African Mining

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African Mining

Recent reforms and increasing stability boost investment interest in Sub-Saharan region.

A REPORT BY GBR FOR E&MJ

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AFRICAN MINING A New Age for Mining in Sub-Saharan Africa Regulatory and fiscal reforms throughout this historically turbulent region attract investor interest

The global mining industry is experienc- mining companies, on the other hand, ration and production are thriving. In ing a mineral boom with the highest com- have generally come to terms with issues Tanzania, reform by the 1997 In- modity prices seen in over a decade, due concerning the allocation of long term vestment and the 1998 Mining Acts en- in large part to the industrialization of operating licenses. couraged exploration of old gold properties both China and India. Mining in the Since 2000, the SADC region has fol- and artisanal mines in the Archean Southern African Development Com- lowed this trend, making a series of regula- Greenstone Belts. This resulted in various munity (SADC) countries is a vast indus- tory and fiscal reforms in the mineral mines going into production, including try, contributing approximately 60% to industry and generally increasing the North Mara and Tulawaka. the total foreign exchange earnings and attractiveness for mining investment across The mineral investment sentiment in 10% of total GDP, though in some mem- the region, with a focus on South Africa, the region remains high with a sustained ber states it runs as high as 50%. The Tanzania, Zambia, Botswana, Mali, Ghana level of exploration. Investors and gov- region is an important player on the inter- and the Democratic Republic of Congo ernments are being rewarded with dis- national mineral market contributing (DRC). Almost half the world’s mined gold coveries of major profitable mines across between 11% and 45% of the world sup- is from the Witwatersrand in South Africa, a range of commodities. This current ply of eight major commodities, which and the majority of known platinum group trend should continue as older deposits include chromite, cobalt, diamonds, metal resources (PGMs) are in the Bush- reach maturity and world demand for gold, manganese, copper, platinum and veld Complex (South Africa) and the Great mineral resources continues to grow. uranium, and has considerable potential Dyke of Zimbabwe. Similarly, the Copper- Historically, mineral-rich African coun- in the dimension stone sector and other belt of Zambia and the DRC form a world- tries explored and mined their resource industrial minerals. class deposit. In long-established mining on their own, but a lack of capital and the Amazingly, South Africa was rated the areas the industry has matured, but there high-risk nature of investment meant that smallest recipient of net foreign direct remains great scope for future develop- development of new assets and infra- investment last year. That is obviously of ment. In South Africa, improvement in the structure lagged. By last year, most coun- great concern for the local industry but it gold price has enabled the development of tries in the Southern African region had also implies a huge opportunity for the new mines and a successful transition from generally evolved to assume the role of rest of the region, whose diversity and surface to underground mining. In Zim- facilitator and regulator to private sector richness of minerals was perhaps over- babwe, new PGM mines are planned near mining development. They have much to looked in the past. The number of con- existing mines at Ngezi, on the Great Dyke. gain from the development of their min- flicts on the continent has decreased In Zambia, one of the world’s largest unde- ing economies through taxation and other from roughly 25 in the early 1990s to veloped copper deposits is scheduled for benefits, with the primary risk being as- about 4 today. In addition to this, the commissioning later this year. Elsewhere, sumed by private investment. Securing majority of today’s youth/voters were not in Botswana and Angola there are very black empowerment, poverty alleviation part of the liberation struggle and have active exploration projects for diamonds, through job creation and training, dealing different priorities tending toward coun- while the development of offshore, diamon- with the HIV/AIDS pandemic and envi- try development and employment oppor- diferous gravels continues in South Africa ronmental conservation are high on the tunities. To exemplify this, of the 680 and Namibia. In Malawi, sandstone-hosted region’s mining legislation agenda. million people in the Sub-Saharan re- uranium deposits are of current interest. Generally speaking, progress in the gion, 45% are below the age of 15. Ilmenite is being successfully mined in SADC region has been good. One chal- There have been substantial changes Mozambique. In Madagascar, nickel explo- lenge relates to legislation, which is not in the governance of mining at an international level over the past 20 years with the most significant changes being Southern African Development Community implemented over the last 10 years. The Southern African Development Community (SADC) traces its roots to the early Programs such as the Extractive In- 1980s. The initial aim of the community was to coordinate development projects dustries Transparency Initiative (EITI) in order to lessen economic dependence on the then apartheid South Africa. support improved governance in re- With the ending of apartheid and the welcoming of South Africa into the com- source-rich countries through the verifi- munity, the organization counts Angola, Botswana, DRC, Lesotho, Madagascar, cation and full publication of company Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, United Re- payments and government revenues from public of Tanzania, Zambia and Zimbabwe as members. oil, gas, and mining. EITI works to build It has a vision of economic and social integration through free movement of multi-stakeholder partnerships in devel- trade, capital, and labor; policy harmonization and project coordination; and oping countries in order to increase the eventual creation of a common market and a unified Southern Africa. Key details accountability of governments. Private of implementation protocols have yet to be negotiated.

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always developed with a long-term perspective, thereby creating onerous obligations on mining companies in down- TABLE OF CONTENTS cycles. Tension relating to this can be seen in Zambia, where mining companies have South Africa: Balancing Riches...... 52 been under pressure by the government, in light of quadrupling copper prices, to Democratic Republic of Congo: Entering a New Era of increase the share of proceeds going to the Peace and Prosperity? ...... 56 central treasury. It is important that governments develop policies that ensure Zambia: Regaining Former Copper Glory ...... 60 them sufficient benefit in the good times, while maintaining a realistic view to the cyclical nature of mineral prices. Tanzania: The Sleeping Giant No Longer...... 64 Mark Bristow, CEO of Randgold Re- sources, believes the gold industry in Af- Botswana: The World’s Largest Diamond Producer by Value...... 66 rica is not taking a long-term approach to profits and hence is in an unsustainable Show Me the Money: Consultants, Contractors and Suppliers...... 68 situation. Bristow outlined his view on the industry at this year’s mining INDABA in Cape Town: “Because we’re in a bull market which rewards production rather than This report was researched and compiled by Global Business Reports (www.gbreports.com) for profits, nobody is focusing too much on Engineering & Mining Journal, and is responsible for its content. Editorial was researched and writ- this financial underperformance, but ulti- ten by Anna Stark ([email protected]), J.M. Peralta ([email protected]) and project coordination mately it’s not a sustainable situation. Stakeholders expect rewards and their by Leanne Arendse ([email protected]). patience is not infinite. When host governments, for example, see that mines are not producing the promised profits, and therefore not paying the anticipated taxes, it prompts them to tax through royalties.” A staunch supporter of social development plans with a long-term perspective he concludes, “Africa is changing and if you can be flexible enough to change with it, it has huge opportunity. Africa is vastly unexplored and needs mining revenue and infrastructure more than any other continent.” Randgold Resources is focused on the African continent mostly in the West where it has two mines, a feasibility stage project and exploration projects in Mali, Senegal, Burkina Faso, Côte d’Ivoire and Ghana, as well as Tanzania in the SADC region. There have been discussions and efforts put toward creating a vision of a single economic entity within the region through more profound legislative integration to facilitate cross border investment, but this has yet to materialize into anything significant. Because of the inherent com- plexity of the regulatory regimes, prudent investors may find it beneficial to inde- pendently review the mining and tax laws and other regulatory policies of the specific country in which they are interested. This report will focus on South Africa, Tanzania, Zambia, Botswana and the DRC.

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AFRICAN MINING South Africa: Balancing Riches

While South Africa boasts infrastructure comparable to most developed countries, its cost structure is dis- tinctly third world. At around 1.70 US cents per kilowatt-hour, it has one of the cheapest electricity costs in the world, even though its generating capacity is stretched. Labor rates are competitive although rising due to the lack of new young talent and the “brain drain” characterized by the emigration of highly skilled people to Europe, North America and Australasia. Despite the global commodities boom, the South African mining sector is only just starting to benefit with investment up 7.2% in 2006. In that same year, the mining and quarrying sector contri- buted US$17.8 billion (or 7% to Gross Value Added) to the economy, a nomi- nal increase of 12.6% over the previous year. Total primary mineral sales earnings climbed an impressive 28% year-on- year to $28.8 billion which represented 30% of merchandise exports for 2006. The contribution of gold to total annual primary mineral export sales value decreased to 18.6% in 2005, from 23.7% the previous year. Gold has long been South Africa’s top mineral earner, but slipped into second place behind PGM in 2004. PGM consolidated its position as the main contributor to South African primary mineral sales revenue in 2006, accounting for 33.6% of total mineral sales, followed by coal with 19.5%, closely followed by gold in third place at 19.2%. During 2006, the mining industry employed 447,500 workers which accounts for about 3% of South Africa’s economically active population. Wesizwe Platinum, a junior broad-based empowerment company has seen its share price steadily increase since its listing on the Johannesburg Stock Exchange in December 2005. (Photo courtesy of Wesizwe/Photographer: Melanie Low) Empowerment Legislation Prior to 1994, when the country was South Africa contains some of the produce gold, 26 produce platinum- ruled by the white minority, discriminato- world’s richest and most diverse mineral group minerals (PGMs), 64 produce coal ry policies excluded a large section of the deposits. The country is the world’s lar- and 202 produce diamonds, all as pri- population from full participation in the gest producer of platinum, gold and mary commodities. The discovery of dia- minerals industry. To rectify the resulting chromium, and also holds significant de- monds in 1867 and gold in 1886 formed imbalances, Black Economic Empower- posits in antimony, coal, iron ore, man- the historic backbone of the country’s ment (BEE) was introduced as a unique ganese, nickel, phosphates, tin, urani- initial industrial development. Over the program encompassing both public and um, gem diamonds, copper and vanadi- past two decades, the non-gold mining private sectors. Although still being inte- um. In 2006, roughly 55 different min- sector led by PGM, coal and ferrous met- grated into economic legislation, its un- erals were produced from more than als sectors has been the mining indus- derstanding is fundamental to doing 1,000 mines and quarries—of which 45 try’s growth locomotive. business in South Africa today.

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Initiatives such as BEE are part of the country’s efforts to reverse the As one of the country’s more visible and wealthier effects of the apartheid era, however, it is critical that a balance be maintained, industries, the mining sector was one of the first under ensuring value continues to be added to pressure to comply but was also one of the first to the economy and that incentives for embrace the BEE initiative with a negotiated charter both foreign and domestic investors are maintained. When BEE was first imple- being agreed upon and signed in 2002. mented in 1993, the “across the board” results were mediocre focusing solely on the market to new players. Applications has not been an issue. As a result, sev- the transfer of enterprise ownership to a for conversions are steadily flowing in, eral black-owned firms and investment partner of the ‘previously disadvantaged although there are complaints of unduly houses such as Mvelaphanda Resources group.’ The result was that a small long delays caused by government and African Rainbow Minerals (ARM) group of ambitious individuals from the bureaucracy. are now beginning to play an important previously disadvantaged group accu- The equity component of BEE even- role in the mining industry both on the mulated a vast amount of wealth but tually dictates that at least 26% of any investment side and in operations. ARM failed to benefit the majority of the in- entity is to be held by previously disad- traces its origins to the Anglo Group in tended benefactors. vantaged persons by 2009. Correspond- 1933, and is a perfect example of how In response to this obvious short ingly, the sector has seen a flurry of adapting to the new legislation and sup- coming, the focus of BEE shifted from joint ventures between locally estab- porting transformation can be success- being exclusively ownership oriented to lished companies on one side and for- fully implemented into the business addressing other elements such as em- eign operators as well as historically model. ARM went through a significant ployment equity, skills development, established (majority white owned) com- restructuring program in 2004 to turn preferential procurement, enterprise panies on the other. As junior compa- the company around and is today recog- development and corporate social in- nies tend to be start-ups and have flexi- nized internationally as being a suc- vestment amongst others. The refocused ble organizational structures, the imple- cessful black owned company. Their strategy of the BEE initiative is referred mentation of BBBEE, for the most part, exploration portfolio includes copper to as the Broad Based approach to BEE. Each of the areas, or pillars, mentioned above has a set quota objective that contributes to awarded points on a scorecard under the Department of Trade and Industry’s BEE Codes. Al- though to different degrees, depending on size, structure and sector, every company operating in South Africa is obliged to work under BEE legislation. The development of industry-specific BEE charters is an on-going process. However, charters have already been developed for several key sectors, including mining, the petroleum and mar- itime sectors, tourism and financial services. As one of the country’s more visible and wealthier industries, the mining sector was one of the first under pressure to comply but was also one of the first to embrace the BEE initiative with a negotiated charter being agreed upon and signed in 2002. The Charter, and hence BEE, is also one aspect that the government considers when awarding new mining rights and in the conversion of old mining rights. The conversion process is set for completion in 2009. As a result of the legislation, ownership of mining and exploration rights, traditionally held by the largest companies, has opened up

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changes these required are not the only culprits for the poor performance. Based on work done by a tripartite “High Level Task Team on Investment” established in mid-November 2006, and comprising of the government, the Chamber of Mines and organized labor, it was recognized that capacity constraints in infrastructure and the volatility of the local currency (the Rand) were also significant constraints to investment and growth in the sector. According to Roger Baxter, chief economist at the Chamber of Mines, all three factors had served to constrain investment. In 2004, for example, coal exports from South Africa declined by 5%, a direct consequence of rail infrastructure limitations. Mining companies subsequently negotiated agreements with the country’s rail oper- South Africa is trying to off set the high cost of deep gold mining with legendary global gold prices. (Photo cour- ator, Spoornet, to invest in upgrades tesy of Africon Consulting) worth approximately US$1.4 billion to expand coal export lines. projects in Zambia, a copper-cobalt pro- BEE is not something that might On the currency front, the rand ject in DRC and a gold project in Na- happen; it is something that is happen- exchange rate against the U.S. dollar mibia. Aside from running mines, ARM’s ing. It is recognized as a business im- appreciated by roughly 48% in 2002 growth strategy is through joint ventures perative to operating in South Africa. which undid a huge amount of gains in as a preferred BEE partner. There are many good opportunities to dollar denominated commodity prices. Simmer & Jack, a gold and uranium create partnerships with local South However, this situation has subsided producer, is another example of a com- African BEE companies. The sector has somewhat as the rand has weakened pany that has successfully integrated had sufficient time to produce some slightly since early 2005 while commodi- BEE. At the start of 2005, Simmers legitimate and highly competent Black- ty prices have continued to boom, includ- made its first appearance as a re-consti- owned players who are transforming the ing record prices for gold and PGM. tuted viable business following the mining business environment at an Consequently, the last 18 months has introduction of a new management team impressive rate. seen a significant improvement in prices and new shareholders. Since then it has and investment is starting to respond. To been among the top performing resource Missed Opportunities in the draw a comparison, over the last two Commodities Boom years, the level of the Australian dollar While the global commodities boom has versus the U.S. dollar match those of the BEE is not something that been on an impressive upwards march South African Rand against the U.S. dol- might happen; it is some- for the past five years, South Africa has lar with a correlation of over 90%. Yet in clearly missed out on some of the bene- 2005, Australian fixed investment in min- thing that is happening. It fits of the surge as year-on-year investing in real terms was up 35%, South is recognized as a business ments in the mining industry fell by Africa’s was down by 13%. Global explo- 20% in 2004, and 13% in 2005, before ration expenditure increased 225% from imperative to operating in a welcome recovery of 7.2% growth in 2003 to 2006, whereas South Africa South Africa. 2006. Unclear and demanding legisla- achieved only 138% growth. Encour- tion may have acted as a deterrent to for- agingly the 45% growth in global explo- stocks on the Johannesburg Stock Ex- eign direct investment, losing out to ration expenditures in 2006 was matched change (JSE) for two years running, with other Southern African countries per- by South Africa’s exploration numbers. the share price increasing almost five- ceived as being easier environments to However, there are issues of legisla- fold in 2006 alone. Simmers produc- operate in, such as Tanzania, Ghana or tion and regulation that are seen as hav- tion’s has increased by 415% year-on- Botswana. Last year the World Bank ing the greatest negative impact on year for the past two years and has reported South Africa to be the country investment. One of the issues is environ- entrenched its position as a uranium with the lowest net foreign direct invest- mental legislation where triplication of player through its subsidiary, Uranium ment in the Sub-Saharan region (nega- requirements and bureaucratic capacity One (67.2%). BEE investments current- tive $1 billion). constraints delayed the issuing of new ly account for a direct equity-ownership However, the introduction of new mining rights and the conversion of exist- stake of 32% of the company. laws in 2004 and the significant ing licenses. It is reported that processes

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such as water license applications can take up to two years which in turn post- What is interesting is the fact that the rest of Africa’s pone environmental management pro- growth in direct mining exploration improved by gram reports that are a fundamental part of issuing a mining license. US$300 million over the last three years. The equiva- Today, the vast majority of global lent in South Africa was just $18 million, miniscule exploration, especially green-field projects, are being undertaken by junior given the country’s leading status on the continent. companies from Canada and Australia. Almost 60% of venture capital funding sensus is let the resources be found then mine site, and that is often not the case.” comes from the same two countries. let BEE kick in.” Despite this complaint, most players in What is interesting is the fact that the South African diamond exploration the sector agree that the government is rest of Africa’s growth in direct mining company Diamondcore Resources has accessible and tries to accommodate for exploration improved by US$300 million experienced both the benefits and draw- the private sector’s needs. over the last three years. The equivalent backs of the BBBEE process. CEO Theo Taking the statistics into considera- in South Africa was just $18 million, Botoulas states, “We have been at the tion, developing legislation beyond the miniscule given the country’s leading sta- forefront of implementation and as such teething stages quickly and efficiently is tus on the continent. At the end of the I think we are one of the few exploration key to regaining investor interest in the day, legislation in other African countries companies to implement BBBEE on the South African exploration sector. Baxter can tend to be less onerous with more ground. As a result of our efforts we were notes the encouraging turnaround in the efficient licensing procedures. granted the very first prospecting right in sector: “High level engagement is taking Baxter summarizes: “The South Af- the Northern Cape through the new Act. place between the industry and the gov- rican mining industry has agreed to the Assessing the current situation, I think ernment as well as with the parastatals transformation targets as part of re- that when considering a prospecting providing key services. In true South dressing issues that are historically inher- right, the act should give more recogni- African fashion we have engaged in tri- ited. Exploration is so high risk that tion to the fact that exploration is partite dialogue, identified the chal- BBBEE should be encouraged, but not extremely risky. Prospecting rights are lenges and are looking at solutions to made a requirement. The general con- treated as if they would be a successful deal with the constraints.”

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With investor attention on other Southern African countries, South Africa has a small window of opportunity to revise and adjust its policies to encourage these investors back. On assessing the success of BBBEE one can look at the flurry of joint ventures between locally established companies and foreign ones on the one hand, and on the other the loss of exploration investment to African neighbors at a time when the industry globally is experiencing a boom. Post-apartheid, the country finds itself trying to balance future social and economic stability with investor friendly legislation. Flow-Through Shares Could Help Investment Flow In A further challenge to investment in exploration in South Africa has been the paucity of venture capital that can be raised locally. Start-ups and smaller BEE companies have difficulty raising funds as local investors and financial institutions tend to be risk averse, regardless of boasting the most developed financial sector on the continent with the JSE ranking in the top 20 globally. Both the private sector and the government are looking at introducing “flow-through shares” tax incentives to regain investor interest in exploration. The incentive gives a tax deduc- tion to investors in exploration companies that incur expenses before they begin to generate income. A similar model was introduced in Canada in October 2000 as a temporary measure to help moderate the effect of a global downturn in mineral exploration in the 1990s. The original three-year program has been extended three times since its inception and is currently due to expire in March 2008. As a result of the Canadian measures, exploration expenditures have risen from approximately $300 million in the late 1990s to more than $800 million in 2004, becoming the number one destination for exploration investment. Australia is also reviewing the system of flow-through shares for its mining industry. In addition, there is a comprehensive review of corporate law taking place under the Department of Trade and Industry and this is expected to reduce the risks to venture capital funding. Investor Comfort Considering the pioneering nature of South Africa’s legislation and the fact that it has been a work in progress for only 13 years, it is understandable that there are implementation issues that need to be addressed. In doing so, it is important that the government balance short-term needs with longer-term strategies. South Africa is ideal as an investment destination for both greenfield and brownfield projects as well as being an entry point to the rest of the continent. With a vibrant business environment, a developed transportation and communication infrastructure, a sound judicial system, sound financial markets and a stable political/economic environment, the pro’s tend to outweigh the con’s. Investment into South Africa should be for the long-term, demonstrating support and tolerance for the fact that the business environment is in a transition period. The tripartite system increasingly recognize that a competitive, stable and predictable mining environment is vital to attracting investment into a long term industry like mining. With the significant policy reform process already reasonably advanced and with the unique South African tripartite manner of dealing with challenges, the prognosis for the country to grow investment in mining is increasingly looking promising.

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AFRICAN MINING Democratic Republic of Congo: Entering a New Era of Peace and Prosperity?

The DRC has lived through perpetual December 2005 and elections for the severely mismanaged in the past with political, social and diplomatic insta- presidency, national assembly, and minuscule reinvestment into basic infra- bility since it gained independence provincial legislatures last year. Joseph structure and social programmes. Will from Belgium in 1960. Colonel Mobutu Kabila was sworn in as the first demo- the establishment of democracy bring a installed himself as President through cratically elected president since new era of peace and prosperity? a coup in 1965 and managed to stay in Congolese independence. power through 32 years of civil war, With a reasonably clear popular man- Rehabilitation: Two often employing brutal force against date—58% in the run-off round—and a Decades of Neglect his country’s own civilians. Mobutu was strong majority in parliament, Kabila The largest hiccup for ground opera- finally overthrown by a rebellion led by controls roughly three fifths of both tions seems to be both the geriatric Laurent Kabila (father of the current houses and is empowered to consolidate transportation systems and limits to president) in 1997 only for Kabila to peace and stability in the country. He is power generation and distribution. be assassinated in 2001. Troops from also seen as a supporter of international Although the DRC generates a substan- Angola, Chad, Namibia, Sudan, and mining companies and has provided on tial amount of electricity, it is estimat- Zimbabwe have intervened to support the ground security to protect opera- ed that the local power grid reaches the recent Kinshasa regime. The DRC tions and attract much needed invest- only 5%-10% of the population. Rural has experienced one of the world’s ment. An abundance of natural re- roads are not in good condition, deadliest conflicts since World War II, sources including cobalt, copper, niobi- although the main road between with more than 3 million dead during um, tantalum, petroleum, industrial and Kolwezi and Lubumbashi is being their civil war between 1998-2003. A gem diamonds, gold, silver, zinc, man- rebuilt. In general, roads around the transitional government held a suc- ganese, tin, uranium, coal, hydro gener- copper-cobalt mines are being upgrad- cessful constitutional referendum in ated power and timber have been ed from dirt to tarmac. With the boom

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in mining, the level of exports (final many on the continent, corruption is in the DRC. In the case of Katanga products) and imports (mining equip- also a big issue and salaries are taxed Mining, their rehabilitation of a mine ment) are going to increase. This is at a spectacular rate of 55%. Today, the complex at Kolwezi, located on the expected to place pressure on customs DRC resembles Ghana in the 1980s Congolese copperbelt, started open-pit services which will require restructuring and Tanzania in the 1990s, when both operations in April of this year with pro- to deal with the growth. Nevertheless, nations were in the early stages of min- duction scheduled for September. DRC should not be considered as a lost ing development. The case of the DRC CEO Art Ditto began negotiations to cause seeing as the country has the is more complex, however, as investor create the Kamoto joint venture in early potential to attract world-class invest- confidence is extremely low, resulting 2003, predicting a political enviroment ments and vast mineral wealth with from a legacy of mismanagement and sufficiently stable to facilitate mining. which to drive progress. corruption. As it is, his investment strategy has As always, it comes down to the In 2005-06, renewed activity in the proved right. “This is one of the rare management of the country and its abil- mining sector, the source of most places in the world where the underly- ity to counter the “resource curse” ex- exports, boosted the country’s fiscal ing size and grade of the ore will sup- perienced in most resource rich areas, position and GDP growth by 7.5% in port a business much bigger than is certainly in the African context. The new 2006. Most investors, however, are sit- being contemplated now. It is unparal- government will need to reassure the ting on the sidelines waiting for more leled and unique.” The reserves and Congolese people that mining deals are stable conditions. Others, in particular resources stand at 200 million metric delivering them tangible benefits, or exploration companies, already see the tons (mt) of ore at an average copper risk inflaming political tensions. Assis- vast opportunity and mining investment grade of 3.50%. When up and running, ted by the World Bank, the drafting of has begun to pour into the country in the mine will produce 150,000 mt of the current Mining Code is now very anticipation of a stabilised political sit- refined copper and 5,000 mt of refined comprehensive but, on the other hand, uation. A range of companies including cobalt a year. “We are currently on legislation covering civil and legal dis- Adastra Minerals, Africo Resources, phase one of four which entails refur- putes is in its infancy and will need to African Diamonds, BHP Billiton, Phelps bishing a section of the concentrator be developed quickly. Obtaining politi- Dodge, Anglo Gold, Banro Corp. and and the metallurgical facilities as well cal stability in the North will be key to Katanga Mining are currently operating as beginning production both on sur- taming negative perceptions of the country’s security. High Risk = High Return? Foreign perceptions of Africa as a cor- rupt, politically unstable, disease rid- den and famished continent at war, with little to no infrastructure is skewed when looking at countries such as South Africa, Botswana or Zambia, but true if we are talking about the DRC. This vast country represents one of the highest economic, political and security risks on the continent. Regardless of this, as established mines around the world come to the end of their lives, mining companies are looking to the DRC as one of the few places where big new deposits can still be found under its relatively unexplored terrain. It is an ideal country for junior exploration companies and investors with a taste for high-risk/high return projects. Se- veral large companies are considering investing billions of dollars, encouraged by the introduction of the World Bank- drafted mining code in 2003. Along- side infrastructure deficiencies, lan- guage is considered to be one of the biggest hurdles to doing business in DRC, especially because government documents are required in French. Like

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face and underground at a rate that sight into operating conditions in the with De Beers in 21 licenses covering would match the amount of capacity we country, “Africo is committed to build- more than 800,000 hectares of prime put back into the concentrator.” Ditto ing the mine without resorting to cor- prospective diamondiferous ground. expects to finish phase one by the end ruption, which does make some things Initial exploration has discovered sever- of the year and be ready to scale up in more difficult. The government is now al new kimberlite clusters in an area 2008. Total operational cost per pound taking a closer look at the issue ac- where alluvial diamonds are already in of copper over the life of the project is knowledging that foreign investors re- evidence. Analysis indicates the pres- predicted to be US$0.22, making it quire greater protection. The most chal- ence of microdiamonds in several of the among the lowest in the world. Fur- lenging part of doing business in the newly discovered kimberlites. This new thermore, because exploration has not DRC is understanding the legal system joint venture combines the technical been carried out since the early 1980s, and doing business without corruption. expertise of African Diamonds, the there is significant potential for new The DRC, in my opinion, is one of the financial leverage of De Beers and the discoveries. last frontiers on the planet for mineral political network of Bugeco. The Katanga province generates an exploration. You can possibly include Mentioned above is only a selection estimated 70% of the DRC’s economy Angola in this category also.” The com- of interesting projects underway, with a and contains most of the country’s pro- pany has an aggressive plan in place to host of licenses currently being applied ven base metals wealth. There is a per- convert existing resources into reserves, for. These companies can be seen as ception that the entire country is dan- bringing the mine into production in the more risk seeking and maverick in gerous, but Katanga can be considered 2008. The mine will create an estimat- nature, looking for large returns to a safe haven where security, in general, ed 500-550 jobs, 25 of which will be compensate for difficult working condi- is not a major issue. Africo Resources, a occupied by expatriates. tions. Assuming the country can come Canadian mineral exploration and devel- African Diamonds, the AIM and to grips with both its infrastructural opment company, traded on the Toronto Botswana listed diamond explorer, has and political challenges, the influx of Stock Exchange, is advancing the devel- recently acquired a 35.42% share in new companies and investors will no opment of its high-grade Kalukundi co- Belgian consulting company Bugeco, doubt be great. In the mean time risk balt-copper deposit in the Kantanga pro- for just over $1.6 million in cash. The savvy investors should shift their focus vince. Grant Pierce, CEO, gives an in- key asset of Bugeco is a joint venture to the DRC.

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AFRICAN MINING Zambia: Regaining Former Copper Glory

Zambia is a peaceful country and among the most stable economies in the region. It has been a major base metal mining country for more than 80 years. Previously a British colony, the country gained independence and its current name in 1964. As a country, it forms a natural hub for the sub-continent’s diverse activities, sharing common borders with eight different neighbors. The history of the Zambian mineral sector is speckled with stories of success and failure; the high point being Zambia’s position as the world’s second largest copper producer. Three governments have been in place since independence. The first government, led by socialist President Kenneth Kaunda, stayed in power for 27 years investing heavily in social and health programs, established off the back of copper reserves. However, inability to diversify its economy meant that the local economy declined 30% between 1975 and 1990 when world wide copper prices slumped. Corre- spondingly, investment in the mining sector dropped dramatically and infrastructure began to deteriorate with large mining houses such as Anglo American retracting their operations from the country. Kaunda voluntarily stepped down following civil unrest and allega- tions of mismanagement. The ban on political parties was lifted, a new constitution drafted and elections were held. The elections brought Frederick Chiluba to power with mixed results and he narrowly survived a coup d’etat. The The Cable Belt Conveyor is the longest single drive conveyor in Africa. It has the unique feature of negotiating two third and current government led by horizontal curves. (Photo courtesy of Luanshya) President Levy Mwanawasa, in power since 2002, and democratically re- ness operations. Through its efforts, the Exploration and Mine elected in 2006, has assumed the role last five years have seen a flurry of rein- Development of rehabilitating the mining sector. vestment due to the country’s low Zambia’s copper/cobalt belt, stretching Mwanawasa has been quick to act in investment risk status and naturally, across the north of the country, is one of attracting mining investment through the effects of the ‘super commodity the greatest reserves in the world. There the privatization of government owned cycle.’ The last 18 months in particular are also reserves of nickel, platinum, ura- copper mines and a fair and compre- have been revolutionary in terms of nium, diamonds, gold and iron ore. The hensible Mining Act and Mineral Char- increasing investment, exploration con- country is also well known for its gem- ter. The government is described as cessions and improving infrastructure stones, especially emeralds and ame- open, clear and has direct communica- development. Today, roughly 80% of thyst. The Mining Code was revised in tions with the mining companies an- Zambian land is under some kind of 1995 with the privatization of the mining swering to the general needs of busi- mining concession. sector at the top of the agenda and

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was based on that of New South Wales, companies to gain a foothold in the region capacity of 1.5 million metric tons (mt) a Australia. It is regarded in most part as without the need for setting up a local year, evenly split between copper, alu- manageable and fair with discretionary office. This is key, considering Zambia minium and zinc. The company has power lying with the Ministry of Mines. borders no less than eight mineral rich ambitious plans to double current capac- There was a technological hiccup in the countries with varying degrees of stability ity. Elsewhere in Zambia, KCM is expand- past with duplicate mining licenses given and general development. ing operations through their Konkola to different parties due to the lack of In Zambia alone there are projects in Deep Mine expansion that will take their computerization of the process, a project all stages of development from grass existing open-pit operation currently at now assisted by the EU. roots to brownfields and rehabilitation. 600 m and 950 m to 1,400 m under- Environmental legislation will be de- With today’s rate of investment and ground. A new acid plant and the expan- veloped from its current underdeveloped development, it is estimated it will take sion of an existing smelter are also state, especially with social pressure five to eight years to return the sector to planned. Also worthy of mention is the mounting after several contamination its former glory assuming the government fact that they operate the largest mine incidents. Prospecting licenses are maintains the current incentives. Some shaft in the world. It is said to be one of awarded for two years with a chance to of the larger companies currently gearing the wettest mines with an astonishing renew through negotiations. Zambia has up production include Konkola Copper 290,000 m³ of water extracted each day. always been regarded as an oasis of Mines (KCM), First Quantum Minerals This figure will increase to a predicted peace and stability in the region, consid- and Equinox Minerals together investing 430,000 m³ for the next seven to eight ering its neighbors’ historical and current more than US$2 million. The importance years as the mine is deepened before set- problems. The infrastructure is relatively of KCM to the Zambian economy is tling on 350,000 m³ for the rest of the advanced with well built main road arter- undisputed. The company is the largest mine’s life. ies and rail connectivity to ports in Dar es business in Zambia accounting for one- First Quantum Minerals is develop- Saalem (Tanzania) and Durban (South sixth of the country’s GDP and contributing Kansanshi, one of the oldest known Africa). Transport is, however, in need of ing one third of the country’s exports. mines in Zambia, with evidence of dir- upgrading which is currently budgeted Originally an Anglo American company, it ect copper smelting dating back to the for and under construction. Electricity is has since changed ownership and under- 4th Century. Since the rediscovery of generated locally through hydroelectric gone restructuring on several occasions. these ancient workings in 1899, the power. On the downside, there have been It is now held in majority by Indian group Kansanshi deposit has been intermit- hints of the government wanting to Vadanta. The group boasts production tently mined for the recovery of high- increase royalties and/or tax to better benefit from the four-fold increase in world copper prices, indicative of a short- term mentality that might rock the investment boat. A major hindrance to growth in the sector is the lack of geologists in the country and region. There is a common consensus that between 50 and 70 geologists are needed on the ground right now to develop current projects under consid- eration. This is a big issue considering the technical university of Zambia only produced two geologists this year and seven last year. Both the government and the private sector are doing what they can to attract talent from other countries and to encourage locals to return who momen- tarily left the industry with the downfall of the mining sector. The lack of skills is both a hindrance and an opportunity to local consultants such as GeoQuest. This risk savvy consulting company, who can be considered veterans in both Zambia and the DRC, provide geological services from grassroots exploration right through to the feasibility stage. Located in Lu- saka, Zambia’s capital city, the company has an operating network geared toward providing a vehicle for foreign mining Smelter working through the night at Chambishi. (Photo courtesy of Chambishi Metals)

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grade copper from both underground social impacts by investing heavily in and open-pits. The total production areas of the local economy such as sec- from the Kansanshi deposit to date is ondary industries, food production and approximately 80,000 mt. The Mopani craft training. LCM is continuing with the Copper Mines (MCM), a joint venture upgrading of the Baluba Shaft Complex, with Glencore, will also see a cash injec- but is focused on expansion through the tion of just over half a billion dollars to Muliashi project, currently undergoing triple its production. feasibility study. The mine will produce Equinox Minerals’ Lumwana project ore that will be concentrated at their involves one of the world's largest unde- Luanshya facility and then transported to veloped copper deposits with measured Chambishi for final “A” grade refine- and indicated Reserves presently total- ment. A new Muliashi plant will be con- ling 321 million mt averaging 0.73% structed in the future to centralize all copper with additional Inferred Re- concentrating. The investment will dras- sources totalling 417 million mt aver- tically increase the scale of operations aging 0.6%. and reduce costs through an integrated The processing of Lumwana concen- scalable operation. The company will be trates into copper metal will be con- looking to re-list on the London Stock ducted mostly at smelters in Zambia. Exchange to fund this expansion. Negotiations are underway with a num- The largest land concession owner in ber of regional smelters, letters of intent the country, Zambezi Resources, have having been signed with Palabora identified several resources and will be Mining Company of South Africa, Ongo- developing these through various joint polo Mining & Processing Ltd. of ventures including one with Glencore. Namibia and Mopani Copper Mines Plc. To further develop other properties, the of Zambia. company is actively looking to create The copper, lead and zinc ores are more joint ventures. Given many years not only extracted in the country but of experience in Zambia, 20 in-house also smelted and refined into metals geologists currently under contract, ex- prior to export. In addition, the precious perienced staff and machinery (seven metals plant in Ndola, recovers bullion drill rigs) on the ground, Zambezi Re- and other metals from the slurries. sources is geared to manage significant Cobalt is recovered through a leaching operational expansions. process. Copper metal fabrication into Zambia is one of, if not the most, cables, though small, is an increasingly desirable country to work in terms of busi- important industry. Foundries produce ness environment, infrastructure and gen- mill balls from scrap iron while calcina- eral standard of living. However, the min- tions of lime and cement production ing legislation will have to be further de- constitute important industrial mineral veloped to manage growth in the sector, related activities. Glencore, who already with a view to the longer-term consistent own two acid plants are keen on build- with commodity cycles. Taking everything ing a third, have a concentrator without into account, the private sector is reason- actually knowing the total resource ably confident that prevailing develop- specifics in the country; a definite sign ment agreements will not be unilaterally of good things to come. changed, and feel that they enjoy ample Luanshya Copper Mines (LCM) has representation. The development of new other issues as it historically hired thou- legislation should be a collaborative sands and supported the surrounding process between the public and private town’s economy. Development of mining sector. If the past 18 months are an indi- technologies and mechanization in the cator of what is to come, Zambia is set to sector has reduced the labor intensive regain its former copper glory. operations and hence substantially reduced the workforce. As has been the Chinese in Africa for case in most of Southern Africa for the African Resources in China past decade or so, both the government China accounted for 22% of world cop- and the private sector are in the spotlight per demand last year, compared with and held accountable for direct return on 13% for the United States. A decade local resources. One of LCM’s main con- ago, the tables were turned with the U.S. cerns is finding ways to counter the accounting for 21% and China account-

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ing for only 10%. This consumption trend looks set to continue in the near future, promising copper revenue for Zambia and its key copper producers. China’s increased economic activities in Africa, including investments in energy and natural resources extraction, as well as loans to African governments have provoked accusations that it is becoming a new neo-colonial power in the continent. Last July, Zambian workers rioted in a wage dispute combined with allega- tions of dangerous working conditions. Confronting Chinese managers, the riot ended in the death of six workers. In his eight-nation tour of Africa in February, Chinese President Hu Jintao cancelled a visit to Zambia’s copperbelt province due to the threat of pro- tests. A hostile reception should not have been anticipated, in light of the fact that Beijing financed and built the 2,000-km Tanzania-Zambia Railway between 1970- 76 at an estimated cost of $400 million, linking the Copperbelt with the Indian Ocean ports at Dar es Salaam (Tanzania) and Mombasa (Kenya). The link is crucial to the export of Zambia’s prime foreign exchange earner, copper. Railways aside, the Sino-Zambian rela- tionship dates back to the 1960s and now seems to be revitalized with the Chinese pledging roughly $800 million to the country. On the face of it, this must be a good thing although everybody is waiting to see what terms and conditions are attached. Nobody really knows what the Zambian government will be obliged to give in return. What has to be very carefully moni- tored by government and local companies is the influx of Chinese labor. Considering the country is running an unemployment rate of roughly 50%, it is imperative that locals do not feel the Chinese are taking Zambian jobs. Furthermore, it is widely known that infrastructural development led by Chinese companies, mainly roads, have been constructed often under questionable ethical conditions. The general consensus is that lan- guage barriers and low engineering and technological skills currently hold the Chinese back. In Zambia, the Chinese influence is something that will continue to grow—how it is managed has yet to be seen. As is the case with most debates concerning China, it is at once the biggest opportunity and the biggest threat to business.

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AFRICAN MINING Tanzania: No Longer a Sleeping Giant

1,300 km2 of gold licenses, points out the generally progressive nature of the legislation. “The new mining act was developed in consultation with international mining companies and government bodies. It is very competitive and similar to some North American acts. It is clear cut from the perspective of a person applying for mineral rights and the steps required to retain those rights. On the government side, perhaps it is not so clear. The grant- ing of exploration licenses, for example, can take longer than is stipulated in the act.” John Deane, president of Tanzanian Royalty Exploration Corp., another Cana- dian junior exploration company whose business model is revenue from royalties Since the liberalization of Tanzania’s economy in 1986, and with today’s stability, exploration companies are increasingly interested in discovering what’s underground. (Photo courtesy of Lakota Resources) believes, however, that it is still a lot easier to obtain prospecting permits in Tan- Touted as one of the most amenable cy; a non-discriminatory licensing proce- zania than a lot of other African countries. investment environments for mining on dure and environmental management He claims that companies in Tanzania can the African continent, the “sleeping legislation. usually acquire prospecting licenses with- giant” has recently benefited hugely from Stanley Robinson, president of Lakota in two to three months, in comparison the boom in commodity prices, and con- Resources, a Canadian junior exploration with South Africa which can take six sequent gold exploration discoveries on company holding an interest in more than months or longer. Tanzanian soil. Thus, despite its status as a predominantly agricultural nation, the performance of the Tanzanian mineral sector has continued to improve, with exports totaling just under $700 million in 2005 (3.5% of GDP). The government aims, as enshrined in the 1997 mineral sector policy, for a contribution of 10% by 2025. A socialist nation from 1967 through untill 1995, mining in Tanzania remained largely underdeveloped until 1997, when President Mcapa introduced a new initiative to encourage mining. Consequently, the Tanzanian mining industry is relatively young in terms of investment, causing investors to remark on the immaturity of the industry in terms of understanding and support. The upside of this, however, is that there remains huge untapped resource potential. Combined with a revised mining act, this renders Tanzania an attractive mining investment destination. 1998 marked the introduction of a revised mining act, closely modeled on Australian and North American mining legislation, creating an environment open and conducive to foreign investors. Salient features of the act include: the right to trade in mineral rights; improved security of tenure; clarity and tranparen-

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Don McLeod, managing director of ment negotiating committee and the benefits: “Much of the dialogue with the Resolute Tanzania, the first company to Tanzanian Chamber of Mines. Giving the mining companies has been to make establish itself in modern Tanzania with industry a common voice, the Chamber sure that the exploitation of Tanzania’s their Golden Pride project in 1997, and plays an important role as an intermedi- mineral resources would benefit the in- now one of Tanzania’s larger gold mining ary in discussions between the govern- vestor, the government and the local companies, notes the extent to which ment and the private sector. As vice- communities.” Under the revised tax the government facilitated their entry to chairman of the Chamber, Gareth Taylor payment incentives cited at the Indaba, the market. However, he also draws (also executive general manager of specific mining companies operating in attention to the changing face of the Barrick Gold Tanzania), highlights the Tanzania will pay the existing corporate industry as it develops. “The industry is challenges that the Chamber often faces tax of 30%. The determination of the now entering a more mature phase in trying to overcome the misunder- time frame for payments will be a result meaning there are a larger number of standings and misconceptions that are of negotiation with these companies, companies present. Consequently, the held by the government and the general and will relate to the assessed life span development of legislation and the busi- public, who don’t always appreciate the of a mine. ness environment has become more extent to which private mining compa- His speech brought to the public’s complex.” In particular, some members nies have invested into Tanzanian attention the agreements that had of the government and the general pub- health, infrastructure and education. already been reached between the new lic hold the view that the government is With regards to the latter, the Chamber government and Barrick Gold Tanzania not getting a fair deal. This relates pre- has been especially active in working and Resolute Tanzania in late August dominantly to certain tax incentives with the private sector to develop better 2006 and late November 2006, respec- which were offered to new investors by formal education for mining. This will in tively. Barrick was the first to agree with the previous government to boost the turn lead to the employment of the government to remove the clause in industry. As a result, the industry is cur- Tanzanian people, benefiting the local its earlier contract that required the rently engaged with the government in economy and providing cost benefits for company to pay 15% additional capital revising existing agreements for the the companies concerned. allowance on unredeemed capital ex- benefits of both parties. Speaking in February at the Mining penditure. In return, Barrick will be re- Communication with the government Indaba in Capetown, President Kikwete quired to pay US$7 million per year un- takes place through a special govern- highlighted the importance of mutual til it starts making profits. Deo Mwan- yika, executive general manager for Cor- porate and Legal Affairs for Barrick Tan- zania, recounts that, “Barrick’s decision to revise its contractual regime with the government was made freely as a ges- ture of good corporate citizenship.” Re- solute Tanzania agreed to revise certain tax concessions in recognition that its operations had now moved on to a more mature phase of operation. The company estimates the cost impact of this package to be about $10-$15 per ounce of production. Not-withstanding, Mc- Leod is optimistic, con-cluding that, “The overall attitude of the government is very positive. They are seeking a sustainable and long-term beneficial environment. Tanzania is overcoming decades of socialism, you can’t change people’s perspectives overnight. Presi- dent Kikwete has only been in power for just over a year.” In terms of overall political stability, Tanzania is perceived as being a stable environment. In the words of William Kagaruki, country manager of IAMGold, “Tanzania is a very peaceful and friendly country and we are very proud of the fact that we are one of the few African countries that has not had a crisis.” Fritz Neeling, executive officer of Anglo-

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Gold Ashanti’s Geita mine is a little Extending the discussion from trans- stream), and the country continues to more cautious, drawing comparisons port to infrastructural support in gener- rank number three in gold production in with other countries the company oper- al, Taylor uses a comparison with South Africa after South Africa and Ghana. ates in, including Namibia and Ghana, Africa to reiterate the immaturity of the The majority of gold mining takes place emphasizing the higher level of risk in industry in Tanzania. “Investors have to on the greenstone belts around Lake Tanzania. He links this to the economic import at huge cost but also huge oppor- Victoria and in the Proterozoic rocks in immaturity of the country and some tunity. There is an impatience to devel- the Southwest of the country. Consistent frustration and impatience amongst the op the kind of support industry that can with the mining reform policy, between people, but balances this risk against be found in South Africa within 10 1998 and 2003 five modern large scale the expectation for higher economic years, however this can only be achieved gold mines were put into production and returns. by the government. If you compare the number of prospecting licenses On an infrastructural level, Tanzania Tanzania with Botswana which has a issued reached 2,360, compared to a remains largely underdeveloped. The very small population and a very mature total of 10 licenses in 1990. By 2006, country’s main port at Dar es Salaam is and well established and profitable min- this figure was at 3,570. As a compari- severely congested, a result of poor road ing industry, the proceeds from the gov- son, 30 years prior to 1995 no viable and rail infrastructure which makes it ernment are much better felt by the mine was opened. difficult to move cargo out of the port. people in that country. It takes a huge In February 1999, the Golden Pride Insufficient infrastructure for the pas- amount of time to invest in a mine, add mine, owned and operated by Resolute sage of large earthmoving equipment to that the immaturity of the support Tanzania, became the first modern, and machinery has led some mining in- industry, and just about everything you large scale gold mine in Tanzania. It has vestors to use the port at Mombasa in bring in comes at a premium meaning been producing approximately 200,000 Kenya instead. Robinson believes that your payback period is longer.” oz of gold annually and the company the country has a long way to go in General sentiment appears to be that plans to extend the project another six terms of developing power supply and increased commitment from the govern- to eight years. Resolute Tanzania has a road infrastructure, but does not see the ment is required to overcome infrastruc- number of joint venture exploration pro- problems as being insurmountable. tural obstacles and push development jects underway and are gradually Speaking from the north of the country, forward. increasing their reserves, notably in the Deane has seen recent improvements in Dominating the industry, 48.2 metric Nyakafuru region. roads in the region, and expects to see a tons of gold was produced in Tanzania Representing the largest gold pro- tar road from Mwanza to Dar es Salaam in 2004 (more recently this figure has ducer in Tanzania, Taylor emphasizes within the next six months, creating new been boosted by several large gold min- the diversity of opportunity for minerals business opportunities. ing projects which have come on in Tanzania. “The minerals are here in

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reasonable quantities, there are some small underground operation. Con- company in July 2005 to address spi- very promising prospective areas and struction of a new gold project, Buz- raling contractor mining costs. The leg- pretty good ore bodies. We probably wagi Gold mine, has just been ap- acy of decades of shelter provided by spend between $6-$8 million per year proved, and the mine is expected to insular government policies, Tanzania in exploration. From a Barrick perspec- start production within the next two offers a wealth of opportunity as the tive we are focusing here, and if we years. It will add another 200,000 oz country crawls out of its socialist shell. grow, we'll grow here.” In addition to a to the current 1.8 million oz that the This entails drawbacks in the underde- number of greenfield projects, Barrick sector is currently producing. veloped infrastructure and administra- currently has three gold mines in pro- Production from these properties tive functions that facilitate ease of duction. together with anticipated production business. However, recognizing this, the Their Bulyanhulu mine began pro- from the company’s Kabanga nickel government is allocating significant duction in 2001, on one of the largest project (currently spending $95 million expenditure to addressing these short- gold reserves in East Africa. At the end on pre-feasibility) will give Barrick 70% comings. of 2005, the mine had 10.7 million oz of Tanzania’s total current mineral pro- The 1997 mineral sector policy and of proven and probable gold reserves. duction. 1998 Mining Act have greatly facilitat- In 2005, the mine produced 311,000 In production under an AngloGold ed foreign mining investment and there oz of gold at a total cash cost of $358 Ashanti joint venture agreement since are promising signs that the negative per oz. Barrick’s North Mara property, 2000, and wholly owned by the merged sentiment surrounding tax incentives is consisting of three open-pit deposits, AngloGold Ashanti since 2004, Tan- being overcome following positive nego- produced 250,000 oz in 2005. More zania’s Geita mine was once the largest tiated outcomes between the govern- recently, the company’s small but high- gold producer in East Africa and consti- ment and Barrick Gold Tanzania and ly profitable Tulawaka mine began pro- tutes one of the most extensive gold Resolute Tanzania. duction in the first quarter of 2005. A mine developments in the world. Education and skills development 70:30 joint venture between Pangea With a total of 2,256 employees, the are seen as the most important contri- Goldfields Inc., a wholly-owned sub- mine had an annual production in 2004 bution that foreign mining companies sidiary of Barrick and Northern Mining of 692,000 oz at a total cost of $250 can make to advancing the Tanzanian Explorations, Barrick’s share of pro- per ounce. Gold production is set to de- minerals sector and the economy as a duction was 87,000 ounces of gold at cline, however, to between 562,000 whole. a total cash cost of $253 per oz in and 585,000 oz in 2006, at an expect- However, for the staggering pace of 2005. While the mine life is limited (it ed total cash cost of between $297 and mining development to continue, invest- has only two years remaining), it is $309 per oz. A change from contract to ment into road, rail and energy infra- hoped that it can be extended with a owner mining was implemented by the structure is imperative.

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AFRICAN MINING Botswana: The World’s Largest Diamond Producer by Value

Formerly the British protectorate of Botswana has transformed itself demic. It is estimated that one in every Bechuanaland, Botswana adopted its from one of the five poorest countries in four adults has contracted the virus new name upon independence in 1966. the world into a middle-income country making it the second highest prevalence Since then, the country has transformed with a per capita GDP of $11,200 in rate in the world. The life expectancy at itself from an agricultural based econo- 2006, and a literacy rate of over 80%. birth is a shocking 34 years. The nation- my into a nation consistently displaying Rich in resources including diamonds, al HIV/AIDS awareness campaign pro- one of the highest economic growth copper, nickel, salt, soda ash, potash, gram is prevalent throughout the coun- rates in the world. Botswana has en- coal, iron ore and silver, mineral extrac- try. There are good support structures in joyed democracy and elections on a reg- tion is focused principally on diamond place which are sponsored by both the ular basis since independence, al- mining which currently accounts for government and the private sector, though the same party has always more than one-third of GDP and 70%- namely De Beers. The challenge, as in remained in power. The constitution is 80% of export earnings. In keeping with the rest of the continent, is to overcome the overriding authority which is re- this safe, stable environment, the coun- the social stigma associated with the spected by all levels of society. The suc- try’s third president recently retired vol- virus, encouraging infected persons to cess of the country can be attributed to untarily to let his vice-president step come forward. To be taken into consid- good management, fiscal discipline, into his position. eration is the lack of adequate reporting progressive social policies and four of HIV/AIDS cases by other countries, decades of uninterrupted civilian lead- Not Without a Fight especially Asian and African countries ership. The country stands as a beacon The government is not, however, without which translates into skewed statistics. on a continent that has more often than its problems. Well-maintained public Although still struggling, Botswana re- not torn itself apart; a model to its health facilities are widespread to deal ceives praise for its early recognition of neighbors and one that international with what could be considered the coun- the problem and its pro-active attitude institutions are keen to promote. try’s Achilles’ heel, the HIV/AIDS pan- toward combating it.

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Another problematic area is the high ment intends to grow to at least $1.5 to be undertaken anywhere in the world unemployment rate. After decades of billion in five years time. There is a and the Botswana government owns rapid GDP growth, unemployment was newly built full facility diamond park to 15% of De Beers International. Deb- officially 23.8% in 2004, but unofficial host the diamond services. swana, is the largest diamond mining estimates placed it closer to 40%. “We hope that there will be a bal- company in the world by both value and The country’s largest company Deb- ance between employment creation volume. About 60% of Botswana’s sur- swana, a joint venture between the gov- through the cutting of smaller goods face area is covered by diamond ernment and De Beers, employs about and profitable operations, which means prospecting licenses, the remainder 6,500 people, or just 2% of the workforce. cutting higher value goods. It is indeed being non-cratonic zones. Apart from the diamond industry, no our hope that all companies will do In line with its effective governmen- other economic sector has experienced everything possible to ensure em- tal style, the minerals act is simple: all much growth. In the meantime, the edu- ployment creation, but we also recog- minerals in Botswana are the property cational system, well funded by income nize that they should be viable,” con- of the state and any company finding from the diamond trade, annually cluded President Mogae. The park is them guarantees the government a min- churns out large numbers of well pre- open to new diamond investors who no imum 15% stake. A further stake can pared students who cannot find jobs, doubt will be visiting the new exchange. be negotiated and purchased as was the even when they have a university de- case with Debswana. gree. Top planners in education have Exploration Tax and fiscal obligations are negoti- concluded that the government must Botswana was one of the poorest coun- ated on a case-by-case basis. Also, the restructure the system to prepare youths tries on the planet prior to the discovery negotiation does not typically happen for export to the global economy. of diamonds in 1967. When the gov- until the bankable feasibility study is Another issue is the size of govern- ernment struck the original deal with delivered and the resource is defined. ment which employs 33% of the work- De Beers to develop the Orapa mine in Although the system seems to work force, 45% if one includes state owned a joint venture called Debswana (cur- so far, it is only doing so due to the organizations. Such a system is unsus- rently 50:50), it had to borrow from De small number of companies operating. tainable and the government is working Beers to pay for its share. Legislative development is required to to rectify the balance. Today, the Orapa mine is still one of facilitate growth. In general the feed- largest single diamond mining projects back from companies currently in the The New Diamond Capital Botswana, the world’s largest diamond producer with 74 kimberlites identified to date, is targeting a 17-fold increase in its fledgling cutting industry within five years. With the full support of President Festus Mogae, downstream operations are set to be supplied directly from producers, as well as the De Beers’ Dia- mond Trading Co. (DTC), which until now has been the exclusive marketing chan- nel for Botswana’s production. “We can and will graduate from a diamond-producing country to a world- class diamond center,” President Mo- gae recently told the press. In support of developing the sector, DTC, which is now based in London and provides industry services (primarily the aggrega- tion of rough production), will migrate to Gabarone, Botswana, by 2008, creating a diamond exchange there. It is hoped that the move will attract related services to Botswana, such as diamond bank- ing, security, insurance, technology and engineering as well as grading or diamond laboratories. Currently the annual cutting and polishing industry is valued at a mere $30 million, a figure that the govern-

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country is positive and progressive. They license that encompasses the re-open- For the investor, Botswana has one feel the conditions are fair and have ing of the Lerala diamond pipes. These of the most investor-friendly tax re- confidence in the government’s resolve deposits were previously mined on a gimes on the continent. It is one of the to legislate. trial basis in the 1990s. It is expected only countries where capital gains can Creating the first opening in the mar- that DiamonEx will commence produc- be moved in and out of the country with ket, Debswana is unbundling all assets tion this year at roughly 330,000 carats virtually no limitations and several ac- deemed “non-economic” as part of their per year. counts held in different currencies. major restructuring project. Junior ex- Larala was discovered by De Beers Working visas for expatriates are not ploration companies have gladly entered but unsuccessfully mined for roughly an issue. It is said to be the least cor- the scene assuming exploration risk and five years. Unlike its stakes in other rupt country in the region and crime is developing assets the major haven’t diamond projects in Botswana, the gov- minimal. Infrastructure is adequate found to be economical. ernment has not taken any equity in the (although the country is landlocked) Although Botswana is home to some DiamonEx project. and the capital city, Gabarone, is clean of the most advanced diamond mining All in all, Botswana is one of, if not and modern offering all the standard technologies, the juniors are bringing the most, peaceful, safest and easiest amenities. know-how to smaller scale mining. places to do business in Southern Diamonds, while being a luxury item African Diamonds (Afdiamonds), for Africa. Mining legislation is clear and for many in the West, are a source of example, has set the record for the fair and the land is host to some of the basic prosperity for the people of Bot- worlds deepest large diameter drill hole world’s largest diamond mines. If one is swana. Developing robust sustainable (23 inch diameter, 700 meter depth) on easily led by hearsay, rumor has it that and diversified economies from diamond their AK6 property. This was, in part, to it is cheaper to produce $1 of revenue revenues will be the real test of the coun- avoid the problem of the rig not fitting at Debswana’s Jwaneng mine than it is try’s leadership. Will the diamonds of into the pit, a problem encountered at for the U.S. to produce one physical Botswana overcome the ‘resource curse?’ both the Jwaneng and Venetia pits: dollar bill. Yes, if they can support -not only pros- properties owned by Debswana and De perity but also pluralism. Beers Consolidated Mines respectively, Diamonds are Not Forever after leaving the drilling too late to do The government of Botswana has taken Clean Diamonds deeper sampling. a long-term perspective on its natural De Beers and Botswana were architects resources, especially concerning dia- of the Kimberley Process, which seeks monds. Appreciating that resource rev- to prevent trade in the small number of All in all, Botswana is enues must be used to build a solid gems produced to fund conflict in one of, if not the most, future for the country, they have to deal Africa. On December 13, 2006, (coin- with high rates of unemployment and cidently the same month Hollywood peaceful, safest and easiest poverty. HIV/AIDS infection rates threat- blockbuster Blood Diamond was re- places to do business in en Botswana's impressive economic leased), a three-judge panel in the gains, and an expected levelling off in country’s high court ruled that the evic- Southern Africa. Mining diamond mining production overshad- tion of the San (Bushmen) tribe from legislation is clear and fair ows long-term prospects. their diamond-rich game reserve was The security of future government rev- illegal. and the land is host to enues is fundamental as the country’s Regardless of the merits of the case, some of the world’s lar- social security system is one of the best the decision is significant insofar as it gest diamond mines. in the world, often compared to that of dispels the cynicism that many Western Sweden. Both Debswana and the govern- populations harbor about judicial sys- ment are looking at the development of tems in Africa. Afdiamonds is a joint venture with De other minerals to spread their risk. To environmentalists, the Kalahari Beers, the latter not being involved in Coal reserves could be developed to San are a perfect example of a ‘noble the operations. James Campbell, manag- feed the growing demand for electricity savage’ being driven to the periphery by ing director, has managed to pull togeth- in the region attracting the likes of South modernity and consumerism, although er a highly sought after world-renowned Africa’s energy company Sasol. Uranium there is little connection between the team, selecting the best in every field exploration is already ongoing and gold San removal and diamond concessions. required to analyze, develop and manage has been mined for quite some time The allure of diamonds as a fatally pre- diamond projects in Botswana and now although reaching maturity. Aside from cious commodity has been attractive to the DRC, following Afdiamonds’ acquisi- the development of downstream diamond journalists and must be considered with tion of 35% of Bugeco. With first pro- operations, mainly in the cutting and pol- apprehension. duction estimated for 2009, they will be ishing fields, the country has high ambi- In the case of Botswana, diamonds looking to raise between $120 million tions for the financial sector. The vision have been the backbone of sound de- and $150 million to develop the mine. is one of establishing Botswana as velopment. As for the Kalahari San, DiamonEx, also a new player, was ‘Africa’s Switzerland’ on a geopolitical their decision not to embrace moderni- awarded the Martin’s Drift prospecting front, in the African context of course. ty must be respected.

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No one appears to be feeling the com- As growth continues there is increas- and currently have a couple of targets in modity boom in Southern Africa more ing selectivity on projects; nowhere is mind, notably in Mozambique.” Sandro than the industry’s support sectors. Not this better seen than in the consulting Scherf, managing director at Pilot Crush- only are they experiencing the pressures sector, a huge turnaround from the previ- tec, suppliers of mobile crushing and of a huge workload coming from the min- ous ‘take what we can get’ scenario. In screening equipment, provides a good ing industry, for most, mining is just one the words of Zulch Lotter, managing example from the supplier side of changing of the sectors comprising their business director of UWP Consulting, “General perceptions with regards to Africa. Scherf model. Construction and infrastructural growth in terms of turnover year on year explains that five years ago buyers were development in general are experiencing is currently 40% which is not at a sus- purchasing cheap equipment on the basis similar booms. Combine this with consis- tainable level. For the first time in my that they may have to leave it and run. tently high commodity prices and mining career of 35+ years we are becoming very Now, he is seeing a dramatic turnaround, houses tending toward outsourcing, selective about what we bid for.” A senti- as buyers for African projects are looking 2010 World Cup plans and weakening of ment shared by many; Terbrugge re- for state of the art machinery. the rand, and not surprisingly the current marks, “We’ve had debates about how to So why this turnaround? According to growth trajectory is expected to continue. handle turning work away. We are telling Greg Holmes, managing director at explo- Peter Terbrugge, chairman at SRK clients that we can do the work for them, sives supplier BME, the international min- Consulting, summed up the situation as but that there will be a delay of three ing houses are moving north of South follows, “The current environment is bull- months.” The industry is also seeing a Africa’s borders to escape an over-regulated ish and we are extremely busy. In the last more overt trend toward collaboration, mining environment. Consequently, his week I have had a number of calls from reflective of a more open and prosperous company has moved with their customers groups wanting to do listings documents in environment. At the same time, there is a into a large number of African countries, so the next six months. The mining compa- move by those who have not already done that 40% of their work is now located out- nies don’t have the expertise to do this sort so, to expand their services. For consult- side of South Africa. While he highlights of work. It is quite a serious situation.” ants this means a move away from a spe- the importance and great intentions of Terbrugge is by no means alone in this sit- cialized model toward the objective of empowerment, he believes that local repre- uation. Chris Brindley, CEO at Sandvik becoming a ‘one stop shop.’ In the words sentation in mines makes investment diffi- Mining and Construction, machinery sup- of Duncan Grant Stuart, a director at con- cult, due to a lack of available/suitable pliers, describes a similar situation from sulting firm Knight Piesold, “The minute human resources. Consequently, he be- the supplier side. The company has seen you sit still and don’t think about ex- lieves that South Africa has not seen the 600% growth over the past 10 years, with panding you are going backwards.” growth that the mining industry anticipated Africa now accounting for 8% of their busi- Breaking with a traditional focus on several years ago. Commenting on the leg- ness world wide. Brindley attributes the South Africa, there is a definite trend islative environment in South Africa, boom to an 80% growth in exploration and toward expanding mining services to other Bennett sees South Africa losing mining the development of new mines on the African countries. Often, these projects are investment to other Southern African coun- African continent. George Bennett, CEO of carried out for Australian and Canadian tries where some of his clients are able to MDM Engineering, process and plant de- junior mining companies who increasingly obtain a mining licence in three to four sign specialists, sees this trend continuing see Africa as an exciting destination. For months, whereas delays in South Africa as the growth in exploration over the last Dempsey Naidoo, chairman of PDNA, a can take over a year. “It is a shame that six years translates into feasibility studies significant BEE controlled consulting and South Africa, with such a developed mining and new projects being built. engineering firm, South Africa is a spring- history, is taking so long to empower com- Growth, however, is not without its dif- board into the SADC region. With an office panies to start investment in this country.” ficulties. Maintaining the same quality in Mozambique, Ghana, Botswana and Nowhere is the stress of the growth standards was identified as a challenge, Angola, he sees Africa coming out of a phase more apparent than on a procurement compounded by the difficulty in finding huge vacuum, from a political perspective. level. The industry is experiencing massive skilled personnel and increasing lead times He highlights that improvements in operat- shortages in machinery, materials and on materials, components and parts. Rory ing environments over the last couple of human resources. All equipment suppliers Kirk, managing director of Hatch South years have been exponential. One company face the same procurement challenges as Africa, process engineers, advocates cau- for whom a focus on Africa has worked lead times are getting longer and parts now tion, drawing a comparison between the especially well is Golder Associates, a have to be ordered six to eight months in current environment in South Africa and Canadian-based international group of con- advance. Commenting on the effects that the overheated industry in Australia three sulting firms. Fred Sutherland, CEO, lead times for certain machinery have on years ago where commodity prices rose explains: “We are pushing aggressively into pricing, Rob Elphinstone, managing director rapidly and resource shortages led to esca- Africa, Ghana is our next stop. We try to of Andru Opencast Mining, a contractor for lating costs. acquire companies with a similar culture small to medium sized open-cast mining

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operations, explains, “We have made bids slow process. Golder’s response to the on retention, coming up with novel ways to on a number of projects and we are having problem has been to acquire a number of train and remunerate existing employees. to pay attention to how we price these. small companies with a view to building In spite of the legislative hindrances to Current lead times are around 12 months on their overall capacity. He acknowledges, foreign investment, the generally held view certain machinery so we have to be very however, that this approach cannot com- is that BEE is a necessary and positive careful when we price it to make sure we pletely solve their problems as they find development. As one of only a few black have those resources, meaning we have to themselves taking on the already sub- controlled consulting/engineering firms in be very aggressive on pricing.” Contrary to stantial workload of the firms acquired. the local industry, Naidoo believes that BEE what one would expect, however, price rates In light of the unavailability of skilled is a tag which has been slightly abused due have so far remained fairly constant, but personnel, the majority of companies see to the government’s focus on the equity ele- Elphinstone believes that increases will be training from a grassroots level as the solu- ment. However, he is happy to see strong felt this year with demand rising. Kirk sees tion. Kirk believes that engineers on the BEE happening at various levels. He containing costs as a threat to the industry, African continent are extremely well explains, “Our focus is meaningful BEE. We questioning its ability to reliably and pre- trained, but highlights that there are more are trying to find candidates who are dictably deliver cost-effective project invest- African trained engineers working in North engaged in this profession and making them ments. He explains, “While we all under- America than in Africa. He explains, leaders and technical practitioners, not just stand that a project is going to cost double “Supply is low and parastatals and big investors. We have also afforded them what it did two years ago, the commodity mining houses have stopped producing investment in the company they are growing prices have more than doubled too. So it is skilled artisans. During the last cycle they with, however we need a faster mechanism marrying that investment expenditure with had to become more cost conscious, between the equity and organic start what future prices might be.” which translated into a lack of investment up–that is what we are trying to promote.” The lack of qualified human resource in training.” Hatch’s solution has been to On the necessity of BEE, he adds, “We need talent is a global phenomenon for the min- implement a massive internal training pro- to train black technical people as they are ing industry, and Southern Africa makes for gram, through bursary grants for university the people who can take projects and make no exception. The lack of skilled human education followed by in-house training. them work in the future. Our office in resources is universally recognized as a As Brindley points out, “You can own Mozambique is our most successful story in major hindrance and threat to growth and an ore body, but if you can’t get the peo- that the entire office is run by local staff.” expansion. Grant-Stuart provides some ple to work it, it is going to be very diffi- On the explosives side, Holmes takes interesting background to the origins of the cult to develop it!” Acknowledging that BEE very seriously, purchasing from black- problem in South Africa: “If you go back to the growth in mechanized equipment is owned companies. Furthermore, BME’s the 1970s there was an engineering boom. limited by the number of people you holding company, Omnia Holdings, is cur- Since then, however, we have seen declin- have to maintain and operate the equip- rently devising a broad ownership plan for ing expenditure in engineering services, ment, Sandvik has developed one of the previously disadvantaged employees. therefore the number of graduates has largest apprenticeship training programs Holmes acknowledges, however, that the been steadily dropping. Now we are faced in Southern Africa with programs in explosives sector does not enjoy the luxu- with the situation where there is a huge South Africa, Zambia and Zimbabwe as ry of buying from only BEE suppliers. “If gap in the middle order (early to mid- well as in West Africa. The program has every company took that stance, none 1930s to late 40s), which is a major threat been very successful in training appren- would be doing business, the country is to the industry.” Terbrugge echoes this tices from a grassroots level over a two just not there yet. I think it is a good thing view, “The biggest threat to the industry is year period. though to keep up the pressure. We are people. For many years mining and engi- Another example of a comprehensive pressurising suppliers and our customers neering has been on the back burner. We approach to training is the PDNA model are pressurising us. We support that fully.” just have not had enough people graduat- with BEE as its center point. With a focus Business is booming for the support ing with the relevant skills. There is cer- on empowering the individual, the com- sector in Southern Africa, and with sugges- tainly an upturn in the number of students pany has successfully implemented in tions that the industry is currently in a doing mining and geology now, but these both South Africa and Mozambique an “supercycle” there is much optimism that kids are five years away from contributing.” ‘on the job’ training program focused on demand from China and India will continue In addition to this, there is a recog- technical training and management lead- to drive commodity prices, and thus the nised drain of highly skilled mining ership and made major efforts to raise industry. After decades of being overlooked, labour to Australia and Canada, while awareness about the opportunities that Southern Africa and the wider continent is South Africa does not tend to attract the mining industry can offer. On the now a hot spot for foreign mining invest- many resources from overseas. Perhaps success of this strategy, Naidoo com- ment. So long as mining projects continue surprisingly given their support struc- ments, “We have helped raise the profile to expand in the continent, the support tures, this has equally been the experi- of the profession amongst all groups and industries will follow. The major constraint ence of international consulting firms. now many of our peers are following.” to the industries’ growth is a huge shortage Sutherland explains, “People don’t auto- However, Naidoo concedes that in spite of human resources. However, most see matically think about coming to South of the fast learning curve and increasing this as an opportunity to develop under- Africa. Locally we have our own bursary responsibility given to motivate young skilled people who have the energy and program and we are often at the universi- employees, retention is definitely a con- potential to learn and become major con- ties trying to recruit, but this is a very straint. Kirk also spends 25% of his time tributors to the industry in the future.