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Dark Clouds Over Table Mountain: Mining Sector Sought Silver Linings at 2016 Indaba

Earlier this month in Cape Town the African mining industry held its annual confab, the Mining Indaba. In the shadow of Table Mountain, industry heavyweights and government officials shared their perspectives, amongst a hum of networking and deal making.
An air of pessimism permeated the event. Organizers reported attendance had fallen and many participants foresaw bleak times ahead and the need to batten down the hatches.
To improve optimism about the event, Indaba organizers encouraged participants to look “beyond the cycle” and keep an eye on long-term prospects for commodity prices. In spite of the current difficulties and pressures to attract investment, government reform efforts should aim to do the same.
Adjusting to the “new normal”
The days of booming commodity prices have ended with the slowing of China’s economic transformation, which had been a backbone of mining industry growth. Commodity prices, including oil prices, continue to tumble and financial markets have seen a particularly jittery start to 2016 following a problematic five years for mining companies.
The opening message for the industry from Mark Cutifani, chief executive of Anglo American, was clear: “If we don’t adapt, we perish.” Anglo American has seen over 90 percent of its market value wiped away and like many mining companies is managing an unhealthy, overleveraged balance sheet. Since the Indaba, Moody’s has downgraded Anglo American’s credit rating to junk status.
Adapting requires scaling back operations, reducing procurement costs and shedding jobs, while also selling assets to repair balance sheets. Anglo American has reportedly aimed to eliminate two-thirds of its jobs and sell an equivalent share of its assets.
Countries stretching the continent from South Africa and Zambia to Ghana and Guinea are managing the consequences for affected communities, including social unrest, combined with the broader consequences of tumbling currencies, increasing inflation rates, and an inability to finance important public services. The need to attract investment is therefore top on the minds of policymakers in the region.
Where do we go from here?
Across the region, governments must aim to take advantage of the opportunities that a period of low commodity prices offers, and not be tied down by the challenges it presents.
1. Don’t be too eager to postpone or unwind governance reforms.
At the Indaba, DRC’s Minister of Mining Martin Kabwelulu announced plans to drop reforms to the 2002 Mining Code. With a pressure to attract increasingly scarce investment, the risk is the aim of “rolling out the red carpet”, as one minister described his government’s position at the Indaba, can undo important strides taken in recent years.
Some efforts, like DRC’s reforms to its mining code, do increase the fiscal costs to companies and will come under pressure. However, there are also many other aspects of the reforms that aim to bring countries in line with international good practice, including important efforts to improve transparency, competitive bidding and leveraging benefits for local communities.
It’s taken a long time to build improvements in the regulatory frameworks and unwinding them now will not bring lasting benefits to resource-rich countries. To do so would be to repeat the mistakes of the last commodity-super cycle.
2. Learn lessons and look to governance reforms that will prepare countries for a future upturn.
With commodity prices now falling, revenues dwindling and jobs disappearing, it is difficult not to see the past two decades as a missed opportunity. This has been a hard reminder that previous governance efforts have not reduced government and community vulnerability to the mining sector, nor convincingly harnessed the sector growth as a means of driving broader economic development.
In the midst of these current difficulties, it is important to make space for learning and reforms. Governments should capitalize on regional initiatives such as NRGI’s Natural Resource Charter benchmarking exercise, the World Bank’s Mining Investment and Governance Review and the African Minerals Development Center’s Country Mining Vision. These can help countries to articulate clear strategies for managing the extractive sectors to produce development outcomes. Such efforts should include a vision for how governments can increase the resilience of their finances to commodity price volatility.
These times of low prices are an opportunity to redouble efforts in investing in institutional capacity across several areas. While revenue mobilization is high on the agenda, tax administrations must be made more capable of preventing pernicious types of tax avoidance and evasion. The African Tax Administration Forum is leading the way on this agenda. Governments must also place a major focus on the capability of government agencies across the region to transparently plan, assess and deliver quality infrastructure projects and public services. Ultimately countries should aim to position themselves much better to capture revenues and ensure revenues can be managed effectively. This is a long process of institutional strengthening.
3. Manage expectations.
Citizen expectations about the benefits the extractive sectors can bring are usually quite high. However, it is important to understand the limits of what these sectors can offer at a time of subdued prices. It is important to use the national planning process to create a realistic understanding of how the mining sector can contribute to overall development objectives.
Diversifying sub-Saharan African economies away from the extractive sector should be the long-term aim of these plans. As was discussed at the Indaba, even regional success stories like Botswana have a long way to go in this regard.
The 2016 Indaba underscored the scale of the immediate challenges facing the industry. But perhaps most importantly it reminded governments and mining companies alike that this was a chance to transform the sector for the longer term. Governments should grasp these opportunities.
Mark Evans is an Africa economic analyst for NRGI.