2015 will continue to be challenging for the global mining industry. Commodity prices are not anticipated to exhibit material improvement, impacting on sector valuations and the ability to raise financing. But, amid a more sober outlook, the prospects for mining in Africa remains essentially intact over the medium term, according to Standard Bank, Africa’s biggest lender by assets.
“The broad fundamentals of the African mining narrative are still firmly in place,” said Rajat Kohli, Head, International Mining and Metals, at Standard Bank. “The reality is that the continent still boasts an abundance of natural resource deposits which are relatively underdeveloped compared to the likes of Australia or Latin America. The continent may be experiencing a cyclical slowdown in new investment but, as the global economy recovers, Africa remains well positioned to benefit from any increase in investment and consumption.”
Standard Bank research shows that African mining remains underexplored. In 2013, African exploration accounted for 17% of the worldwide exploration budget despite the fact that the continent holds more than 30% of the world’s mineral resources.
Capital spending in the sector peaked in the first half of 2013 as investor criticism of lacklustre returns in the sector and lower commodity prices motivated producers to limit spending on new projects. The focus now is on cutting costs, restoring weakened balance sheets and optimising asset portfolios, to improve cash flow generation and, hence, returns. With growth in China to continue, albeit at a lower rate (but off a larger base), the medium-term prognosis appears more optimistic.
“A sustained recovery in demand growth, coupled with limited investment, will provide the ingredients for a recovery in the sector’s fortunes.” But, in the next 12-24 months, the outlook is less secure. “If producers can withstand challenging market conditions, they should be set fair to benefit from an economic recovery.”
Commodities ranging from iron ore to crude oil have slumped to multi-year lows amidst a combination of slower global economic growth and a stronger US dollar. “Mining has always been a cyclical industry and Standard Bank is of the view that what we are currently experiencing is a cyclical correction, we’re either at the bottom of the cycle or very close to the bottom,” said Mr Kohli.
Financing challenges have also arisen, especially for mid-tier and junior miners. Public equity markets are highly discreet and lending terms have tightened. In this environment, Mr Kohli says, private capital has emerged as a growing source of funding for new mine investment in Africa, which is partly driven by the fact that resource assets can currently be acquired at relatively attractive prices. Furthermore, this will spur an increase in M&A activity.
“One of the positives of the decline in commodity prices is that you’re able to pick up natural resource assets at attractive valuations at the moment,” said Mr Kohli. “Our expectation is that the bulk of these assets are likely to be far more valuable in 5-10 years than they are now, which makes for a very good investment proposition.”