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Africa’s Mining Industry Gaining Momentum

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Africa is home to 30% of the world’s mineral reserves, 8% of the world’s natural gas, and 12% of the world’s oil reserves. Despite being endowed with abundant resources, the continent accounts for only 5% of the global mining production. Mining in Africa was often overlooked because of the unstable political environment, opaque regulations, and poor enforcement capacity. Despite these challenges, investments in Africa’s mineral wealth have been steadily increasing in recent years. The massive swings in mineral demand due to the accelerated clean energy transition along with the rising geopolitical tensions have made countries across the globe diversify their sources of minerals and venture into highly challenged regions such as Africa.

Clean energy – A major force driving mineral extraction in Africa

The globally accelerating clean energy transition is set to unleash unprecedented mineral demand in the coming decades. Demand for minerals such as lithium, copper, cobalt, nickel, and zinc is expected to increase exponentially since they are required in the production of batteries, electric vehicles, wind turbines, and solar photovoltaic plants, all of which are the cornerstone of clean energy development. Among all clean energy technologies, electric vehicle manufacturing and energy storage are likely to account for about half of the global mineral demand over the next two decades.

Lithium

The African continent hosts many of the global mineral reserves required for manufacturing electric vehicles and batteries. Zimbabwe and the Democratic Republic of the Congo are among the top ten countries with the largest lithium reserves in the world. Lithium is a crucial component of lithium-ion batteries, which are used in smartphones and electric vehicles. In Zimbabwe, a mine named Bikita holds more than 11 million tons of lithium ore. Despite being bestowed with massive lithium reserves, the region is largely unexplored due to the lack of investment. However, as the lithium demand is on the rise, the government of Zimbabwe has been actively promoting the development of lithium mines to attract foreign investments. At the same time, an increasing interest in electric vehicles and lithium-ion batteries is driving the lithium demand, pushing many global economies to invest in lithium mining. One such example is an investment from December 2021, when a Chinese-owned mineral production and processing company, Zhejiang Huayou Cobalt, acquired a 100% stake in the Zimbabwean Arcadia lithium mine.

Cobalt

Cobalt is another important metal, used in energy storage technologies and electric vehicle production. Most lithium-ion batteries depend on cobalt, which is a by-product of copper and nickel production. The Democratic Republic of the Congo supplies almost 70% of global cobalt, while Australia and the Philippines supply 4.2% and 3.3% of global cobalt, respectively. The growth of the electric vehicle industry has driven major cobalt producers to ramp up the output at multiple mine sites in the Democratic Republic of the Congo.

Graphite

Like lithium and cobalt, graphite is another significant mineral used in electric vehicle manufacturing. A lithium-ion battery needs 10 times more graphite than lithium. China produces around 82% of the global graphite, followed by Brazil at 7%. Due to the increasing demand, many countries with graphite reserves are launching their graphite mining projects. Mozambique is expected to increase its flake graphite 2021 production levels fivefold by 2030. The country has around 20% to 40% of total global graphite reserves.

Copper

Copper also holds a significant position in a range of minerals used in renewable energy technologies. It plays a vital role in grid infrastructure due to its efficiency, reliability, and conductivity. Around 60% of copper demand is driven by wind turbines, solar panels, and electric vehicle manufacturing. Increasing copper demand along with the rising global copper shortage has made many global producers expand their production and venture into new regions for mining. Consequently, Africa’s Zambia, one of the largest copper producers in the world, has attracted a significant number of investments recently. The country aims to take its annual copper production levels from 830,000 metric tons in 2020 to 3 million metric tons in the next ten years.

Africa also hosts many other mineral reserves such as platinum, manganese, nickel, and chromium, which are used in a variety of clean energy technologies. The continent is poised to take advantage of the growing demand for these minerals and has already started to attract significant foreign investments.

Africa’s Mining Industry Gaining Momentum by EOS Intelligence

High commodity prices and rising geopolitical tensions favor Africa’s mining

Africa has experienced a boom in mining since 2000 when the commodities super cycle (a phenomenon where commodities trade for higher prices for a long period) began. Along with the commodity boom, the African mining industry has grown substantially, attracting investments in exploration, acquiring new concessions, and opening new mines. The recently spiking prices of commodities such as aluminum, zinc, nickel, copper, gold, and coal are further fueling investments across the continent.

The Russian war on Ukraine further benefits Africa as many countries started to diversify their supply chains away from Russia. In March 2022, the USA and the UK imposed a ban on Russian oil imports. Europe also has plans to cut its Russian gas imports by two-thirds before the end of 2022. These could lead to supply shortages of oil and gas in many countries. Russia also supplies 7% of the world’s nickel, 10% of the world’s platinum, and 25-30% of the world’s palladium, which are critical to the globally accelerating clean energy transition. The US and European governments are looking closely at further sanctions against Russia which could disrupt these critical minerals supply. The situation has made many developed countries diversify and secure their sources of minerals. This will be a huge opportunity for Africa to promote its resources.

Massive African gold reserves attract global gold producers

Gold is often perceived as a safe haven asset and its demand is constantly rising, pushing major global gold producers to ramp up their production. Additionally, as many of the global gold reserves are depleting, mining companies find it imperative to explore new gold deposits across the world. Interestingly, the Birimian greenstone belt of West Africa hosts huge deposits of gold but remains highly underexplored. Many leading global gold producers started exploring the region due to the favorable mining regulations and mining codes implemented recently. Between 2009 and 2019, approximately 1,400 metric tons of gold reserves were discovered in West Africa, while about 1,000 metric tons and 680 metric tons were found in Canada and Ecuador, respectively. A total of US$470 million was invested in West Africa’s gold resource exploration in 2020. This was the third-largest global gold exploration expenditure in 2020, behind that of Australia and Canada.

Investments in Africa’s mining

Countries such as Australia, China, Canada, the UK, and the USA have invested heavily in Africa’s mineral extraction over the years. Emerging economies such as India, Russia, and Brazil also have sizeable investments in Africa’s mining, creating more competition for resources. Among all the countries that have invested, China has demonstrated a significant presence across the continent. The rise of industrialization in China has driven increased demand for mineral exploration and extraction in Africa over the past decades. China’s investment in exploring African mineral resources multiplied to a remarkable extent between 2005 and 2015. In 2021, China’s total outbound foreign direct investment (FDI) was US$145.2 billion, of which a quarter was dedicated to African mining.

Many of the mining projects in Africa are funded by international stock exchanges. For instance, in 2015, Deloitte analyzed the funds of 29 major mining projects which were in development across the continent. The Toronto Stock Exchange funded 28% of these projects, followed by the Hong Kong Stock Exchange funding 17%, and the National Stock Exchange of India funding 10% of the projects.

A 2019 report published by PricewaterhouseCoopers states that, in 2018, total mining deals in Africa amounted to US$48 billion. Out of this, West Africa received the largest share of investment worth US$16.2 billion for its oil, gas, and gold reserves, followed by Southern Africa, which received US$14.7 billion worth of investment for its gold, platinum, nickel, and cobalt. East Africa and Central Africa received the least amount of mining investment.

Challenges

Asia constitutes approximately 60% of the world’s total mining production, followed by North America (14%). Africa, despite being endowed with abundant mineral reserves, constitutes only 5% of the global mining production. The continent has failed to achieve real mining expansion due to many challenges prevailing in the continent. One of the prime challenges is the poor infrastructure (rail and port) that causes trade blockages. High levels of political instability, unstable regulations, and corruption are other significant challenges hindering mining across Africa. Other challenges impacting the African mining industry include poor geological data management, illegal mining, lack of mineral processing facilities, unreliable power supply, and weak local markets.

EOS Perspective

With the world’s increasing appetite for clean energy, Africa has a chance to establish itself as a key player in the mining industry. Significant investments in extraction and exploration are required to get the most out of the continent’s resources, and this is happening to a certain extent. Most significantly, the countries involved must build a robust value chain to promote industrialization and boost their economies, instead of just supplying raw materials. Governments should consider fostering joint ventures and partnerships with foreign companies to bridge the technical skill gaps that prevail in the continent. The industry itself must ensure that it shares the mining benefits with the people, thereby improving their welfare.

The African countries must also address challenges such as poor infrastructure to participate effectively in the value chain. Many projects are already underway to boost the transport infrastructure. China has built significant inroads in Africa under its Belt and Road Initiative. Deloitte estimates approximately US$50 billion would be invested in over 830 infrastructure projects between 2003 and 2030.

Along with infrastructure development, strong governance, and a stable and reliable regulatory environment are critical to attracting foreign investments. Several governments across Africa are revising mining codes and regulations and providing tax incentives to stimulate manufacturing. The mining industry is at a critical stage where it needs to satisfy an increased demand for minerals while also curbing the environmental impact of mining operations. This process seems to be complex, but it also provides many opportunities. For instance, mining companies can utilize the adoption of renewable, energy-efficient systems for power generation. Technologies such as artificial intelligence, automation, and big data could be adopted to mitigate rising costs.

There is still a long way for the region to achieve the desired mining growth and economic development, with multiple challenges across the entire value chain. However, with stronger governance, more stable regulations, and considerable foreign investments, Africa could position itself as one of the largest mining economies in the world. The opportunity for Africa is huge, but it needs to be utilized properly.

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Australia – Stepping on to the Mine Field

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While most developing countries have been negatively impacted by the significantly deteriorated economic conditions in the US and European markets, Australian economy appeared to be largely shielded from the impact of the global economic slowdown thanks to its mining industry. Following the onset of the 2008 crisis, when most developed economies slowed down, China continued on its path of infrastructure development and investment. This boosted its demand for minerals and resources, large part of which continue to be imported from mines across Australia.

Thanks to the Chinese economy growth sprint, Australian mining industry has been in a boom mode since 2006, and consequently witnessed soaring levels of capital investment in mining and related logistic infrastructure. The industry growth was significant enough to have resulted in higher dependency of Australian economy on this sector, with the mining and mining-related service industries accounting for about 20% of GDP in 2011-12, compared with only 10% a decade earlier.

The industry is still on a roll, yet the situation might change soon. With the Chinese economy showing signs of slowing down in 2011 and 2012, the Australian government and business executives can no longer be certain of the continuous inflow of Chinese orders for Australian mining output. But the decline in orders is just part of their worries, as mining companies operating across Australia are faced with other challenges as well, which question their ability to remain competitive in the global market.

The Challenges

While currently it is estimated that the strong performance of the Australian mining sector will continue till at least 2014, there are already growing challenges in the industry. Slackening demand, particularly from the Chinese infrastructure sector, has lead to a global drop in commodity prices of coal and iron. This decline in prices, coupled with higher operating costs due to rise in employee wages and energy costs, makes it less economical for Australian ore extractors to trade in global markets.

Skills shortage and union pressures further drive the operational costs upwards. A shortfall in skilled personnel is likely to result in employees being available only at a premium, leading to further increase in costs. A shortage of truck drivers in mining sector has seen employees of large companies, such as Rio Tinto and Xstrata, receive as much as three times their base salary. The insufficient talent is also witnessed in more skilled and experienced jobs, including mine planning engineers, geologists, metallurgists and mineral processing engineers. This skill shortage also gives employee unions an upper-hand when it comes to negotiating perks.

The rise in costs is further multiplied by the introduction of additional taxes, including the Carbon Tax and the Mineral Resource Rent Tax, all of which contribute to the rising cost burden of the Australian mining companies.

At the same time, mining productivity has resurfaced as an increasingly relevant issue. According to 2012 estimates by the Mineral Council of Australia, productivity in mining industry has reduced by about 30% since 2003.

These challenges are a visible sign that Australia’s mining sector is likely to have an increasingly harder job to compete with mining companies in other emerging resource-rich countries, such as Indonesia, whose proximity to important Asian customers results in lower shipping costs to the client. This could result in a considerable decline in Australian mineral exports, and thereby, have a negative impact on the Australian economy as such.

The Way Out

Both the government and mining companies are devising ways to overcome the challenges posed by these increasingly pressing issues.

Expecting that the current peak in mining investment boom will soon be followed by the sector’s decline, the Reserve Bank of Australia (RBA) announced cuts of cash and lending rates in December 2012. Concerned by the fact that the non-mining industries in Australia continue to struggle, RBA has introduced these cuts to support the underperforming non-mining sectors, such as housing, construction, and retail. While the short-term outlook for non-resources investment is likely to remain subdued, these cuts are expected to provide impetus for investment in these sectors over a long term.

Mining companies face a tougher task to remain competitive in the global market. In the short-term, several Australian mining companies are looking at temporary shelving of investment projects to deal with the deteriorating demand and decline in commodity prices. For instance, BHP Billiton, the world’s largest mining company, shelved its Olympic Dam and Bowel Basin projects after witnessing a decline in profits.

However, putting investment projects on hold is not enough and mining companies will have to continue to undertake initiatives to tackle the problem of increase in cost per ton of output.

  • Initiatives to raise employee productivity are being put in place. In 2012, a contracting company overseeing work on Chevron’s $52 billion Gorgon gas project banned sitting during working hours to improve operational productivity.

  • Companies are trying to explore alternatives to tackle skill shortage. Rio Tinto has started employing driverless trains and trucks to cart iron ore from its mines in order to tackle the premium wage demands, caused by the shortage of drivers in mining operations.

  • Companies are cutting employee perks to lower wage costs and offset lower returns. In 2012, Fortescue Metals Group scrapped weekly staff barbecues, and removed free coffee and ketchup from the canteens.

While these initiatives might attract negative publicity, particularly with labour unions, these steps have become increasingly necessary for mining companies to get back on the path of competitiveness and profitability over a long run. But will this be enough? Will cutting weekly employee get-togethers, and making workers stand at work take care of 30% productivity decline witnessed over the past decade? These measures definitely appear disproportionate to the problem’s weight. Or do the Australian mining executives have some more tricks up their sleeves that will actually matter in prolonging the mining sector golden years?

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