Mining – a tough year globally, but optimism remains in Africa
The mining and metals industry is going through a rough period, but there are good reasons to be hopeful for the future
The fall in commodity prices and slow-down in China’s GDP growth have made 2015 a difficult year for the mining industry, with a drop in M&A activity, suspended or stalled development of both greenfield and brownfield projects, and multiple restructurings, write-downs and sell offs affecting majors and juniors alike.
Alongside a perceived decrease in demand and a drop in revenues, costs have also been going up. This despite the drop in oil prices which should have meant lower production costs.
Overall, the focus has clearly shifted from the resource supercycle’s growth, exploration and diversification model, to high quality, core assets and controlling costs and capital expenditure.
But it’s not all doom and gloom. There are some new projects underway in Africa which reflect the optimism the mining industry is known for, and some of this optimism is being found in quite unexpected places.
Ethiopia is the focus on a number of greenfield projects, with Kefi Minerals focusing on gold and Yara International on potash, and Guinea-Bissau is the site of GB Minerals’ greenfield phosphate project. All of these projects are ‘firsts’ for their countries. And despite concerns about the copper price, companies such as ERG (Eurasian Resources Group) and Cupric Canyon are continuing with the development of their African copper assets.
The optimism is not without cause. There are market fundamentals which support a favourable long-term outlook for the industry.
It goes without saying that metals prices are cyclical, and there is every probability that they will improve over time. Combine that with the fact that a new project is estimated to take an average of 10 years from discovery to full feasibility, and another 6 years to give returns to its investors: investment at the bottom end of the cycle may position a project perfectly to take advantage of the next upturn in the cycle once it is producing.
Even with speculation that demand will decrease, due to a slow-down in growth in China and around the world, supply will also become more constrained over time with the declining quality of operating mines and less money being spent on exploration.
And of course, there is increasing demand for particular commodities. Bauxite, used in the production of aluminium, and potash and phosphate, crucial to the growth of fertilizer and other agribusiness, are two examples.
Africa is well placed to capitalise on these opportunities.