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Can Africa’s mines sector shake off investors’ negative perceptions?

As Nigeria gears up for elections next month, policies on mining and mineral exploration will be of special interest to investors. While the country is known for its high-quality crude, with global oil prices significantly below their past highs, Nigeria is looking to attract mining investment in a bid to diversify revenues.

Currently, the oil and gas sector represents 70% of Nigeria’s GDP and 90% of its revenues. “By 2025 we want metals and mining sectors to account for 3-7% of our GDP,” the minister of state for Mines and Steel, Abubakar Bawa Bwarii told  S&P Global Platts. At the moment this sector accounts for only 0.5% of Nigeria’s GDP.

For their part, investors have been eyeing opportunities in Africa’s unexplored mineral reserves, but issues around security, infrastructure, and overall ease of doing business remain key perception challenges for the continent as a whole.

At the Mines and Money conference in London in December, Hajiya Fatima Shinkafi, Executive Secretary of Nigeria’s Solid Minerals Development Fund, said: “There are perception challenges, definitely. Everyone knows Africa is the last frontier, in terms of resources, and not fully explored. For example, there’s a billion tons of coal in terms of estimated reserves and only about a million of that has been explored. In Nigeria we have some of the friendliest mining acts in Africa, but there is still some inertia.”

As part of the strategy to reform the sector, the Ministry of Solid Minerals Development has identified seven key categories for priority development: coal, bitumen, and carbonated rocks, iron ore, barites and gold. Lead and zinc, whose ore deposits are often found together, are the final priority area.

Botswana provides something of a model that Nigeria and others may try to emulate, having become a minerals investment magnet due to its reduced tax rates, and political stability. According to the 2017 Policy Perception Index from Canadian think-tank, the Fraser Institute, Botswana is the highest-ranked jurisdiction in Africa in terms of the attractiveness of its mining policies.

In a bid to attract investment and challenge negative perceptions about the ease of doing business in the country, Nigeria has put in place a digitalized licencing process and is pushing to create more mining infrastructure, such as ports and roads, to transport materials. The government is offering to mining companies a two- to three-year “tax holiday”. On top of that, investors will have duty-free imports of equipment, full ownership of their businesses and the ability to take profits out of the country.

Government-investor trust gap

Africa accounts for as much as 30% of world mineral resources, according to the African Development Bank, but they remain underexplored because of the trust gap between governments and investors.

In July 2017 Tanzanian President John Magufuli signed into law new mining bills which require the government to own at least a 16% stake in mining projects. The laws also saw royalty rates for metallic minerals such as copper, gold, silver, and PGM increase from 4% to 6%. These policies were accompanied by a series of other actions associated with Tanzanian mining that sent shockwaves through the sector. According to media reports, Magufuli’s actions were prompted by the need to ensure that the Tanzanian people benefited from mining projects in the country.

Similarly, the Democratic Republic of Congo in November classified cobalt—a key raw material in batteries for electric vehicles—as a “strategic” mineral, hiking royalties from 3.5% to 10% and aggravating the tug of war with mine investors in the country. As some African governments have taken action to curb exploitation of their resources, investors pointed to regulatory uncertainty as a primary concern.

David Street, principal at Tembo Capital Management said: “I think one of the key issues is the mining code of particular countries. Some countries have more attractive investor legislation than others. Investors are also seeking stability in these codes - if a government is changing rules regularly it is difficult for investors to invest in that country with any degree of certainty.”

He noted that most West African countries have done well in terms of gold mining investments, following changes to their mining frameworks. Ghana, Senegal, Ivory Coast and Mali, for example, have expanded gold production significantly. Although South Africa and Zimbabwe have a long history of mining, those West African countries have grown their industries more successfully in recent years.

“Gold is usually one of the first mining sectors to grow, because the mines don’t need a lot of infrastructure to produce gold, with production relatively easy to export for sale. Coal, iron ore and base metals, for example, need a lot more infrastructure, such as good roads, railway lines and ports. And traditionally, parts of Africa haven’t had the best infrastructure compared to other parts of the world, unfortunately,” he said.

Business ethics remains a hard nut to crack in a continent that is tremendously culturally diverse. Issues still persist in community engagement and community development agreements, and often investors take a one-size-fits-all approach while working in various communities, Peter Breese, CEO of Ghana-based Asanko Gold, said during the Mines and Money conference.

“There is a misconception that bribery is the rule of law in Africa. The issue is you can’t do business in Africa until you understand what it’s like to do business in Africa; you have to understand the culture, the values and the jurisdiction that you live in. How do you integrate with the community on a local, regional and national level? When you get your head around corporate social responsibility issues is when you start to understand how to do business in Africa,” he said.

Street noted the importance of having the social licence to operate in a local community. “It’s important for example that the local people are given a fair chance of employment and benefit from skills transfer. A mine might run for 10-20 years--is there any legacy left for those people afterwards?”

Some mining companies have stepped up social responsibility by, for example, using local produce for catering at the mines, and moving towards solar power so local people could benefit from solar energy after the mine’s tenure.

How Nigeria and other neighbours in West Africa hold to recent regulatory changes in the next few years will be crucial for mining investment. The political will to drive the sector forward is not in doubt. But governments will have to achieve a balancing act between proving to investors they can offer a stable policy environment, and making sure mining development also brings long-term benefits to their own population and economy.