Tuesday, September 3, 2013

Africa's Mineral Wealth: Curse or Blessing?

Interviewed on CNBC on the outcomes of the Mining Lekgotla held in Johannesburg last week, the deputy chief executive of the South African Chamber of Mines acknowledged that his industry still has much to learn in how it manages its employees and works with local communities. This was a bold statement from the executive of an industry association founded in 1889 (following the discovery of gold in the area of Johannesburg or iGoli / place of gold). It was a reminder of higher standards - among others in governance and quality of management - that will increasingly be expected of emerging market investors (i.e. BRICS countries) in Africa.

Africa is seen as an extractives growth region, accounting for 10% of today's mine production and 15% of investments signaled by the project pipeline. Expectations for a new golden era, with new discoveries in among others oil and natural gas, are high in Sub-Saharan Africa. Yet many have mixed feelings about the impact of a renewed "scramble for Africa" and "gold rush mentality" that have taken hold in recent years, as government leaders in Africa became excited about booming commodity prices and prospects of newly found mineral reserves. Technological advances make resource extraction in previously inaccessible locations of remote areas easier, which among others can put precious habitat and protected areas at risk.

Local socio-economic impact was upfront last week in a seminar on "Reversing the Resource Curse", hosted by the African Centre for Economic Transformation and the Ford Foundation in Accra, Ghana. One of four moderators, I joined researchers, financial transparency activists and lawyers dealing with local community - industry relations. Acknowledging that litigation cannot be the solution to all problems, the lawyers impressed me with their keen sense of how the failure to effectively implement seemingly sound laws and regulations often requires legal action to establish standards bottom up, step-by-step. The overwhelming impression is that of local communities (holders of "surface rights", current land users) being bulldozed by big industry representatives (foreigners pursuing "mineral rights") and oft-corrupt political functionaries (who have the power to expropriate land in the "public interest"). Local communities obviously need support in understanding an increasingly complex terrain. Experts from Asia and Latin America presented success stories and lessons for Africa.

The realities of localities and operating sites are far removed from that of investors based far abroad. The annual World Investment Report (UNCTAD 2013) indicates that foreign direct investment (FDI) flows to African countries increased by 5% to US$ 50 billion in 2012. As reflected in the make-up of the top recipient countries (Nigeria, Mozambique, South Africa, DRC, Ghana), investment in extractive industries remained the most important driver of FDI. In Central Africa, where inflows reached US$ 10 billion, significant FDI was targeted at the expansion of the copper-cobalt Tenke Fungurume mine in the Democratic Republic of the Congo (DRC). Energy resources such as recently discovered gas reserves in Tanzania and oil fields in Uganda drew increased FDI to East Africa. In Southern Africa, inflows to Mozambique doubled to US$ 5.2 billion, attracted by the country's huge offshore gas deposits. South Africa remained the top investor from the region, the largest source country of FDI in Africa.

Recognising the growing interest in Africa's mineral resources and imbalances in the negotiation of terms of entry (bilateral investment agreements) and licence to operate, the World Bank (WB) launched in 2012 a new fund to help African governments "level the playing field and ensure equitable deals in their natural resource contracts with international companies" (press release 05.10.2012). In its annual analysis of Africa's economic prospects, the WB report Africa's Pulse noted that the decline in poverty rates in resource-rich countries has generally lagged behind that of countries without such riches in the ground. This raises the classical model for emerging market crisis, which starts with a boom based on natural resources - reflected in significant portion of export earnings and GDP but not sustainable growth.  Dependence on the export of individual commodities cause vulnerability to the fluctuations of international markets. The WB fund intends to provide not only planning and legal advice but also technical assistance on environmental and social risks (incl benefit sharing regimes and health, livelihood effects, local service delivery). The WB appears to be learning from the mistakes of the past.

Yet feelings of mistrust of large institutions - including financial ones and extractive corporates - will remain. If you are a social responsibility or sustainability manager inside an extractives multinational, you are most probably aware of the list of things that could go wrong. A 2008 report by a Ghanaian governmental commission on human rights and mining communities gave a list of root problems which occur in many African countries:
  • inadequate compensation for destroyed properties,
  • unacceptable alternative livelihood projects,
  • absence of effective channels of communication and consultation between companies and communities,
  • excesses against small scale miners, 
  • health problems attributed to mining,
  • cyanide spillages and water contamination, as well as
  • unfulfilled development promises.
When the International Institute for Environment and Development (IIED) recently took stock, a decade onwards, of its 2002 report on the mining industry and sustainable development, it found that the key environmental issues identified remain unresolved. It also noted that water has become a higher priority issue and that the industry faces new pressures, notably climate change and a re-emergence of "resource nationalism". Overall, it is evident that key issues remain related to environmental impact assessments (EIAs - weak enforcement, follow-up), energy use (incl declining ore grades), water use (incl acid drainage), land use (incl habitat destruction), mine wastes (incl tailings dams), metals in the environment (incl mercury use) as well as mine closure and legacy issues. We were reminded of the latter when visiting the Obuasi mine of AngloGold Ashanti in Ghana last week, a mine that has been operating for over a century and became part of the South African multinational in 2004. The International Council on Mining and Metals (ICMM) has tackled all of the above environmental issues over the last decade, among others committing its 21 member companies to do performance reporting based on the Global Reporting Initiative Guidelines.

Commodity Metals Price Index, 1990-2010
(includes copper, aluminum, iron ore, tin, nickel,
zinc, lead and uranium price indices). 

Source: Index Mundi and IMF
But speaking of legacies, are we seeing the beginning or the end of a golden era? This is the question posed by the Aug/Sept 2013 edition of the magazine African Business. While gold prices have risen significantly over the last decade, similar to the 1970s, recent months have seen a sharp downturn. This came, among others, after the US Federal Reserve reminded us that fiscal stimulus will not go on forever. The resultant commodity sell-off saw the price of gold fall 25% between April and June 2013. As company shares are down and assets written off (e.g. mining projects mothballed), the World Gold Council is encouraging change in the way producers report costs.

The Thomson Reuters GFMS gold survey reports that at a cost of US$ 1,200 per oz (ounce), half of gold producers are producing at a loss. Total production cash costs (not including capital expenditure) in continental Africa (Ghana, Guinea, Mali, Namibia, Tanzania) was US$ 1,111 per oz in 2012. But as the "cash costs" model is said to understate annual costs, the World Gold Council is promoting new metrics in the form of "all-in cost". The latter comprises all costs required to sustain production, as well as the lifetime costs of a mine including all capital expenditure. Such measurement and reporting of lifetime costs would need to be compared with the related environmental and social costs, mindful that standard valuation techniques tend to ignore delayed environmental costs and remediation expenses at the end of the project life cycle. Senior managers inside progressive mining multinationals are certainly aware of these complications, even though their mainstream investors more often than not are paying scant attention to these. 

African Business suggests that African governments are increasingly questioning the contribution of extractive industries to wider society. This results in higher corporate taxes, royalties and bigger ownership stakes for the state or local residents (disadvantaged groups, host communities). The levels of financial inflows and outflows - some licit, some illicit - remains a bone of contention. Many applaud efforts by the EU and US (Dodd-Frank Act) to require companies to publish what they pay to governments on a country-by-country and project-by-project basis. 

The Resource Governance Index (RGI) of the Revenue Watch Institute will be an important monitor to follow. It measures the quality of governance of the oil, gas and mining sectors in 58 countries. It considers indicators related to the institutional and legal setting, governmental reporting practices, safeguards and quality controls, as well as the enabling environment. The more resource dependent countries tend to score lower than others in their quality of public governance. In the 2013 RGI no African country reached the "satisfactory" score segment (as does the Latin American majors). Of 21 African countries, 8 appear in the "failing"" segment, 8 in the "weak" segment and 5 in the "partially satisfactory" segment (South Africa, Zambia, Ghana, Liberia, Morocco).

Beefing up integrated planning, implementation and regulatory enforcement also remains a challenge in South Africa. In 2012, a South African court for the first time found a mining company director criminally liable for contravening environmental laws. The RGI shows that South Africa, like Botswana, scored particularly low in the area of governmental reporting practices. This refers to the difficulty in finding information on minerals, subsidies, conflict of interest declarations, contracting and licensing, as well as environmental and social impact assessments. In a country known for leading reporting (incl sustainability) practices by business, governmental reporting practices are coming short. Arguably it is time for South Africa, like the US and others, to become a participant in the Extractive Industries Transparency Initiative.

As gold, platinum and other commodity prices started to decline in the last two years, labour instability in South Africa has certainly not been helpful to its mining industry. It employs over half a million people in an industry where labour can take up to 60% of operating costs, despite the ongoing trend towards greater automation world-wide. Conflict between old and new mineworkers unions have destabilised tripartite negotiations with business and government. As has often been the case in other countries, the situation has been further complicated by weaknesses and lack of standards applied by other important actors such as local authorities and providers of microfinance to workers. Clearly, the health of the industry is ingrained with the health of public, financial and social infrastructure.

Considering that the life span of a mining operation may take a hundred years, it is no wonder that the preceding exploration, assessments, negotiations, site design and construction can take 15 years. ArcelorMittal has been collaborating with a range of societal partners during 2009-2011 in preparing for its iron ore operations in the Nimba mountain range in Liberia. In Peru it took Anglo American some 20 years including exploration, feasibility studies and assessments, government approval and local community negotiations - especially on water use in an arid region - before getting the final go-ahead and starting construction of the Quellaveco copper mine. Operations are due to start in 2016. Mindful of the long-term impact on local assets (including Natural Capital) involved, one can only hope that investors and politicians in Africa would get beyond the "rush mentality".  As a Peruvian expert reminded me, compared to colonial times and 1970s military dictatorships, today we at least have a conception of environmental and social impact assessments (ESIAs) and what best practice in its strategic use could look like. Tectonic shifts are slowly underway.

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