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Monday, January 30, 2006

Sub-Saharan Africa economy: Digging deep


Mining houses are engaged in a new scramble for Africa. Buoyed by forecasts that higher metal and energy prices are set to persist, for the next five years at least, not to mention the fact that gold and platinum prices have reached 26-year highs, and copper is reaching new peaks, prospectors, developers and investors are looking at greenfield and expansion projects, as well as higher-risk locations and schemes. Last year, John Borshoff, the chief executive of Australia’s Paladin Resources, told an investment conference that the current resource boom will “redefine Africa”.

Of course, such comments have been made before, notably in the lead-up to the commodity price peaks of 1973-74 and the subsequent gold boom of 1979-82. On both those occasions, however, the commodity price boom soon faltered, and it is important to remember that the current boom is largely being driven by just two countries--the US and China. Equally, while metal prices rose 29% in 2005 to reach a new record high they are still some 27% off their 1974 peak after adjustment for inflation.

Perhaps for this reasons most African mining expansion is currently being carried out by more adventurous juniors and middleweights, with the major players tending to hang back, although this situation may not persist for very much longer. Gold is a hot favourite, given that its price has doubled to more than US$500 an ounce since 1999 and seems set to break through US$600/oz during 2006.

For example, in a joint venture with the Tanzanian government, a mid-sized South African mining house, Randgold Resources, is exploring for gold deposits in the Kiabakari Maji-Moto area, having recently opened its second mine, Loulo, in Mali, where it already operates the Morila mine. Pan-African Resources, listed on London’s Alternative Investment Market, has sold its Tanzanian mineral rights to Canadian major Barrick Gold and is prospecting in the Central African Republic, while in Eritrea Canada’s Nevsun Resources is developing a gold and copper property at Bisha. Australia’s Gallery Gold, which was taken over by Iamgold of Canada last year, has opened up the Mupane gold mine in Botswana and is also prospecting in Tanzania.

However, the biggest potential gold projects look to be in Ghana, where US gold major Newmont is developing two new properties, and has plans to invest elsewhere in West Africa. Australian junior Azumah Resources, which raised US$6m through an Initial Public Offering when it listed on the Australian Stock Exchange last month, has earmarked the cash for exploration and possible development of the Wa-Lawra gold project in Ghana, which has an estimated deposit of some 225,000 ounces of gold.

In Burkina Faso another junior, AIM Resources of Australia, is opening up the Perkoa zinc mine, which it bought from South Africa’s Metorex. According to AIM Resources’ managing director, Marc Flory, finance is the “sole remaining hurdle” to developing the mine. The company has appointed Barclays Capital as its financial adviser to raise the US$73m needed. Perkoa has an estimated mine life of 14 years and, if all goes to plan, should become fully operational during 2007.

AIM is also assessing the Mumbwa iron oxide, copper and gold property in Zambia, but this project is simply too big for a small company. Accordingly, AIM has entered into a joint-venture agreement with BHP Billiton, which is entitled to take up an 80% stake in Mumbwa should the feasibility study prove positive. In South Africa, however, AIM's Mokopane platinum project is on hold. According to Mr Flory, Mokopane is the company’s “least preferred asset” because--surprisingly at a time when optimism in the country is rising--he believes that the investment environment in South Africa is deteriorating. In sharp contrast, he sees Perkoa in Burkina Faso as a “potential company maker”.

It is not just Africa that is being re-defined by the commodity market boom: there are also implications for the very nature of investment. In a recent commentary on the copper market, Bloomsbury Minerals Economics (BME) notes that until very recently the actual copper price, at a record high of US$4,615 a tonne in mid-January, was not being driven by strong Chinese demand so much as by investment buying. BME estimates that fund investment in so-called Commodity Indices will rise from some US$80bn at the end of 2005 to around US$110bn by the end of this year and US$145bn by end-2007.

It says this is equivalent to an increase in copper demand of between 180,000 and 270,000 tones. No longer is the price of copper being driven by industrial demand and supply but by commodity fund buying. Some analysts argue that the supply situation is very tight and becoming more so, partly because of labour unrest in a number of countries, including major producers like Zambia and Chile, but also because of investment fund buying and downright speculation. One bank has even forecast a copper price of US$8,000/tonne before the year is out.

One way and another, therefore, there is a great deal riding on forecasts that metal and energy prices will remain high. Much of this optimism is pegged to the, seemingly reasonable, belief that rapid Chinese growth--which has brought with it strong demand for all commodities, but especially metals and energy--will continue for the foreseeable future. If this proves accurate the current scramble for Africa could turn into a sustained rush by mining and energy companies.

SOURCE: ViewsWire Africa
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