Cape Town, South Africa — The Investing in African Mining Conference (Indaba 2001), held here earlier this month, generated both optimism and pessimism among delegates weighing the continent’s mineral opportunities against growing political risk. It also triggered plenty of debate about the future of the gold mining industry, and what can be done to reverse the yellow metal’s sagging fortunes.
Kelvin Williams, marketing director for
Williams said AngloGold rejects the argument that physical offtake of gold is irrelevant to price and should be left to get on with itself. “We believe a healthy physical offtake is what sustains some kind of floor price in the market we’re living through right now. Forget for the moment about the notion of a conspiracy against gold, and worldwide plots between central bankers here, there and everywhere. We face an overhang of metal, and if we don’t keep the physical markets healthy, we might all face a less-happy long-term future in gold.”
Williams urged all gold companies to work together to improve the desirability of gold to the market consumer, improve market sentiment, and increase the offtake of gold. AngloGold is doing its bit by taking part in various marketing initiatives. Among the projects either under way or on the drawing board are the Gold of Africa Museum, jewelry design competitions and new-product development. The company also holds stakes in two downstream investments called OroAfrica (South Africa’s largest jewelry manufacturer) and GoldAvenue (a gold e-commerce site).
AngloGold appears to be taking a page from South Africa’s platinum producers, which have long viewed themselves as a market-driven business, rather than as traditional resource extractors. With 1.5 billion oz. of platinum known to exist in the ground (75% in South Africa), the strategy makes obvious sense, said Barry Davison, chief executive officer of Anglo Platinum.
“That’s 250 years of supply if demand continues at a rate of 6.5 million oz. annually,” Davison told delegates. “So what we produce must have reference to the size of the market.”
The jewelry sector, which accounts for 47% of consumption, has been helped by marketing efforts that promote platinum’s hardness over gold. Industrial demand is growing too, Davison added, particularly in new applications such as fuel cells and computer disks.
Diamonds are another marketing success story, though not one lacking challenges, given the present controversy over conflict diamonds and new sources of supply that bypass the traditional single-marketing channel.
Gary Ralfe, managing director of
Ralfe also discussed the company’s social transformation, which he conceded was a more difficult topic than economic issues. “I cannot pretend that the management of De Beers reflects the racial, let alone the gender, make-up of South African society. But that is our challenge.”
However, Ralfe expressed concern that black empowerment schemes on their own could lead to the enrichment of a few, rather than the transformation of the lives of many. “The more effective tool for the social transformation required in South Africa is undoubtedly empowerment through education, skills transfer and employment equity. This would achieve the operational presence of blacks at all levels of the business.”
Draft mining bill
The South African government is attempting a social transformation too, in part through new legislation governing the minerals industry. The challenge of producing an internationally competitive piece of legislation that also incorporates legal measures to redress past racial discrimination helps explain why the country’s proposed Minerals Development Bill has undergone 17 revisions yet still continues to generate controversy.
If enacted, the current system allowing dual state/private ownership of mineral rights will be scrapped, and all ownership would vest in the state, which would be responsible for granting prospecting and mining licences. The goals are to prevent companies from monopolizing rights to extensive lands, provide a level playing field for foreign and domestic investors, and encourage development of junior companies and black-owned companies.
The new “use-it-or-lose-it” principle is applauded for the most part, particularly as assurances have been given that compensation will be paid in the event of expropriation of property. However, other aspects are not being welcomed. Several speakers urged investor caution over controversial aspects such as: lack of recognition for South Africa’s mining heritage; the extent of ministerial discretion; the lack of an objective appeal process; and the obligation of the minister to favour previously disadvantaged groups.
“We don’t claim that everyone supports the bill,” said Phumzile Mlambo-Ngcuka, South Africa’s minister for minerals and energy. “But over the next two months, the industry can make submissions to improve it. And we will take the draft bill to the constitutional court and to the World Bank to make sure we are on the right track. The last thing we want is a confrontation with industry.”
Mining companies don’t want that either, though several speakers urged the government to listen carefully to industry concerns. Gary Ralfe of De Beers said mineral rights could indeed vest in the state, as they do in Botswana and Namibia and in other countries, and as envisaged in the Mineral Development Bill. But in return, the private sector is entitled to expect an enabling environment for investment, which means ensuring civil peace and order, security of tenure and fiscal certainty.
“Mining investment, because of its colossal scale and long lead-in times, requires fiscal certainty,” he added. “It should not be subject to punitive fiscal impost and certainly not to any ministerial discretion in fiscal matters. This is a basic matter of establishing the rules of the game, and keeping to the rules of game, which have to be predictable and transparent.”
Afro-pessimism
Mines ministers from most African nations were in attendance, and several used the occasion to promote investment opportunities in their nations. However, even as some spoke, a phenomenon described as “Afro-pessimism” was undermining the rosy message being delivered to delegates, who, for the most part, fully realized the challenges of working in places such as Sierra Leone, the Democratic Republic of Congo, and Angola. Even Zimbabwe, a former economic star, suffered from negative sentiment brought about primarily by recent actions of President Robert Mugabe.
However, several countries won repeated praise for their political stability and favourable investment climate, including Botswana, Namibia, Ghana and Tanzania.
Sam Jonah, president of
Tanzania was also praised for greatly improving its investment climate. “It’s not perfect,” one delegate said, “but it’s getting better. They’ve had the benefit of knowing that all these central planning schemes don’t work.”
Allan Hill of
One of the most strongly worded comments on political stability came from Tafilani Machacha, Botswana’s minister of energy and mines. “We are an exception to the rule in Africa, and that is not our biased view. Transparency International and other organizations agree. There is no queue of people to be paid. You will always get an official receipt, and you won’t have to pay a local chief. That’s not how we do business in Botswana. The rule of law applies to all.
“Our business climate is second to none in Africa, and our best asset.”
Industry consolidation
The global mining business is not the only sector undergoing consolidation. Gerard Holden of Barclays Capital told delegates that the banking sector is consolidating too, which means there will be fewer lenders in the years ahead.
“Ten years ago, thirty banks were lending to mining companies. Now it’s about half that, and only five or six of those are able to do major deals.”
Attracting capital is expected to become increasingly challenging for gold companies in particular, which has energized to the view that consolidation is the best way to stay relevant to institutional investors.
AngloGold’s Kelvin Williams envisions that the gold sector eventually will be dominated by three to four global giants able to command the attention of generalist portfolio managers. “These producers would generate fifty to sixty per cent of the world’s production, at far higher margins, and sell it to consumers in a modern market in which we would be competing with other value-enhancing companies, like pharmaceuticals and software.”
While the conference was abuzz with rumours that a major merger or takeover was imminent in the gold sector, nothing had materialized at presstime. Indeed, numerous delegates expressed the view that the strategy to grow through acquisitions would soon take a back seat to a more pressing concern, such as the need to make money from existing operations.
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