This was a key conclusion drawn by KPMG member firm partners and mining executives who convened recently at KPMG’s Global Mining Conference in Maputo, Mozambique.
KPMG selected Mozambique as the venue to host its mining conference in recognition of the country's and the continent’s economic success story. In 2012, Mozambique was one of the fastest growing economies in Sub-Saharan Africa with a GDP growth of 7.4 percent with coal and natural gas significant contributors to the boom. KPMG’s two previous global mining conferences were in Beijing, China and Santiago, Chile.
“Reduced margins, cash flow and increased debt levels are putting pressure on loan covenants and many mining executives are concerned about being downgraded by credit rating agencies. This increases the cost of financing in an industry highly dependent on raising external funds for both working capital and ongoing projects,” said Wayne Jansen, KPMG's Global Head of Mining and a partner with KPMG in South Africa. “As a response, mining executives are focusing on options to manage and conserve cash as well as portfolio reviews to inform decisions on future operating models and transactions. This could lead to large integrated projects being unbundled to attract a wider range of financiers with differing risk appetites.”
Rama Ayman, KPMG's Global Head of Metals & Mining, Corporate Finance practice said: “Traditional sources of financing, such as IPOs, and debt markets in the mining sector have become scarce especially for smaller mining and exploration companies. Players in the sector are now also more selective regarding their projects, becoming more focused on cash generation potential in the short to medium term – projects with long dates to production will be hard pressed to obtain financing unless they have well above average grades or substantially lower than average cash costs. We are witnessing new trends in financing in the mining sector and are in active discussions with newly emerged sources of financing increasingly secured through private equity, infrastructure and sovereign funds as well as trading houses who have the ambition to secure supply of feedstock by going long on assets.”
Mr. Ayman added that as cash for external growth and funding capex becomes more scarce, the mining industry may well consider lessons learned from the oil and gas sector, where equity partnerships and joint venture approach to developing resources have been the norm for decades – this type of equity risk sharing especially in major multi-billion dollar projects may be more considered by mining companies to reduce equity risk in their projects.
“Many large mining projects, in emerging markets of Africa, which could generate a substantial portion of a country’s hard currency income, have been unnecessarily delayed or even abandoned due to an ineffective multi-stakeholder approach,” he continued. “As such, the lack of adequate solutions to meet the needs of communities, labor, government and companies and their shareholders has led to many unrealized projects – raising funds in the absence of realistic solutions that address the legitimate needs of all key stakeholders will become increasingly challenged. Mining executives would need to collaborate more closely with government in the planning and execution going forward.”
But despite various challenges, “Africa is still a continent which offers attractive business opportunities for investors and is open for investment,” said Mr. Jansen.
While traditional mining companies are forced to operate more efficiently and cost-effectively than in the past, they are also facing increasing demands by governments, labor and communities. Countries are expecting more value from mining projects for their local communities. This includes employment opportunities, skills development and local procurement for goods and services. It is also expected that mining companies play a role in building necessary infrastructure, such as housing, roads, schools and hospitals.
“Mining houses are playing a prominent role in the development of various countries and communities and often a project can represent a sizeable share of the GDP of a developing country,” said Mr. Jansen. “Mining companies are development alliance partners for governments and this requires careful relationship development and collaboration to achieve differing goals.”
Mr. Jansen did however caution that, as there was increased competition to attract limited capital that governments, labor and communities be realistic in their demands. What mining executives typically look for before investing in a viable project is clear and consistent application of mining and tax policy, rule of law, an independent and effective judiciary, and the ability to expatriate funds. As there is increasing competition from other geographies to attract capital, governments should try to avoid missing out on transformational business opportunities. While Africa needs to actively market itself in terms of its resource potential it should also implement investor friendly policies and processes to attract much needed capital.
“Africa needs to use its natural resources wisely to build a diversified economy and develop the continent,” concluded Mr. Jansen.
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