Africa is a fertile, largely untapped continent with more third-world countries. As a result of having more third-world countries, potentials awaiting maximization, both in human and mineral resources, are readily available for both local and foreign investors who are interested. But this worthy profit-making investment opportunity is not without its risks. Reports in favor of the extensive natural and highly marketable resources in Africa can be found with little or no effort. Except deliberately sorted out, only a few of these reports extensively cover and inform the investor about risks associated with Mining in Africa and how they can be managed. As a result of this, a good number of local and foreign individuals/organizations that invest in Africa’s mineral resources often do so with a misrepresented view of the risks that operating in the mining sector presents.
Over the years, implementation of policies by African nations’ governments to increase attraction and interest in investing in Africa have helped curb some of this risk but by doing so have created a different often overlooked kind of risk. Risks associated with mining can be classified into two – below the ground and above the ground. While below-the-ground risks are common unavoidable issues faced by mining companies, above-the-ground risks can be avoided if properly managed.
Common Risks associated with mining in Africa and how they can be managed
There are quite some risks associated with Mining. These risks, often classified as either below the ground or above the ground, ranging from fluctuations in currency and commodity price, nationalization, insurance, occupational injuries, and diseases that affect miners, security, and many others. In this article, some of the common risks will be listed and recommendations on how to manage them will be provided.
- Safety and Security
- Regulations – adequate perusal of policies.
- Nationalization – insure substantial risks
- The fluctuation of currency and commodity price
- Occupational injuries and diseases that affect miners
- Design faults
Safety and Security
The worldwide demand for precious metals and copper is a way the African mining industry contributes to the worldwide economy. Mines are located in harsh environments and as a result, security and workers’ safety are huge and expensive.
The mining companies have to ensure the environment is safe for the workers to prevent casualties and avoid legal fines that can come up when necessary safety measures are not put in place. While investors may have little control over what goes on at the mines, such as theft, illegal mining, bunkering, or injuries at work, can negatively affect profit margins which will invariably affect investors at all levels.
Investing in mining operators that have full insurance packages that cover both workers and properties is one way to avoid some major losses that insurances will cover.
Political risks, fluctuating and not transparent policies are common recognizable risks in Africa. This often causes contract frustration as private operators and investors without appropriate legal skills have been on the losing end as it concerns unstable government policies. Some of these policies often referred to as ‘opaque regulations’ are usually not clear about restrictions on developments and expansion, royalties, possibilities of tax increase, and profit share (for private government partnerships).
Although African mining codes have evolved, investment companies set out to guide investors, while also providing consultancy services to the mining companies have found ways to legally foresee and prevent avoidable losses that often come as a result of unclear, inconsistent, or unpredictable regulations. One of such processes is a proper perusal of government policies before papers are signed by the mining companies and the government involved.
Governments cannot and do not run mines. Rather, governments can appoint private operators to run the mining of natural resources in their nations. It has been discovered that some African governments do not traditionally insure properties or the health of workers of nationalized industries. As a result, when losses occur in mining either avoidable or unavoidable disasters, which can typically be up to hundreds of millions, the private operators and their investors lose substantial profit that sometimes cuts into the capital which can affect the continuation of such companies. Since some of these contracts do not put the governments under obligations to subsidize losses incurred during casualties, it is possible for an operator to close down as a result of bankruptcy.
As the mining sector must function to increase foreign investments, the closing up of a private industry granted mining right does not in any way prevent the granting of rights to another industry as soon as there is an available operator.
Private operators running nationalized mines are always advised to ensure their very substantial risks which remain unchanged regardless of who owns the mine and investors are also advised to only invest in mines that have insured assets.
Currency and commodity price Fluctuation
The global market is quite volatile with some seasons shocking the economy space with formerly unpredicted fluctuation of commodity price and Africa is no exception. Swings in commodity price are often a result of a change in either demand or supply of products by the users or end consumers.
The potential fluctuations in currency values are not always detrimental to a mining business. It can either present a threat or an opportunity, depending on where it conducts its operations and how well-prepared it is to capitalize on the rise or drop in currency value.
Although positive commodity price fluctuation can be of immense benefits to investors and miners, a negative fall in commodity price if not properly managed can leave a dent in the company.
While the revenue of product export provides a potential source for investment funds, experts can be consulted in choosing the right time to make long-term profiting decisions. It also requires that companies implement a robust and comprehensive risk-management strategy to minimize their exposure to foreign currency movements which often result from political uncertainty.
These experts will thoroughly understand the company’s level of exposure in terms of currency movement and from there, an appropriate budget rate can be set and a suitable hedging plan put in place. Using a combination of forwarding contracts, spot deals, and orders according to such a strategy can provide certainty and protection, shielding their bottom line and maximizing the funds they receive.
Occupational injuries and diseases that affect miners
Due to the harsh conditions of mines, accidental injuries and sometimes death at the mines cannot be prevented. Although safety measures can be put in place such as a well-equipped first-aid spot to manage casualties, availability of the necessary clothing for everyone at the site, security cameras, and parameter fences to stay off thieves and vandals.
According to the African review, ‘when a death occurs the Department of Mineral Resources closes the mine, thereby stopping production until the tragedy is fully investigated’. This delay in production, although not one that can be insured, can be prevented with the necessary precautions put in place. Private operators who have been careful about pumping enough money into properly securing life and property often end up losing more millions than would have been unavoidably lost if the necessary contingencies were put in place.
Most miners are indigenes and because of this, African governments have enacted laws to protect employees in the mining sector. An example of such laws is South Africa’s silicosis sufferer’s rights to compensation.’ These laws allow all employees in general, to institute claims against employers and also claim benefits in respect of diseases and injuries traceable to have been getting as a result of working at the mines.
One of the most common risks associated with mining in Africa includes design faults. African nations do not produce most of the machines used in mining mineral resources. These machines are imported from other continents and are operated by indigenes, who make up for most of the workers at the mine. Flying out a faulty machine can cost a lot of money such as bringing in a manufacturer’s expert. In such cases, professionals in the host nation who may not have the exact spare parts are called to work on such machines to reduce the amount of time such machines stay dormant. This risk can and should be covered under professional indemnity (PI) policies with a business interruption extension.
The global mining sector has general risks but some risks are peculiar to the mining sector in Africa. These numerous issues do not make Africa any less of a yielding investment continent especially in mining. It only requires you as an investor to ensure to use secure investment firms that do not only know their way around the sector but also those with traceable records of minimizing casualties from unavoidable risks. Not all African insurers have been identified to possess the capacity and expertise to underwrite the very large numbers required in mining, and this has made ensuring mining operations in Africa more expensive.
While there are other measures that investors, on their own, can put in place to manage these risks, it is advisable to give such duties to experts who have been trained and have industry experience in that regard.
If you’re investing for the first time or you’re a return investor, it is advisable to maximize dividends by using trustworthy investment firms such as shiKana Group.