[miningmx.com] – SPECULATION that the world’s largest miner, BHP
Billiton, is quitting its Mount Nimba iron ore mining prospect in west Africa’s Guinea
could spell the start of similar reverses from “frontier regions’, according to analysts.
That’s because shareholders in the world’s largest miners want returns amid volatile
market conditions.
A knock-on effect is that some African countries may have overplayed the resource
nationalism card – increasing government taxes on mining and resources – not
anticipating that changing economic conditions mean investors are not as keen to
invest in their countries, especially since tax regimes have changed for the worse.
Marius Kloppers, CEO of BHP Billiton, observed earlier this year at the Bank of
America Merrill Lynch Mining and Metals Conference that the world’s mining firms
had “more projects than cashflows’. Kloppers has subsequently put aluminium assets
in Brazil and diamond assets in Canada on the block. Rio Tinto wants to sell its
diamond assets, and it has been rumoured Anglo American wants to sell its Amapa
iron ore mine in Brazil so it can focus its balance sheet on the larger Minas Rio
project.
“We believe west Africa will be the region in focus for any capital pullback,’ said
Macquarie Research in a recent note. “These are projects we use to set our long-run
incentive price, and not only is infrastructure a major challenge, this is also overlaid
with greater geopolitical risk,’ it said.
As a result, and owing to a further reduction in China’s GDP growth, further
pullbacks in projects are possible. While this is potentially negative news for host
nations, it’s more positive for the mid-tier and junior miners that are still committed
to the regions – especially Exxaro Resources, which recently paid R2.8bn for control
of the Mayoko iron ore deposit in the Republic of Congo.
What’s helpful to companies such as Exxaro is that the retreat of the majors helps
build its business case in respect of projected metals demand, especially in iron ore
where the future price of the metal is always, in this particular case, forecast to be
lower than the existing price. In addition, the pessimism that greeted the second
quarter GDP figures from China – in which growth fell disappointingly to 7.6% – is a
bit of a mirage, says consulting group Deloitte’s Global Head of Mining Merger and
Acquisitions, Jeremy South.
South said China’s growth was being closely controlled, but failing to power
economic development in China was not an option, if only because the country had
to create employment. “China’s biggest challenge is feeding 1.4 billion people. So
the country’s investment in resources plays to a domestic agenda,’ he said. Securing
resources, including potash which is used for nitrogen in the agriculture business,
was part of the reason the world’s miners shouldn’t be deceived by data suggesting
slowing GDP.
Given the pullback in western mining companies’ spending, a funding gap would be
created that would provide Chinese and Asia Pacific state-owned companies in
particular with fresh investment oppportunities. One potential example is London-
listed Afferro Mining, which is hoping to build the Nkout iron ore mine in Cameroon.
David Netherway, the non-executive chairman of Afferro, and who is a veteran of
the exploration to mining industry, says the company is now on the lookout for a
partner, possibly Asian.
South said he expected Chinese investment in Africa to continue unabated; in fact, a
fresh wave of merger and acquisition activity could be on our doorstep, especially in
view of the funding gap. “I see a significant wave of merger and acquisition activity
over the next year,’ said South. “If you are sitting on a project you can perhaps
make it more marketable, or you can get on the plane to Asia. Probably both,’ he
said.
The pullback in capital expenditure is not uniform to all metals. Projects in copper,
for instance, will continue to find support, according to Macquarie Research,
notwithstanding a 22% per year average increase in spending over the last seven
years. “The lack of mine output growth over the same period, and the high rate of
depletion, means copper investments continue to find backing,’ the broker said.
