In need of assurance

2/3/2012 1:00:00 PM

Having certainty on issues that concern mining would put investors at ease If you are a junior miner in any of Africa’s main resources regions working towards pay dirt, the good news is there is a “wall of money out there” waiting to be invested. The bad news is the issue of governance in some of the riskier jurisdictions. For every step forward in terms of providing certainty for investors through increased transparency, these regions seem to take two steps backwards. “There is money out there ready to go when things settle [when the direction of the global economy is more clear],” says Michael Solomon, chairman of international firm Maitland, which advises on legal and tax matters on transactions in a number of African countries. “I think while a number of governments are in trouble, companies are generally well capitalised, but they are biding their time before investing,” he says. He says that asset prices had been inflated to bubble-type conditions during the commodities boom from 2004 to 2008 and now valuations are more realistic, with a number of opportunities out there. In particular, large companies that are keen to boost their resources and reserves are scouting for resources. In some cases, even governments — through sovereign funds and state-owned entities — that want to secure resources to ensure the growth of their countries are doing the same. Given the number and diversity of some of the resource rich countries on the African continent and elsewhere, they have vastly different track records when it comes to creating certainty for investors in the resources sector. For example, Botswana is held up as a model to emulate if you are keen to secure investment in your country’s minerals. Zimbabwe is at the other end of the spectrum, with mining companies for the past few years never really sure where they stand. Countries such as Ghana, on the other hand, are said to be attracting investment through continuously improving conditions. And here in SA — while nowhere near as risky as the likes of investing in the Democratic Republic of Congo given the legal uncertainty that has been seen there previously — the state seems to be in limbo when it comes to providing clarity for investors. This is all part of what has been labelled “resource nationalism”, a phenomenon that has been on the rise as commodity prices have risen and remained strong in the past decade or so. Solomon says there is a sense that with the increase in commodity values, governments in resource-rich countries have taken a much greater interest in their countries’ natural resources and are trying to claw back some of the gains. “Sometimes the methods may be questioned, but you can understand why governments are pursuing such policies,” he says. Nonetheless, even with governments increasingly holding out for their shareof the resources prize, “the costs of production are still at a level that would allow for operators to make decent profits”, says Solomon. This is despite the fact that some commodity prices have come under pressure. In SA the ruling ANC’s Youth League’s calls for nationalisation of the mining industry, in whatever form it has in mind, is enough to make investors look elsewhere. And the ironic thing is that in looking elsewhere they may be confronted with resource nationalism, which is perhaps nearer the nationalisation that the league would like to see. Many countries require that foreign investors take the state as a partner to a lesser or greater degree. Royalty taxes/windfall taxes are the order of the day. Even these additional costs, in many cases, are not enough to deter investors, but they all call for certainty. “I think the problem with resource nationalism is that it has created instability. There is now an uncertainty [in many mineral rich countries] about what any new government is going to do,” says Solomon. Nonetheless some will be willing to invest if the reward is high enough. “There is a lot of money around; it is not necessary to seek to raise that through a listing. Good projects will have no difficulty finding money from the likes of specialist private equity funds,” he says. Major resources companies too may be a faster route to pay dirt for junior miners than listing their companies. Majors, though, tend to be a bit more cautious than some private equity investors. If investors are prepared to invest in companies with resources that have not been upgraded to reserves, Solomon says they may be looking for “much better returns” than 30%. Either way, even with these concerns, Maitland says a great deal of preparatory work is being carried out across a number of African countries, and that could translate into deal flow in the year ahead. “Based on our current pipeline of projects, we expect more mergers and acquisitions than listings this year,” says Rupert Weber, a partner at Maitland. He highlights another issue that may make it increasingly complicated for UK companies to act swiftly to invest in high-yielding African assets — the UK’s Bribery Act 2010. It came into force last year. A number of law firms have said it could “significantly affect the conduct of business, both in the UK and abroad”. The law now makes private firms liable for bribery. Prior to the introduction of the law the legal implications of the crime had been ring-fenced to agents and public officials. Any company hoping to carry out transactions in the UK and abroad will have to show that it went out of its way to make sure that there was no bribery involved in it winning or securing the deal. Proving this to be the case in some countries where companies are conducting business may be a stretch given that investors often have to work with both local and foreign partners. “The offences contained in the Bribery Act carry criminal penalties for individuals and organisations. For individuals, a maximum prison sentence of 10 years and/or an unlimited fine can be imposed; for companies, an unlimited fine can be imposed,” says Beswicks Solicitors on its website. UK-based businesses should review (or for those that do not have them in place, implement) anticorruption procedures to ensure they are sufficiently robust to prevent corruption and mitigate the risk of committing an offence under the act. Given the working environment in some countries where transparency levels may not be high, and where corruption exists to a lesser or greater degree as part of doing business, companies will have to be vigilant. Though Weber makes it clear that corruption is a global phenomenon, lack of transparency is clearly a major problem when it comes to doing business in some African countries. “Africa is definitely maturing and some countries do want to do serious work with regard to eliminating the corruption element. But it is a long process and it remains one of the risks of doing business in Africa,” says Solomon. Weber points out, though, that these risks vary “massively” from jurisdiction to jurisdiction. “There will have to be a different level of due diligence carried out,” he says.

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