Resource investors should recognise Africa's challenges

The two greatest challenges facing investors in the often hard life of African resource mining remain as transport and power, delegates at the Investing in African Mining Indaba said this week.

Investors and small miners are finding themselves increasingly in an unsparing world where hard decisions are being forced on them; investors need to have a clear sense of the circumstances, conditions and challenges of mining in Africa, and to have a realistic perspective on things.

In sprawling Africa, often the best deposits are in the most inhospitable and deprived places. Unsurprisingly, African Eagle Resources (AFE) spokesman Mark Parker says the company's biggest challenges are transport and power - not uncommon to miners the world over.

Located in southern Tanzania, near Lake Victoria, the company faces an expensive and difficult 1,000 kilometre road trek to get their nickel to shipping. Railways are in need of upgrade. The barges that ply their way over the lakes are an option, though a less than preferred one.

Discussions are underway between miners and the government to improve the railways. However, since Uganda has discovered oil, further discussions are underway between the two governments with a view to creating a joint venture that will restore railways in Tanzania to allow the oil to be transported from the landlocked country to the coast. How long these discussions will take, and whether they ultimately compromise mining operations, is anyone's guess.

A positive is that the wealth of various deposits and the presence of a number of successful miners may further concentrate the minds of officials and motivate them to act sooner rather than later.

Then there is the matter of power. Tanzania has suffered an extended dry spell over the last two years which has affected the country's important hydroelectric power generation. This is a particular concern, as Africa is dependent on mining to generate revenues to fund development, but cannot always guarantee stable provision of power for miners.

Perversely, the increased rates of economic growth on the continent, driven in part by mining success, may be exacerbating the problem through increased demand, leading to increased rates to fund improvements to power and therefore increased costs for miners.

In return for investing in this uncertainty, the company, like many others, offers a bullish prognosis; African Eagle could almost be a snapshot of mining prospects in Africa.

The size of the nickel deposits it controls have the potential to deliver 1% to 2% of the world's total output by 2015, says Parker. The deposits are easily mined, he says, as most mining will take place on the surface, saving costs.

Asked to balance the upside against this uncertainty and increased transport and power costs, Parker says nickel would have to fall to historic lows for the company to not make money.

Having established the Dutwa Mine in 2008, Parker says the feasibility phase will complete by the end of 2012, beating the average of ten to 12 years comfortably. Once completed, the construction phase will begin.

Company executives are currently negotiating with banks for funding to facilitate construction, with 2014 as the target date for production. The company was unable to quantify costs for construction yet, nor give an indication of how close they are to securing funding.

The speed at which African Eagle is moving ahead, despite the challenges of operating in the Dark Continent, shows a trend towards bringing mines online and ramping up production as quickly as possible. Many small miners are selling assets or limiting exploration to raise the required capital - often to the frustration of investors.

Chalice Gold Mines for instance, has sold its Eritrean mine to concentrate on the Arabian-Nubian Shield; Afferro Mining (AFF) has divested from one of two assets.

Weatherly International (WTI) likewise intends to "create a business capable of producing 20,000 tones per annum of copper for at least the next 10 years," says chief executive Rod Webster, by focusing on its Othjihase, Tschudi and Tsumeb operations.

Baobab Resources (BAO) is targeting a production date for iron, titanium and vanadium production in Mozambique only, while Zyl managing director Ian Benning says his company is focused on further drilling in its current areas of operation in KwaZulu Natal and Mpumalanga in South Africa, to meet the growing global demand for anthracite.

This urgency could be explained by the drive to capitalise on an expected recovery of the global markets.

Even as major mining houses are jostling for new reserves around the globe and are ramping up exploration, small miners are pinched by the need to position for production in difficult circumstances and to earn revenues as economies tick up.

This is forcing them to forego exploration and further development of more risky ventures.

Are you looking for more on mineral resources in the region? Read our focus on mining in Africa.