Africa’s mining sector has proven to be something of a mixed blessing. The continent’s mineral resources offer enormous possibilities of wealth, but they are also hard to reach. Sub-Saharan Africa, along with the inhospitable Arctic, remains the most underexplored region on earth, geologically speaking. Yet the continent accounts for approximately 30 percent of the world’s mineral reserves.
The geographical and logistical difficulties involved in locating and accessing Africa’s resource wealth have been exacerbated by the constrained post-2008 macroeconomic climate. Investors have been reluctant to fund new projects in far-flung geographies despite the rich rewards such projects offer in the medium to long term.
One lingering consequence of the 2008 global financial crisis has been that equity markets have largely closed up, says Wickus Botha, a mining and metals expert at EY, an accounting and professional services firm. Companies in high-risk, long-term industries such as mining have a harder time finding funding. This applies even more for projects in more remote regions.
Two factors have compounded the decline of interest in mining investment, Botha says. First, many investors claim they did not substantially benefit from mining portfolio investments during the commodities super cycle of the early 2000s, which saw a boom in prices for food stuffs, fuels, and other resources.
Second, commodity prices have fallen considerably since 2008. A significant drop in demand for metals and minerals, particularly from the Asian market, followed the commodities boom. This was followed by a general slump in commodity prices. As a result, willingness to invest in exploration and mining projects has waned considerably, he says.
Energy-related commodity prices decreased by 41.7 percent between the first quarter of 2014 and first quarter of 2015, according to an April World Bank report. Those for metals and precious metals decreased by 13.4 percent and 3.4 percent respectively over the same period.
If the price of a commodity drops, even by a few percent, mining companies will notice the difference in their profit margins. This influences the amount of money they can make available for other things. “Although there is still funding available for brownfield expansion and some for acquisitions, there is virtually no investment capital for greenfield projects,” Botha says.
Mining companies now have to pay far more for project financing than they did a decade ago because investment capital is scarce, says Tony Zoghby, a mining industry expert at Deloitte & Touche South Africa, an auditing firm. When investment funding is scarce, it costs companies more to access it. “This of course drives up the cost of the investment and reduces returns, which might then lead to the project not meeting the hurdles and requirements set.”
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