NATURAL RESOURCES AND ENERGY

Banking on metals
of the future

Shirley Webber

Managing Principal,
Head: Resources & Energy

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The next decade will be pivotal for the mining sector in Africa and there are numerous reasons to feel optimistic about deal-flow and transactions on the continent in the coming years.

While African producers and governments - including South Africa - have enjoyed a windfall from buoyant commodity prices in the latter part of 2020 and 2021, there is an expectation that we will see a revision back to historical long term price trends due to a myriad of factors.  Top of mind is an expected sector focus shift where we see historical sector heavyweights starting to identify opportunities in the so-called “metals of the future” such as copper, manganese, cobalt, and lithium as well as diversification into energy sources such as hydrogen, helium, and natural gas.

Evidence of this trend is already starting to play out with transactions from the likes of Canadian mining development Ivanhoe investing R200m in South African based Renergen and renewed activity in Ghana which has the potential to become a significant player in the global lithium market.

The so-called “battery metals” – nickel, copper, and lithium – have all recently hit new all-time highs as renewable energy, electric vehicles and low carbon future investing themes have driven this demand.

Many of the major producers are transitioning their production mixes and this will drive activities in research and development, explorations as well as Mergers and Acquisitions (“M&A”).

Mining businesses of the future will look materially different. With this transformative change taking place in the African mining landscape, these are some of the key trends we are positioning ourselves around:

Mine-to-Market ecosystem:

Mining operators in Africa have moved beyond traditional pure extraction models to incorporate downstream activities including refining and trading. On top of this, commodity producers are focused on reducing their carbon footprint by incorporating the use of renewables, hydrogen-based fuel cells or more efficient or less dirty mining techniques.

Downstream recycling activities will also materially change the impact of primary commodity demand.

A look at the global chip shortage and the downstream impact on sectors ranging from automotive to mobile phones highlights how important it is to develop value-adding services to de-risk supply chains and ensure seamless global trade.

This shift is likely to drive Merger and Acquisition (M&A) activity as miners seek to extract greater value from the value chain.

The Russian connection

Apart from vast gas and oil reserves, Russia is recognised as a top-3 producer of diamonds, gold, platinum, palladium, coal, and iron ore. Recent events in Eastern Europe are likely to reverberate across the mining sector in numerous ways including driving up demand for key metals and oil price shocks across supply chains globally.

The impact of these events is hard to calculate in the near-term although rising inflation driven by increased prices has an immediate impact on us all.

On top of this Russia had been – before March 2022 - steadily building up a presence in the African market but with recent sanctions coming into play, we are anticipating forced sales of equity stakes.

The African Continental Free Trade Area (AfCFTA) and exchange controls

While the AfCFTA is regarded as one of the most important developments on the African continent in terms of stimulating intra-African trade, one of the key themes that will be interrogated will relate to exchange controls and whether the investors will have the ability to move capital in and out of Africa over the coming decade.

Countries that can develop deep capital markets with easy repatriation frameworks will find themselves in pole position when it comes to attracting new investment into the sector.

Mining inflation can’t be ignored

While miners have enjoyed a purple patch on the back of increased profits, operators are keeping a close eye on their input costs with rising cash and capital expenditure costs off-setting margins. Input costs like labour, electricity and fuel costs are accelerating across the continent.

This coupled with a persistent skills shortage – and the associated training activities - in the mining sector will further heighten this issue.

The risk-reward trade-off can be mitigated with local knowledge

Africa is a true frontier market offering a variety of challenges and opportunities. Countries including South Africa, Botswana, Ghana and Mozambique have developed frameworks for embracing international investors while other emerging markets on the continent are still catching up to attract investors.

As a bank, we have focused on developing a deep understanding of the local markets and regional stakeholders. Our investment in on-the-ground specialists and relationships with domestic regulators has seen us enjoy successful capital raisings in a diverse range of African markets and this has given us a clear competitive advantage over those who do not have a local presence.

ESG will be more than a buzzword

Alignment with the UN Sustainable Development Goals (SDGs) and Environmental, Social and Governance targets will become more than just buzzwords. A focus on “Zero” in one or other form, by either 2030 or 2050 is putting hard deadlines on interventions from the mining sector. Almost all the major mining houses are developing their own clean energy projects and our clients are strategically deciding whether to build these projects on their balance sheets or use the well-established Independent Power Producer (IPP) model to secure long term power supply from project developers.

For mining companies, M&A will be a key enabler on the journey to a lower carbon future as companies aim to do deals that accelerate the energy transition and divest of high-carbon assets. Furthermore, to plug knowledge gaps and accelerate transition strategies, more companies have become more open to joint venture structures that promote partnerships.

We at Absa have the capabilities to walk the journey to a lower carbon future with our clients.

As the leading Pan-African banking group we are grateful to see the return of foreign investors to the 2022 Mining Indaba. With the African mining sector transforming dramatically over the next decade, we look forward to being the banker of choice for the continent.

Shirley Webber

Managing Principal, Head: Resources & Energy

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