Exploring Africa - EY

Exploring Africa Rich in minerals, natural resources and opportunities

Foreword Africa is one of the most diverse and fascinating places to live and conduct business. A continent with 54 sovereign states, a billion people, hundreds of indigenous languages and a myriad of cultures; it is also home to massive untapped mineral resources ready to be unlocked by investors looking for great returns on their investments. Africa accounts for nearly two thirds of the world’s known mineral reserves and even with the global economic slowdown and weakening Foreign Direct Investment (FDI) into the region, FDI has remained resilient, steadying at around $38b in 2012 compared to $32.5b in 2011. This is mostly due to the opportunities that exist in the mining sector, the relatively high levels of commodity prices and the ongoing resource prospecting and exploration. Exploring Africa guides mining investors not only in navigating the intricacies of conducting mining business in Africa but shares some of the interesting facts about the continent; what makes it a special place to invest in; and the vast cross-cutting opportunities that sets it apart from other continents. Mining companies have an opportunity to invest in the much-needed infrastructure developments in these countries – a requisite for unlocking the value of the mineral wealth they behold and make a sustainable contribution to the socio-economic development in the countries that they are investing in. There is no doubt that positive returns are to be obtained especially with countries becoming increasingly attractive, growing at consistently high rates, making steady political and social progress and generally creating environments that are increasingly conducive to doing business. Wickus Botha Africa Mining and Metals Leader

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Exploring the diversity of the African continent

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Exploring Africa’s diversity Exploring Africa’s growth potential

80%

2nd

Namibia is the second least densely populated country on earth.

The Republic of Congo is home to 80% of the world’s wild gorillas and chimpanzees.

Exploring merger and acquisition activity in Africa

Rock paintings found in the region of Gao and Timbuktu suggest that the region of Mali was inhabited even around 50,000 BC.

Exploration in Africa

Zambia’s name comes from the Zambezi River. Zambezi is from a local word “heart of all”.

Nigeria is one of the top 5 producers of cocoa beans in the world.

South Africa has the longest wine route in the world.

Niger has the highest fertility rate in the world - 7.52 births per woman according to 2012 estimates; this means that nearly half (49%) of the Nigerien population is under the age of 15.

Bridging the infrastructure gap

Top 5

yambezhi

4th

Reserves and resources : the potential

Rwanda is Africa’s most densely populated country.

FDI in the mining sector

Tanzania is famous for its Mpingo tree, also known as the African blackwood tree (dalbergia melanoxylon) is the most expensive hardwood tree in the world.

Madagascar is the world’s fourth largest island and is about the size of Texas.

The Seychelles Island has a matriarchal society, with mothers being the head of the family. 5

Exploring Africa with the help of EY

Botswana’s Okavango River Delta is one of the world’s largest in-land deltas.

What others are saying about Africa The Fraser Institute’s Survey of Mining Companies 2012/2013 shows that most of the African countries measured have been improving their overall policy attractiveness. Mauritania and Namibia have shown a significant improvement in the index since the 2011/2012 survey. Looking at Africa’s performance compared to selected emerging markets, Botswana’s policy attractiveness ranked best, with Chile a close second.1 The Extractive Industries Transparency Initiative (EITI)2 is focused on improving transparency and accountability in the extractives sector. Eleven of the eighteen EITI compliant countries are in Africa while six of the thirteen EITI Candidate status countries are in Africa:

EITI compliant countries

EITI candidate status countries

Burkina Faso

Cameroon

Central African Republic

Chad

Ghana

Côte d’Ivoire

Liberia

Guinea

Mali

Togo

Mozambique Nigeria Niger Republic of Congo Tanzania Zambia

1 “Fraser Institute Survey of Mining Companies 2012/2013”, Fraser Institute, February 2013. 2 “EITI countries”, EITI website, http://eitransparency.org/eiti, accessed 15 May 2013.

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Exploring Africa’s growth potential


Africa by numbers

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54 17

billion Africa’s population

$400

African countries ahead of India on the World Bank’s Ease of Doing Business Index

billion South Africa’s Government proposed infrastructure program

11 800+

active infrastructure projects across different sectors in Africa, with a combined value in excess of $700 billion

38 8

sovereign states

African countries ahead of China on the EIU’s Democracy Index

of the world’s fastest 20 growing economies through 2017 will be African

Exploring the diversity of the African continent Exploring Africa’s growth potential FDI in the mining sector

of all new FDI projects (3,848) attracted by Africa’s top 10 destinations since 2003


71%


$2

trillion Africa’s collective GDP

compound growth for Sub-Saharan Africa, and 12.8% for Africa in new FDI projects 2007-2012


22.3%


60%

China-Africa proportion of BRICS trade (totalling $340 billion in 2012) with Africa

Source: “Africa Attractiveness Survey 2013”, EY; “World Bank Ease of Doing Index 2013”, World Bank; “Corruption Perception Index 2013”, World Bank; “Economist Intelligence Unit Democracy Index 2013”.

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African countries ahead of Russia on Transparency International’s Corruption Perception Index

Exploring Africa’s growth potential Sub-Saharan Africa (SSA) is expected to continue growing strongly in the near term, with regional differences in prospects reflecting in part economies’ varying exposure to external shocks. As elsewhere, external risks remain elevated. Policymakers in the region should use the window provided by strong growth to rebuild budgetary space and normalize monetary conditions to be better prepared for downside risks.3

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Export diversification has reduced exposure to weak demand from advanced economies, and high commodity prices have supported the region’s commodity exporters and boosted investment in resource extraction.

Africa’s growth potential

Improved policy frameworks and judicious use of policies in response to adverse shocks have been important elements in improved performance during the past decade. Leading risks for organizations investing in growth in Africa

•

Operational threats affect the processes, systems, people and overall value chain of a business.

•

Compliance threats originate in politics, law, regulations or corporate governance.

Source: Africa by Numbers: Assessing market attractiveness in Africa, EY, 2012

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Up from 2012

Down from 2012

t d men n tio ss

itutes f subst eat o Thr access 10. e r u t c stru nfra 9. I ene ts b e h ing t har 8. S ect execution j o r p al apit 7. C currency volatilit d n y ea Pric 6. rtage o h lls s i k S 5. ense to oper ial lic ate Soc 4. ce national r u ism eso R 3. o rgin pr tectio Ma tivity imp n an rov 2. roduc e p pital allo Ca d acc ca e an

Same as 2012

New entry

The risks closest to the center of the radar are those that pose the greatest challenges to the mining and metals sector in 2013 and into 2014.

5% 41% Despite difficult global conditions, growth in SSA has remained largely on track, projected to stay above 5%.4

41% of Africans live in cities, with an additional one percent every two years. By 2033, Africa – like the rest of the world – will be a majority urban continent.5


Financial threats stem from volatility in markets and the real economy.


•


Strategic threats are related to customers, competitors and investors.


•


The EY risk radar presents a snapshot of the leading risks that affect these businesses doing business across Africa. The risks at the center of the radar are those that pose the greatest challenge to the organization. The radar is divided into four sections:

3 “World Economic Outlook: Coping with high debt and sluggish growth”, International Monetary Fund, October 2012. 4 “World Economic Outlook: Coping with high debt and sluggish growth”, International Monetary Fund, October 2012. 5 “World Economic Outlook: Coping with high debt and sluggish growth”, International Monetary Fund, October 2012. 11


Source: Business risks facing mining and metals 2013 - 2014, EY, June 2013

Understanding the investment environment As Africa embarks on its growth trajectory, the value that lies beneath can only be unlocked by investors who understand the mining and investment environment in each country. Any mining investor in Africa will be advised to understand what infrastructure needs a country has and even be prepared at times to contribute to these infrastructure needs. Resource nationalism Resource nationalism has been widely reported on and commitment to current as well as future projects is dependent on two key points: • Securing the tenure/ownership of mineral rights • The cost of doing business / rate of return Although the debate about nationalizing mines is not topical anymore, the issue of resource nationalism is. Resource nationalism, the term used to describe situations where governments assert increased control over the natural resources located in their territories. Resource nationalism places a large cost burden on mining and metals companies and increases the risk of achieving long term project profitability and it can influence an entity’s decision about whether to invest in a particular country - this comes in the form of increased taxes, increased royalties, resource rents, multi-party participation in projects and so forth. Natural resources management Managing natural resources remains crucial to economic and environmental sustainability of several countries across the continent. Some of the most successful mining-based economies have balanced the involvement of private enterprise and the state. Skills High up on mining companies agendas is securing skills - mining skills as well as other specialized skills such as finance, HR and IT skills.

Competitive landscape Africa needs to improve the competitiveness of its mining industry, while ensuring more equitable distribution of the benefits flowing from the industry to the majority of its residents. While mining creates jobs and boosts tax revenues, its benefits are sometimes overshadowed by two themes: • Criticism that the industry does not sufficiently address its environmental impact. • Increasing calls for beneficiation. We are however seeing evidence of countries changing their operating models to overcome these issues. Going forward we will see this trend increase. 12


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Africa’s growth potential


Mergers and acquisition activity in Africa “In 2012, the African continent attracted investment as traditional mining regions become increasingly saturated and risk differentials began to narrow globally. Increasingly Africa is being looked to in order to provide mineral supply to meet the worlds future growth.” Michael Bosman, Mining and Metals Transactions Leader, EY, South Africa

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Exploring the diversity of the African continent Exploring Africa’s growth potential FDI in the mining sector

Exploring mergers and acquisition activity in Africa

South Africa’s $8.5b of M&A activity in 2012 was largely the outcome of portfolio optimization by major mining and metals companies, which prompted decisions to mothball high-cost operations, divest non-core assets and build on existing stakes in key assets to achieve the right risk-return balance.

$182m


ASX-, TSX- and AIM-listed juniors, as well as financial investors, showed great interest in copper, uranium, iron ore and gold. This doubled Africa’s inbound deal volume year-on-year. However, these were largely small sized deals (