African Mining Growth Led by Chinese Enterprises
African mining

African Mining Growth Led by Chinese Enterprises

Supported by growing Chinese investment, Africa’s mining sector is set for a prosperous future.

Africa’s mineral wealth is vast. With an estimated 30 percent of global mineral resources being found on the continent, the opportunities for investors are substantial. However, a myriad of challenges face would-be enterprises who want to explore Africa’s burgeoning mining sector. Unclear mining policies, poor infrastructure, political instability and nascent legal systems make the proposition of embarking on mining projects a complex undertaking for many international firms.

As China continues on its ambitious growth journey, their consumption of minerals is set to significantly increase, especially when it comes to so-called ‘green’ metals such as copper, lithium and cobalt. China’s 14th Five-Year Plan (FYP) (2021–2025) included a carbon peak target of 2030 and a carbon neutralisation target of 2060, indicating the move to cleaner forms of energy.

Ambitious goals

A central reason for the expansion of China’s mining plans in Africa in recent years is the urgent need to broaden the supply of in-demand resources, according to Robin Griffin, Vice President, Metals and Mining Research, at Wood Mackenzie, a global mining and energy consultancy.

“China’s goals in Africa have been to diversify supply away from traditional sources for those commodities that they need to import. For Iron ore they are reliant on Australia and Brazil,” says Griffin. “They have been supporters of growth in west African iron ore.”

The growing presence of Chinese firms in Africa is also supporting the development of knowledge around the mining environment in the diverse nations across the continent.  China Nonferrous has a major presence in copper mines with the firm controlling around 17 in the Central African Copperbelt.

Chinese firms view copper as an essential resource with data from S&P Global Market Intelligence showing that “copper assets in Africa have been lower cost than the global average over the past decade.”

Research from S&P Global Market Intelligence also finds that China has allocated an average of $75.5 million every year since 2011 on exploration in Africa, excluding 2020 due to the impact of COVID. The continent also accounted for 12.3% of the total exploration budget of Chinese companies in 2020, up from 8.1% in 2011.

“The Democratic Republic of Congo dominates the world’s production and resources of cobalt and China has invested heavily to secure access to these resources. The theme has been similar for bauxite investments in west Africa, particularly Guinea,” says William Tankard, Research Manager, Copper Mine Costs, at Wood Mackenzie.

Increasing attractiveness 

China’s engagement with African mining nations is not new, with major deals being struck in recent decades. Many of the agreements made between China and African states focuses on a development model where Chinese firms provide financial support for a wide range of infrastructure improvements.

Shangdong Iron & Steel spent $170 million acquiring 100 percent of the Tonkolili iron ore mine in Sierra Leone in 2015. China Molybdenum also gained control of 80 percent of Tenke-Fungurume based in the Democratic Republic of Congo in 2017 for $3.8 billion, marking two major projects by Chinese firms.

In a continent as diverse as Africa, few blanket statements can be made about how to best attract international mining investment that is a win-win for both the local economy and foreign business partners. Yet, there are a number of clear minimum requirements all nations should meet in order for international businesses to feel confident in investing.

Robbie Gonsalves, managing director of South Africa-based Mergence Corporate Solutions, a provider of independent corporate advisory services, sees the first step for African countries to be establishing concise and understandable mining legislation that reduces bureaucracy and improves efficiency.

“Governments need to assist foreign companies with the interactions with communities and the employment of Chinese nationals versus local employees,” adds Gonsalves. “Chinese companies must have absolute certainty around how and when concessions will be granted, which taxes need to be paid, the employment criteria and the repatriation of profits.”

There are several cases of the leadership of African nations agreeing to major mining contracts, only to see later administrations reassess or attempt to renegotiate these deals. Last year, Democratic Republic of Congo’s government announced a review of a $6 billion “infrastructure-for-minerals” deal with Chinese state-owned firms Sinohydro Corp and China Railway Group Limited to ensure that it was fair and effective.

Investment barriers

While Africa’s mining ecosystem presents clear opportunities to investors, much still needs to be done to make doing business easier. For Tankard, achieving policy stability and taking a collaborative approach between operators and government is essential, as well as understanding that stranded resources will often need dedicated infrastructure plans.  

“Long-term investments and a country’s investment frameworks have to recognise this.  For enduring success, it is imperative that parties are clear on terms that will outlast government change and economic cycles,” Tankard adds.

Accessing solid and reliable energy can be a challenge in some areas where mining would otherwise be a worthwhile endeavour. By creating deals where infrastructure can also be built out can be a powerful way to attract investment.

“In the case of some projects in central Africa, capital is now being provided to refurbish run-down hydropower facilities in order to secure access to cheap, renewable power. If large renewable projects can be funded under green initiatives and executed well, this could be a key contributor to lifting the fortunes of parts of central and southern Africa,” adds Tankard.

With Chinese investment in African mines only on track to grow as the need for resources increases, there should be an equal effort being made to harmonise trade regimes and mining policies to capitalise on global tailwinds. At the moment, some African nations offer less onerous regulations around environmental issues and mining regulations.

“Many African countries are still largely untapped from a mining perspective and cheap labour and easier access to governments in these countries has resulted in increased Chinese interest,” concludes Gonsalves.

Regional focus

No two countries have the exact same investment criteria when it comes to selecting the country and project to fund. A great deal of often complex factors play into the decision making process beyond traditional considerations such as infrastructure, project viability and forecast profits. Many Chinese firms will also need to review the political connections the host nation has which could complicate operations.

“Diplomatic associations and access to capital has made these entities less sensitive to investments that would be considered high-risk by publicly listed ‘western’ companies with reporting obligations to investors which demand faster return on investment and increasingly stringent ESG compliance,” explains Tankard.

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