Investigating major African mining challenges – February 2011

February 2011: With a vast array of broadly dispersed mineral resources, Africa holds a wealth of opportunity for investors, mining organisations and the people that call this diverse and expansive continent home.

While there are other industries, among them tourism and telecommunications, that are growing in stature as drivers of Africa’s economic growth and development, none has the same depth of potential to generate revenue, create employment, provide sustainable economic and social benefits and attract large scale, long-term international investment to the continent as mining. In fact, for many African countries income from metals and minerals can make up the majority of total export earnings – in some cases up to 90%.

That said, unlocking the mineral wealth of Africa is not without its significant challenges, not least of which are a glaring lack of infrastructure development, perceptions of corruption and unfair licensing practices, and the high capital costs of establishing or expanding a mining presence in what are predominantly developing countries.

With its extensive network of leading legal firms spanning 30 African countries, Lex Africa affords the international business community access to an established pool of skilled and reputable lawyers, all of whom strive to facilitate trade and investment in the continent through best legal practice.

Many of these professional law firms work very closely with the various stakeholders in mining in their countries – from government departments and associations to exploration and extraction firms and established miners – in an effort to help address the challenges facing the industry and transform these into opportunities for the benefit of all parties.

Ahead of the 2011 Mining Indaba, representatives of several Lex Africa members highlight the most pressing challenges facing the growth and development of mining in their counties, and outline what needs to be done to address these challenges:

Madagascar, Mali, CAR, Niger, and other Francophone African countries
According to John Ffooks, of John W Ffooks & Co in Madagascar, the primary challenge facing mining in that country, and in the majority of Francophone African regions, remains a significant lack of infrastructure. Obviously, mining is infrastructure intensive and in a country where there has been little or no investment mining houses and investors face potentially massive capital outlays before their investment into mining can even begin to deliver returns.

Ffooks states “Many African countries are still not politically stable and the possibility of a change of government, with the resulting turnaround in mining policies, can be very off-putting for a prospective investor.” However, he is quick to note that, while most people assume that corruption and political interference are the primary challenges, this is not always the case because of the attitude in the boardrooms of the majors and the large juniors is just a blanket “no” to bribery and corruption”

Kenya
Nigel Shaw, partner at Kaplan & Stratton in Kenya echoes Ffooks’ concerns regarding political risk as a key challenge facing mining in Africa.

“While there is a definite push to see mining develop and grow in Kenya, and the political will to ensure that it does,” he explains, “political interference and corruption remain huge stumbling blocks.”

According to Shaw, these political challenges become particularly evident when mining companies that have been in business in Kenya for a number of years are unable to have their licenses renewed due to their unwillingness to stoop to unethical behaviours.

However, he is optimistic that the situation may improve in the coming years thanks to a new constitution that places ownership of all minerals in the country in the hands of the government. “According to this new constitution, any benefits derived from the exploitation of Kenya’s minerals is for the benefit of the people in the country,” he explains, “and if this is
upheld, there should be greater accountability and, potentially, greater transparency concerning the financial transactions involved in developing the industry.”

Botswana
Sipho Ziga of Armstrong’s Attorneys, Notaries and Conveyancers in Botswana, believes the mining industry in that country faces its greatest challenge in the form of red tape. “While the mining industry in Botswana is well established, operates relatively autonomously and experiences little interference from government, the legal and administrative delays as a result of inefficiency and bureaucracy can be crippling – particularly for new mining ventures, but also for established mines wishing to expand or develop their operations.”

According to Ziga for some time now Botswana’s legislation has placed mineral rights in the hands of government, which means it has worked through the learning curve currently facing many other countries and resolved the political issues surrounding mineral ownership by the state.

“Mining legislation in Botswana is effective, working well and, for the most part, very investor friendly,” Ziga explains, “but, unfortunately, mines and investors that wish to take advantage of this positive environment are finding themselves hamstrung by bureaucracy and, in particular, an extremely slow license application processing system.”

Namibia
Peter Koep of Koep & Partners in Namibia points to administrative difficulties and delays as a significant challenge in that country as well.  “One of the big challenges faced by mining in Namibia is a general inability by government to deal with license applications and approval processes in a way that is totally transparent, “says Koep, “particularly given the pressure currently being placed on the mining ministry to facilitate empowerment within the industry despite a lack of official documentation or guidelines to this effect.”

According to Koep, it is not this requirement for empowerment that creates a challenge, but the general lack of understanding by government as to how to facilitate it in an equitable way, without creating a perception of corruption or unfair treatment.

Ironically, a further challenge facing the Namibian mining industry relates to the success that has been achieved in recent years. “With the future of mining looking so bright the question becomes what to do with the wealth it is generating,” Koep explains, “policies now need to be agreed in order to ensure that this future wealth does, in fact, benefit the entire Namibian population.”

Nigeria
In Nigeria administrative delays are also a key challenge to the development and growth of the mining industry. According to Osayaba Giwa-Osagie of Giwa-Osagie & Co, the time frames involved in obtaining or renewing mining or exploration titles are dampening enthusiasm for mining and limiting the industry from realising its full potential.

“While the Mineral and Mining Act of 2007 clarified the requirements for licensing there are still teething problems that result in significant frustrations for industry participants.” He explains, “A lack of knowledge and understanding of the legislative regime surrounding mining titles and licenses is still a source of difficulty for many industry stakeholders.”

Giwa-Osagie also points to difficulties in raising finance for projects as a key challenge in Nigeria. “While investors are aware of the potential for returns in the oil and gas, telecommunications and banking industries in Nigeria, few fully understand the long-term wealth generation opportunities and potential inherent in mining.” He does point out however, that this situation is rapidly changing, particularly now that the government has identified a number of minerals and metals as strategically important to the Nigerian economy.

“The mining sector is becoming structured, the political situation in the country is stabilising and good fiscal and tax incentives are being put in place to promote mining,”says Giwa-Osagie, “all of which augurs very well for mining in this country going forward.

South Africa
In South Africa, stakeholders in the mining industry are finding their biggest challenge coming from government quarters – albeit in a very different form to most other African countries.

“The South African government is clearly taking a more prescriptive stance in relation to regulation and enforcement in the mining sector,” explains Morné van der Merwe of Werksmans Attorneys, “as is evidenced not only by the revised mining charter, but also by the fact that non-compliance with this charter could constitute sufficient reason for government to revoke an organisation’s prospecting and mining rights.”

Van der Merwe points out, however, that if it is correctly and collaboratively implemented, the revised charter will have significant positive implications for South Africa’s mining industry by helping to improve efficiency in the Department of Mineral Resources, root out corruption, and ensure that the country remains an attractive destination for prospective mining investors.

Democratic Republic of Congo
According to Lambert Djunga of Djunga & Risasi in the DRC, the ineffective and irregular application of the mining codes governing mineral exploration and extraction is the primary challenge facing mining participants in that country. “While the codes have been in effect for some eight years now,” he explains, “differing interpretations of the legislation mean that the rules and statutes are still often not applied consistently, particularly in terms of license applications and the levying of taxes and fees on mining operations.”

Djunga expresses concern that this kind of inconsistency can be perceived as corruption by external parties, despite the fact that this is generally not the case. “The inability by government to consistently apply legislation is ultimately the result of a lack of unified vision within government. This results in political infighting and different agendas amongst ministers dealing with the mining industry.”

Zambia
In Zambia a primary challenge facing the mining industry applies to the ability of that industry to contribute towards the socio-economic development of the country. That’s according to Charles Mkokweza of Corpus Legal Practitioners in Zambia, who points to the recent surge in prices of certain minerals and metals as placing a particular burden of social upliftment on both industry participants and government.

“There is growing pressure on the mining industry to share the perceived windfalls it is enjoying as a result of rising commodity prices, “he explains, “and this has led to talk of the possibility of windfall taxes being applied.”

Mkokweza points out that the implementation of such a windfall tax could potentially dent the attractiveness of mining in the region, and in order to avoid this situation, the industry needs to become more transparent. “The implementation by government of the UN-sponsored Extractive Industries Transparency Initiative is a definite step in the right direction as this will result in disclosure of payments made and received within the industry, thereby improving collections and enabling the public to hold government accountable for the sharing of revenues without having to introduce windfall tax.”

Conclusion
While these comments by Lex Africa members confirm that mining in Africa clearly still faces many challenges, none of these are insurmountable and many are already in the process of being addressed.

Perhaps more importantly than the challenges outlined here is the general sense of optimism and excitement within much of the African mining industry, most of whom are confident that the soil in Africa is being steadily prepared, and the seeds planted, from which will soon emerge the stellar growth in mining in Africa that the world has long predicted will occur.