countries have to compete with
Australia and Canada, which boast the top two jurisdictions of
Western Australia state and Saskatchewan province.
While those are developed countries, other developing
nations such as Chile, in 11th spot, and Brazil, in 56th place,
offer stiff competition for mining dollars.
So what can African countries do to improve matters while
still meeting the goals of getting mining to contribute more to
the development of local economies and people?
The first step is to agree a regulatory framework and then
stick to it, resisting the urge to tinker when commodity prices
start to rally.
But it's also important for governments and miners to
recognise that what they have been doing simply isn't going to
An example of innovative thinking could be that a government
decides to raise the royalty rate on mining ore, perhaps to a
level slightly higher than comparable jurisdictions, and then
places the extra revenue in a sovereign wealth fund.
Such a fund could have a mandate to buy stakes in new
projects, or to lend money to suitable local investors so that
they might participate in mining ventures.
A well-managed and structured wealth fund would also go some
way to cutting down on susceptibility to corruption, a problem
that plagues the current systems of forcing companies to give
equity stakes to local investors.
The risk for African nations is that if they don't sort out
their regulatory frameworks, they will continue to miss out.
Without improvement, it's likely the only projects that will
be developed will be either the absolute best, as they will be
justifiable because of their superior economics, or the ones
where dodgy deals can be secured through corruption or by mining
without care for the environment.
(Editing by Joseph Radford)