Feb 27 2013

African mining sector slides into pit of despair

African mining sector slides into pit of despair Photo Credit:Reuters/ Stringer .
Global mining giants have been left licking their wounds after their African bets failed to pay off.

On February 14, Australian mining titan Rio Tinto said it is taking a whopping USD 3-billion impairment charge for 2012 on its balance sheet due to its coal project in Mozambique (RTCM), which has failed to live up to its expectation

"In Mozambique, the development of infrastructure to support the coal assets is more challenging than Rio Tinto originally anticipated," the company acknowledged in a statement.

On the same day, Barrick Gold, the world's biggest gold miner, announced it is taking a USD 4.2-billion write-down on its Lumwana copper mine in Zambia.

"The operating results at Lumwana have been disappointing since we acquired Equinox," chief executive Jamie Sokalsky said in an investor call. "They have been unacceptable, actually."

Meanwhile, Kinross Gold took a USD 3-billion non-cash impairment charge on Tasiast, its gold mining project in Mauritania.

Indeed, in the space of a few weeks, the CEOs of BHP Billiton, Anglo American and Rio Tinto lost their jobs as the mining projects they overpaid for a few years ago, failed to generate adequate returns for investors.

Like its peers, BHP Billiton blamed "substantially lower" commodity prices and rising cost of operations for the downward spiral.

Recent losses in the mining industry have raised concerns whether the mining giants will cool off on their mining ventures in Africa and elsewhere to repair their balance sheets before launching another expansion spree.

"We've always been wanting to keep building and keep putting the cash which we generate into new assets," Ivan Glasberg, the CEO of mining trader Glencore, said recently at an investor presentation. "That's what we've got to stop doing as a mining industry. We've got to learn about demand and supply."

While the mining giants face problems across the world, Africa's poor infrastructure did little to help the industry.

"Infrastructure is probably the biggest problem that African miners and trading houses are facing these days," Jamie Holley, Divisional Chief Executive of Rail, Grindrod Rail, told KPMG in its recent report on Africa. "Decades of underinvestment have meant that the critical infrastructure needed for the export of bulk commodities has regressed to a point where it requires major refurbishment and large capital investment."

Rio Tinto, for example, had planned to transport coal by barge along the Zambezi River for its Mozambique project, but failed to secure formal approvals.

"These infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes on the RTCM tenements, have led to a reassessment of the overall scale and ramp up schedule of RTCM, and consequently to the impairment," the company said.

"Rio Tinto continues to engage with the Government of Mozambique on all transport infrastructure options."

Victim of its own success

Management consultancy Ernst & Young says the mining industry is facing one of its most challenging trading conditions in years.

"Commodity prices have softened and operating and capital costs have soared, resulting in squeezed margins," said E&Y. "Additionally, the investment grade producers have become victims of their own success. The prior years of strong growth, prudent balance sheet management and exposure to emerging market demand attracted a new breed of investor to share registers. During 2012, these investors have shown greater conservatism and are demanding shorter return timeframes for new investments."

While major publicly-listed mining giants may be in retreat, state-owned enterprises (SOE) and companies from emerging markets are ready to take their place.

Africa was the second biggest M&A target in the mining industry last year after Asia Pacific, according to Ernst & Young. International companies poured in USD 19.94 billion in African resource assets last year, marginally lower than the USD 20 billion in 2011.

While the industry managed M&A deals of more than USD 100 billion last year, it was more than a third lower from the year before, suggesting a major reversal of mining fortunes.

China, Japan and South Korea accounted for a third of overall M&A activity in the mining sector last year, according to E&Y, which expects them to lead the hunt for African mining resources.

"In 2012, Chinese SOEs were the most active acquirers in Africa's frontier markets, leveraging China's resource for infrastructure investment contracts with many African governments."

While South Africa remained the top African M&A destination, companies are looking to diversify into other African nations.

"Relatively untapped African nations continued to attract growth driven investment for resource security," said E&Y, adding that companies are moving away from the mature South African market which is facing labor unrest and growing resource nationalism.

The consultancy expects to see emerging economies take a long-term view and fill the gap left behind by traditional mining players.

"Asian interest in Africa's mineral reserves will gain further impetus from improvements in the rail network that links mining and metals operations with the Africa's East coast, thereby providing easier access to Asian markets.

"In the longer term further investment is likely to follow from traditional investors as the impact on the region's infrastructure from the investments made by Chinese SOEs and sovereign wealth funds [SWFs] filters through, translating into future M&A opportunities."

KPMG's analysts highlight Botswana, Ghana, Mozambique, Namibia, Tanzania and Zambia as key mining destinations in the continent.

"Of particular interest to African mining activities is the positive growth outlook for its key trading partners. The growth outlook towards 2020 is better than the current expansion in real GDP for all Africa's largest trading partners."

© alifarabia.com 2013

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