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THE AFRICA MINING VISION THE AFRICA MINING VISION A Tool for Structural Transformation?A Tool for Structural Transformation?

AEC 2011– Green Economy and Structural Transformation

25 – 28 October 2011

Wilfred C. LombeRegional Integration, Infrastructure and Trade

Division

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Presentation structure

• What is the AMV• What are its tenets• What are the key drivers• A SWOT analysis of Africa and mining• Implementing the AMV – process and findings to

date• The main enablers

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WHAT IS THE AMV?

• A vision adopted by the African Heads of State and Government in February 2009

• Created by a technical task team comprising UN agencies, the AfDB, AMP, RECs and AUC

• Its goal is to create a -

“Transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development”

• It is essentially seeks to use Africa's natural resources sector to transform the continent's social and economic development path

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THE TENETS – focus areas

• Development of a diversified and globally competitive African mineral industry which contributes to broad economic and social growth through creation of economic linkages

• Fostering a transparent and accountable mineral sector in which resource rents are optimized and utilized to promote broad economic and social development

• Promoting good governance of the mineral sector in which communities and citizens participate in mineral assets and in which there is equity in the distribution of benefits

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THE TENETS – focus areas

• Optimizing knowledge & benefits of finite mineral resources at all levels of mining & for all minerals

• Harnessing the potential of small scale mining to improve rural livelihoods and integration into the rural and national economy

• Fostering sustainable development principles based on environmentally and socially responsible mining, which is safe & includes communities and all other stakeholders.

• Building human and institutional capacities towards a knowledge economy that supports innovation, research and development

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KEY DRIVERS OF THE AMVAfrica has a comparative advantage but most minerals exported as raw materials - potential for resource based industrialization has always been high

Source: Deutsche Bank; US Geological Survey (USGS); World Nuclear Association, cited from McKinsey Global Institute Analysis (2010)

Eleven African countries are actually among the top ten global resource countries inat least one major mineral.

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The mining value chain and Africa

ExplorationMineral

processing

Smelting &

refining

Semi – fabrication

MiningFinal

product manufacture

1. Inputs

– Consulting services (surveying, drilling, design, bulk earthworks)– Specialized equipment– Utilities and raw materials– Finance

Output/Sellable Product

– Run-of-mine ore for sale to miners

2. Inputs

– Run-of-mine ore– Consulting services – Specialized equipment– Raw material inputs– water and power– Labour

Output/Sellable Product

– Concentrate for sale to traders

3. Inputs

– Concentrate – Consulting services – Specialized equipment– Raw material inputs– water and power– Labour

Output/Sellable Product

– Refined product for sale at metal exchanges

4. Inputs

– Refined product – Consulting services – Specialized equipment– Raw material inputs– water and power– Labour

Output/Sellable Product

– Semi-fabricated product for sale to manufacturers

5. Inputs

– Semi-fabricated product – Consulting services – Specialized equipment– Raw material inputs– water and power– Labour

Output/Sellable Product

– Final manufactured product for use

Source: Adapted from Lydall, 2010

The value chain in Africa ends here, at best

Developed countries complete the chainLeast value Most value

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KEY DRIVERS OF THE AMV

Metal Refined use (2007) Share of China (2000) %

Share of China (2007) %

Aluminium (kt) 12,267 13 32.5Copper (kt) 4,800 11.8 26.2Zinc (kt) 3,750 14.9 32.1Lead (kt) 2,548 10.1 30.6Nickel (kt) 345 6 24.9Tin (kt) 150 18.6 39.9Crude steel (Mt) 437 16.3 32.3Iron ore seaborne imports (Mt) 379 15.6 48.2

Source: Ericsson (2009) citing Chinese statistics and metal forecasting, Macquarie Commodities Research, Macquarie Capital Securities (2008).

China leads current global consumption

Gold LeadCopper Iron ore Nickel Zinc PGMs Other

Source: Raw materials data (2010)

Demand for mineral commodities has soared since about 2003

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What is driving demand?Some economists believe a super cycle is taking place - a prolonged long-trend rise (10 to 35 years) in commodity prices, driven by industrialization of a major economy

Source: USGS - Platts; US Department of Labor. (cited Citigroup, 2005)Source: Source: Raw Materials Group, 2011

The super cycleU.S

Japan, EU

Consumption vs. GDP per capita

The 6 most traded metals on LME are Al,

Cu, Pb, Ni, Sn and Zn, inputs in

construction, transportation and heavy

manufacturing

Consumption vs. GDP per capita

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KEY DRIVERS OF THE AMVSelected commodity prices

Source: PWC review of global trend sin the mining industry (2011)

Mineral commodity prices have increased exponentially since 2003

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KEY DRIVERS OF THE AMV

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Major Chinese mining investments in Africa (2009)

High demand and mineral commodity prices have created strong geopolitical competition for minerals - has led to large investment in African mining

China now imports $100 billion worth of base metals per yearHas invested in both acquisitions and greenfield projects Also in mineral processing (7 EPZs) facilities and infrastructure

Extractive mining operations with Canadian interests

Mines in production, including advanced development projects as of December 2008.

KEY DRIVERS OF THE AMV Cumulative Canadian Mining assets in Africa

Growth in Canadian assets1989 – 233 million1995 – 635 million2008 - $25.8 billion

In 2007 Canada present in 35 countries

KEY DRIVERS OF THE AMV

57%

8%

6%

5%

4%

4%

2%2% 2%

10%

South Africa (48)

Ghana (7)

Guinea (5)

Mali (4)

Zambia (3)

Zimbabwe (3)

Tanzania (2)

Mozambique (2)

Cameroun (2)

Others (8)

Some 150 ASX listed or Australasian based mining and exploration companies are active in 40 African countries

Their collective investment in last ten years is believed to be in excess of $20 billion – 87% of deals in last 10 years!

ASX-listed companies with operations in Africa

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Is a scramble taking place?• India has also expanded its FDI into the African extractive sector, driven by large multinationals like Vedanta in copper and Tata in steel

• Brazilian companies are aggressively investing in Africa’s mining sector – eg Vale in Guinea, Mozambique and Zambia

• Concerns about security of supplies led to EU defining the Raw Materials Initiative

• And the US and Japanese strategy based on “criticality” of high technology materials eg rare earths considered more important

• Criticality defined by importance & availability (US)

• The EU, like the US has no stock pile. But systematically monitors markets and supply – Raw materials initiative

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Who are the major players?

Source: Capital IQ, cited from PWC review of global trend sin the mining industry (2011)

BHP Billiton•Mines copper, iron, gold, and coal, and has proved oil reserves

•Strategy of owning and operating large, long-life, low-cost, upstream assets

•Intends to diversify into potash

Performance …for whom??Share of revenue by commodity % Revenue by customer location

2005-2010 Average returns for the top 10 ($bn)

Source: PWC review of global trend sin the mining industry (2011)

Returns to the company - net profitsPayments to governments – taxes and royaltiesPayments to employees – salaries, wages, bonuses

Top 40 Results:• Revenues up 32% – breaking $400 billion for the first time• Net profit up 156% to $110 bn• Op cash flows grew 59%, with > $100bn cash on hand at year end• Total assets →$1 trillion• Net debt down to $46 billion, resulting in gearing of only 8%

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Strengths

• Unquestionable mineral endowments

• Unexplored areas

• An increasing regional market share

• Political and economic reform

• Improved macroeconomic stability and capital markets recognition

A SWOT analysis of Africa and miningWeaknesses

• Negative perception for investment

• Infrastructure deficiencies

• Heavy reliance on commodities combined with low capacity for contract negotiation

• Low capacity to audit value chain

• Weak policy capacity

Threats

• If China’s growth slows down there will be a fall in mineral prices

• Global recession leading to high interest rates and low capital markets activity for financing exploration and development

• Lack of local participation in the value chain

Opportunities

• Expand mineral production to meet demand through foreign and domestic investment

• Explore opportunities for linkages with local industries

• Invest in infrastructure development

• Explore resource corridors to facilitate FDI flows

Source: WBMS, Raw materials group data (2010)

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IMPLEMENTATION – process and findings

• Two main phases: an analytical first phase to develop body of knowledge, actions and recommendations to guide phase II

• Implementation phase II will develop toolkits, policy guidelines, templates and targeted capacity building programmes

• Phases are not mutually exclusive: actions can be fast tracked depending on internal and external factors

• Phase I: An international study group was established to explore how Africa’s mineral regimes can transform mining into a tool for broad economic development

• Work of the ISG group is complete and an analytical framework report compiled

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IMPLEMENTATION – process and findings

Main findings of ISG Report: • Exploit global competition and resource glut by encouraging

development contracts that are fair– Optimize tax revenues through strategic use of royalties,

resource rents, and other imposts– Explore diversification alternatives along the value chain

• Strengthen environmental and social practice through greater local and community participation – explore legislated CSR to provide certainty and uniformity– Embed CSR in a broader social development agenda– Strengthen effectiveness of environmental and social

impact frameworks

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IMPLEMENTATION – process and findings

• Improve revenue transparency, sharing and use on developmental projects through improved governance eg EITI, EITI++ , Dodd Frank Law, New EU legislation, are they enough?

• Strengthen capacities to manage mineral sector especially in tax structuring, contract negotiations, value chain auditing, monitoring transfer pricing, investment agreements, etc

• Boost the contribution of ASM– Embed ASM in mainstream rural economic activities– Work towards converting ASM into viable businesses eg through

cooperation and mentorship by LSM – Adopt a regional approach to bridge technical and financial challenges

• Encourage regional cooperation to share capacities eg developing regional economic and social infrastructure

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IMPLEMENTATION – process and findings

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Explore use of price discovery instruments eg auctions or contracts that include development objectives – eg infrastructure (R4I), economic linkage (processing zones) and more PPIs

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IMPLEMENTATION – process and findings

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Country Year Status Resource Project Financing$ million

Botswana 2006 Proposed Coal Traportation

Trans Kgalagadi railway to Namibia

n.a

Guinea 2006 Re-assessed bauxite Souapiti Dam project (515 MW)

1,000

Gabon 2006 agreement iron Bélinga iron ore reserve

790

Zimbabwe 2006 agreement, chromium Coal mines and 3 thermal power stations

n.a

Mauritania 2007 Agreement phosphate mining

430 km railway from Nouakchott to Bofal

620

DRC 2008 under construction

copper, cobalt mining and social infrastructure

6,000

Guinea 2009 re-assessed variousminerals

mining and social infrastructure

7,000

R4I contracts combine mining contracts and infrastructure projects to offer FDI benefits greater than provided by the sum of the two contract types.

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IMPLEMENTATION – process and findings

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In optimizing mineral linkages, pay attention to collateral economic and social use to promote integrated spatial resource use

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IMPLEMENTATION – process and findings

• An Action Plan is being developed by AUC, ECA and ADB to implement the AMV – requested by Heads of State

• Recommendations the international study group being included in Action Plan

• ISG Framework Report and Action Plan to be presented to African Ministers of Mining in December 2011

• The ministerial outcome will be used to report back to Heads of State

• The Plan will then be implemented under the supervision of

the AUC by various partners

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ENABLERS – success factors

• AMV was developed by African Leaders for Africa and is the reference Framework

• Collective ownership by Governments, regional institutions (AUC, RECs, AUC, AfDB), NGOs and private sector important

• Need very strong coordination capacity – Mineral Centre?• Partnerships are critical – Bilaterals have offered support• EU using AMV as a basis for EU-AUC partnership cooperation

programmes • ACP countries giving support • World Bank has offered partnership & support• Capacity building of Africans to better manage the mineral

sector in critical areas•

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THANK YOU !THANK YOU !

THE AFRICA MINING VISION THE AFRICA MINING VISION Natural Resources and Structural TransformationNatural Resources and Structural Transformation