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Interesting read on African risk for miners.


African adventures come with risks -- and rich rewards
BY:PAUL GARVEY From: The Australian February 04, 2013 12:00AM
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AS the global mining industry converges on Cape Town for the annual Indaba mining conference, it does so against an increasingly complex political and economic backdrop.

The miners and investors that will gather this week are united by a common interest in Africa and the riches its undoubted mineral potential can offer.

But recent events in Mali and Algeria are a reminder of the bloodshed that has marred too much of the continent's history, and which has made Africa such a difficult place for Australian companies to navigate.

On top of that, governments throughout the continent continue to debate how to ensure their citizens enjoy the spoils of the country's minerals to the full extent possible. Governments from South Africa to Kenya in the east and Guinea to the west are toying with the concepts of changing taxes or even nationalising portions of the mining industry, trying to achieve the delicate balance between maximising returns to the state, and not driving away foreign investment.


That heightened sovereign risk challenge is further complicated by the fragile state of global equity markets, and the commodities market in particular.

Investors, scarred by years of poor equities performance, are increasingly drawn to stable, high-yielding investments rather than the high-risk, high-reward investment opportunities that typically come out of Africa. On top of that, the commodities story is harder to sell to investors than it has been in years past, further complicating the efforts of Africa-focused mining plays looking to attract investor support.

While the recent pick-up in equity markets in recent weeks is likely to ensure a more buoyant mood at this year's event than it would have if the conference was held a month or two ago, real challenges remain.

Resolute Gold chief executive Peter Sullivan has seen the pros and cons of working in Africa more than most, having built the company into one of the largest Australian-listed goldminers over the past decade on the back of mines in Mali and Tanzania.

The unrest in Mali over the past year has meant plenty of questions for Resolute, and Mr Sullivan notes that the firm's Syama mine is in the country's far southwest, far from the disputed areas in the north and northeast.

But the market's growing aversion to risk, he says, has hit many of the smaller companies working in Africa much harder.

"For exploration and development stories, it's very difficult at the moment, it's very tough," Mr Sullivan told The Australian.

"The capital markets have really tightened up, and shareholders want returns. People want to see companies focus a bit more on delivering returns, rather than just pursuing the growth objectives that companies had over the last five years or so."

The increased challenges facing junior miners and explorers working in Africa are seen as likely to push companies into consolidation, as firms with promising assets but no cash are embraced by those that are better funded.

While some deals have been forthcoming, the comparative lack of transactions has surprised Allen & Overy partner Meredith Campion. "We thought there'd be a lot of M&A activity among smaller companies, but interestingly we haven't seen as much of that as we thought we may have," says Ms Campion, who has worked closely with several Africa-focused clients. Sovereign risk in Africa remains a very real issue, she says. She recalls one ASX-listed client that found out that another company also held the title to its project, while tax legislation changes continue to represent a risk.

"We have seen some companies start to look at South America because of sovereign risk issues in Africa," she says.

"The bigger picture is nationalisation and uncertainty in relation to mining legislation, because it can be introduced one day and replaced pretty swiftly the next."

Robert Edel, a partner at DLA Piper whose first experience in Africa involved a year backpacking across the continent in 1988, said there had been a "massive" improvement in a number of African nations.

"I don't think coup d'etats or military unrest are off the radar -- look at Algeria and Mali -- but I think as a general comment, countries are understanding the need for stability and transparency in their political networks and their governance and legal frameworks," Mr Edel said.

Mr Edel is also tipping an increase in M&A among Africa-focused miners, both as companies look to survive the current negative environment and as sentiment starts to turn around.

"Let's not kid ourselves, it's still going to be tough for companies at the junior end -- particularly those with high risk projects -- to get funding away. It's not going to be easy this year so the trend for M&A will stay steady this year," he said.

"When these companies start to emerge and debt and equity markets start to open up again, I think there'll be a lot of companies snapping up other companies because there's been a lot of hard work done and there will be opportunities to be taken."

As far as managing the risks that seem to arise so often in Africa, Deloitte global mining lead Phil Hopwood says a commitment to transparency and an effort to work with local communities can help protect companies from falling into the same traps as their predecessors.

"(The Mali situation) is a reminder that these are volatile economies, and that volatility is always going to be there," Mr Hopwood said.

"But having said that, it's sometimes easy to forget that the successful miners are the ones who have been working with their local communities from the start. Governments may come and go, but if the local communities are engaged and onside with what you're trying to do there's some kind of stability that comes with that."

Data compiled by Deloitte shows just how tough the past five years have been for Australian miners in Africa.

Uranium miner Paladin Energy, for example, has seen its market capitalisation fall from $4.1 billion to $862 million. Aquarius Platinum has fallen from $3.3bn to $399m in the same period.

But for every Paladin or Aquarius, there's a Papillon Resources.

The Perth-based junior has rocketed in recent years on the back of a gold discovery in Mali, its market cap improving from $124m a year ago to $463m today.

Judging by the number and scale of parties and events planned around Cape Town during the course of Indaba, the industry isn't letting any of the current challenges get in the way of a good time this week.