Difficulties of mining in Africa

Mining companies looking to do business in an African country need to be aware of the complexities they will likely face, from securing debt financing to political risks to complying with local anti-bribery laws.

“What are the mandates that I’m seeing in Africa?” says Martin McCann, Norton Rose’s head of infrastructure, mining and commodities, in a recent seminar titled “Mining in Difficult Jurisdictions” at the international law firm’s Toronto office. “There has been a shrinkage in the number of banks offering project financings to greenfield projects,” he continues, explaining when he led the project financing for Equinox Minerals’ Lumwana copper mine in Zambia, the number of lenders offering US$50-US$100 million in debt at that time was around 20 in many African countries.

But with that number now at eight to 12, with even a less number of truly active lenders, McCann says companies need to consider other options to secure the required amount of debt. Since some banks may provide a portion of the required debt or only lend if the company is backed by an export credit agency (ECA).

A company can consider a loan from an ECA to boost the amount of debt it secures. Most OECD countries have ECAs, which are official financial institutions that support the country’s exports and foreign direct investments as well as provide some political or commercial protection. 

McCann says over the last two years China’s ECA, Sinosure, has been the biggest supporter of mining projects in Africa.

“The world has been dominated by Chinese investors, particularly down the east side of Africa, and all of Australia,” comments McCann. Some other ECAs that have been largely supporting mining projects include: South Africa’s ECIC, Australia’s EFIC, Korea’s K-sure and Japan’s J-BIC.

“People are now looking to try and go to these ECAs to try to get some equipment to see if they can then get some soft protection from the banks for an increase debt amount,” says McCann.

Although Sinosure is dominating the playing field, he notes for a true junior, the Chinese financing has been difficult to crack. But for the mid-tiers and seniors there has been real liquidity. One reason why the juniors have been left out is because mining deals backed by Sinosure often have a parent company involved, which juniors usually lack.

If companies can’t access debt through ECAs, they could try tapping into a development finance institution (DFI) financing, which would be easier to access but a lot slower.  

Some other options include: equipment financing and off-take agreements for the project’s primary product and possible by-products.

Even before all these financing arrangements are made, a company should understand the operating environment of the country they are in, says Norton Rose’s corporate lawyer Poupak Bahamin, who specializes in mergers and acquisitions.  

 “The reality is that carrying out business in a developing country does add a layer, well, several layers of complexities to any M&A or financing transactions that you would be used to here,” she notes.

 Bahamin, who has worked in several African countries including the DRC, Angola and Cameroon, says everyone knows what political risk is, but no one knows how to handle it. It’s a factor that can’t be controlled by an investor or a party, she notes.   

Bahamin suggests companies can buy political risk insurance, but concedes that doesn’t offer a “perfect solution” in ensuring financing or covering all the elements of political risk.

That risk covers a gamut of country-specific and project-specific factors such as political instability, unpredictable policies, currency fluctuations, expropriation of assets, legislative changes and raising taxes/royalties.

A few steps a company can take to safeguard itself include understanding the operating and local environments. Starting with the basics, it means complying with the judicial system in that country, and knowing if any restrictions exist on foreign ownership when it comes to holding a licence, exiting the project, or transferring production or capital out of the country.

 There’s a lot of due diligence that needs to be done, where lawyers can help navigate through the bureaucracy, such as reviewing all relevant legislation from the constitution, Financial Acts, mining laws and regulations, company and employment laws.

“You have to go in eyes wide open,” says Norton Rose’s Pierre Dagenais, who practices corporate and securities law. 

This also applies for a company taking an equity interest in a Canadian public company with a mining or exploration property in Africa. When you are dealing with an exploration property, you need to understand what the property is, says Dagenais. Some keys things to know include: how long the licence or lease is for and what it entitles you to do. Conducting site visits for technical diligence will also help form a clear picture.

Some of the non-financial risks that may come up while doing business in Africa are corporate social responsibility, and anti-bribery or anti-corruption laws.

Those anti-corporate laws are legislated by OECD countries, and apply to companies that have a certain connection to those countries despite where they work, says Norton Rose’s Michael Torrance. 

A Canadian company may find itself in a sticky situation when they’re in a country where “grease payments” or bribes are expected to do business, but could result in criminal penalties and heavy fines.

What to do? Some exceptions to the law exist, says Norton Rose’s Dawn Whittaker, a securities and mergers and acquisition lawyer, adding “there’s no magic answer.”

 “The law is the law here. The law is the law there,” she says. “If the cost of compliance is more expensive than the cost of paying the bribe, it’ll absolutely drive up the cost of doing business.”