Cape Town conference brings support from African politicians

Cape Town, South Africa — Improved commodity prices and easier mine financing made for an upbeat mood at the Indaba 2004 meeting, formally known as the Investing in African Mining Conference.

Organizers reported the largest-ever attendance for the conference, with 2,000 delegates and more than 100 sponsors, including mining companies, service firms, and government agencies.

The meeting’s early sessions underscored how welcome mineral development is among African governments. Phumzile Mlambo-Ngcuka, South Africa’s minister of mines and energy, told the conference that a meeting of African mines ministers immediately before the conference had resolved to oppose the recommendations made by the World Bank’s Extractive Industries Review, which said financing agencies under the World Bank umbrella — the Bank, the International Finance Corp., and the Multilateral Investment Guarantee Agency — should cease or drastically limit their investment in resource-extraction projects in developing countries.

Mlambo-Ngcuka said South Africa, with a large and long-established mining industry, and Tanzania, with a series of new projects awaiting startup, “stood to lose the most” from the proposals, and that the governments represented at the meeting planned to promote mineral development through government financial support for value-added projects and small-scale mining.

Bobby Godsell, CEO of AngloGold (AU-N), delivered an address in the conference’s plenary session in which he argued that African mining, seen as a high-risk investment in much of the world, has had a bad rap. He observed that risk exists for all investments, regardless of whether the investment is in an African project or not, saying companies need to identify and manage risk, rather than try to avoid it. Singapore and Switzerland might finish high on the list of stable countries, Godsell said, but a company’s chances of finding and developing a mine in either country are unknown.

Godsell delivered a catalogue of First-World problems, including the U.S.’s dual trade and fiscal deficits, the European governments currently in violation of the Maastricht Treaty on government finances, and Japan’s recent rise out of a decade-long recessionary and deflationary period. He said an African might look at the developed world and quite reasonably say, “and you tell us we’ve got problems.”

Echoing the minister of mines, Godsell was critical of the pressure on the World Bank to scale back investment in extractive industries. After creating the most resource-intensive economies in history, many of the large industrial countries have turned their backs on those industries, he said.

The U.S., especially, has backed away from investing in commodity industries, even though it is a vast consumer.

One major theme of the conference was the progress of black empowerment compliance in the mineral industry. Speakers from the industry agreed that empowerment must happen, and restricted their criticisms of the government to matters that travel well off the continent, such as taxes.

The speakers’ different experiences proved there is more than one route to empowerment, and to compliance with empowerment legislation. Rick Menell, chairman of Anglovaal Mining (AVMIN), said the granddaddy of black empowerment deals in mining, the creation of African Rainbow Minerals, started with a well-capitalized group headed by businessman Patrice Motsepe, which had first concluded empowerment deals on individual mine operations with Harmony Gold Mining (HMY-N).

Harmony, in turn, badly wanted to consolidate some of the better operations in the Orange Free State and was looking to acquire Anglovaal Gold (AVGOLD). Avmin, for its part, was too small to support the risk of developing large projects, and needed to expand its capital base.

The solution was a new structure, evolving over the next few months, that takes Anglovaal out of direct involvement in the gold business and gives African Rainbow holding-company control of Avmin, holding 43% of the equity and exercising 63% voting control. Harmony takes over Avgold in exchange for shares, with African Rainbow receiving a 20% interest in Harmony.

The result, Menell said, was a new Avmin (renamed African Rainbow Mining) that “can compete on equal terms with the major mining houses” but complies fully with black empowerment legislation.

An entirely different path had been followed by Royal Bafokeng Resources, which is held privately by the Royal Bafokeng Nation, the tribal group representing about 300,000 Tswana people in the Bushveld region. The company was formed in 2002 to hold a royalty interest and minority shareholding in Impala Platinum (IMPUY-O), and is now an equal joint-venture partner with Anglo American Platinum (AAPTY-O) at the Bafokeng Rasimone platinum operation on the northern Bushveld.

Steven Handley, executive chairman of Royal Bafokeng Resources, said the company requires “significant influence” over the operations it invests in, and, though private, governs and conducts itself like a public company, with strong independent directors.

Lemogang Alvin Pitsoe, the company’s business manager, emphasized that the company had been fully involved in management at Bafokeng Rasimone, which made a significant turnaround and cut costs substantially in the past year. Moves to trackless underground mining, and reconfiguration of the mining layout, had started the high-cost operation in a move down the platinum industry’s cost curve.

In a much-anticipated speech on the future of the metal markets, mining promoter Robert Friedland told the delegates “everybody in this audience is working for the Chinese.”

Industrialization, and more significantly for Friedland, urbanization, have made mainland China the world’s largest producer of steel, exceeding Japan and the U.S. combined in 2003. China’s manufacturing industries — producing vehicles, heavy machinery and durable goods — have grown at double-digit annual rates in recent years — even in 2003, against the tide of the SARS outbreak. In 2003, for the first time ever, mainland China absorbed more foreign direct investment than the U.S.

‘Lucky country’

Friedland said the trends would give China “lucky country” status — the combination of rising incomes and falling prices that fuelled economic growth in the New World between 1880 and 1920. “All these people that are making this stuff,” he said, pointing to the growth figures, “can afford to buy it.”

Urbanization would also underpin increased consumption by the Chinese, with vast numbers of rural people moving to cities yet unbuilt. “Don’t believe it’s a bubble,” said Friedland, “China is run by very intelligent people who know precisely what they’re doing.”

On the outlook for gold, Friedland said “the Chinese are also interested in the ‘barbaric relic.'” With about US$400 billion in U.S.-dollar currency reserves, the Chinese may also be looking to diversify foreign-exchange holdings. Friedland warned that the U.S. had “gone from being the safest country in the world to being the most dangerous” and said the potential for terrorist attacks on U.S. cities made it likely anyone with a spare US$400 billion would be anxious to find new assets to hold.

It was probably not entirely coincidental that Friedland’s predictions centred on copper, gold, nickel and platinum — commodities his companies are heavy in. He said, however, that all metals would be lifted by the rising tide, and that the long-term decline of the commodity markets probably would not resume for at least 20 years.