BMI View: Although the downshift in the Chinese economy has removed much shine off frontier mining investment, China will continue to expand its mining footprint in Africa over the coming years. While the pain from the fading commodities boom will continue to set in, the frequent use of state-sponsored investment to address a domestic shortfall in the production of key minerals will accentuate China's push for African riches. West Africa is set to prove the most attractive for Chinese miners due to the rich deposits of high grade iron ore in the region.
We expect an increasing number of Chinese miners to expand their footprint in Africa's mining s ector over the coming years. Despite our downbeat macro view on China, a domestic shor tfall in the production of key mineral s will sustain China's push for African mining. The Asian giant is on a massive drive to improve its self-sufficiency in mining production, with market sources indicating that China is planning to import around 50% of its iron ore through Chinese-owned foreign assets by 2015. A ccording to China Mining Association (CMA), capital infl ows from China into A frica reached US$15.6bn in 2011, marking a tenfold increase from the previous year.
| Pushing To Plug The Gap |
|China - % Of Global Production & Consumption (2012)|
Frontier Markets Losing Shine...
Undoubtedly , the downshift in the Chinese economy has removed much shine fro m frontier mining investment , and by extension Africa, as miners across the board narrow their focus on the development of brownfield projects. Crucially, the axe that mining compan ies are taking to their operations has been more aggressive than we initially anticipated. In particular, we now have a dimmer view on the prospects for frontier mining than previously ( see: 'Guinea Iron Ore: Pushing Back The Boom , July 11 ).
| Austerity Is The Word |
|Select Companies - Mining Capex (% chg y-o-y)|
...But Chinese Miners Undeterred By Cooling Boom
However , we believe Chinese miners will continue to pour into the African region for investment over the coming years. As evidenced by the string of project interests announced in recent quarters, mining investment in Africa is dominated by Chinese state-owned miners that are often armed with the significant war chests to carry out the related infrastructure projects.
W hile our below-consensus view on industrial metal prices will force many miners to shift away from greenfield projects, the frequent use of state-sponsored investment by Chinese miners will continue to underpin the surge in mineral investment into Africa. Although the pain from the fading commodities boom will continue to set in , China's huge structural deficit in the production of several key minerals such as bauxite, copper and iron ore will continue to embolden the chase for more mining assets in overseas markets.
| Africa To Benefit As China's Ore Grade Falls |
|China - Iron Ore Grade|
We expect Africa to receive the greatest interest due to the growing commercial and political ties between China and the resource-rich continent. Most importantly, we note that there is potentially more than 35bnt (billion tonnes), or 400-600mn tonnes per annum (mntpa), of direct-shipping iron ore in Africa. These iron ore deposit s can be fed directly into iron-making blast furnaces and are particularly attractive with Chinese miners due to the sharp decrease in domestic ore grades over recent years.
West African Iron Ore To Receive Greatest Focus
We expect West Africa's iron ore sector to be a focal point of China's investment. The region hosts rich deposits of high grade iron ore reserves, with iron content estimated at around 50-60%. With cash costs as low as US$40/tonne, these high grades substantially lower the cost of production for many mining companies and enable them to reap some of the highest margins in the world ( see: 'Iron Ore: West Africa To Be Key Growth Area', February 12 ).
| Comfortable Margins For Simandou |
|Global - Cash Costs of Select Iron Ore Mines (US$/tonne)|
Underpinned by forthcoming investment from major miners in China, India and Australia, we believe iron ore production in countries such as Guinea, Sierra Leone and Liberia will continue to experience rapid growth from low bases over the coming years. Indeed, the development of the Simandou mine by Chinalco and Rio Tinto could potentially transform Guinea into one of the world's largest iron ore producers with its product ion capacity of 95mntpa by the end of the decade .
| Ore To Play For, At What Costs? |
|Guinea - Iron Ore Mines|
China Inking Larger Footprints In Central & Southern Africa
Aside from West African iron ore, we expect continued Chinese interes t in Central & Southern Africa. Countries such as Zambia and the Democratic Republic of Congo (DR Congo) are home to high-grade copper reserves, a metal which China h as a clear structural deficit in.
Nonetheless, we are aware that the paucity of infrastructure in Africa will remain a significant roadblock to further growth in the mining space. To be sure, the construction of mining-related infrastructure at the Simandou mine, which entails the building of a trans-Guinea railway and an expansion of a deep water port, has increased to more than US$20bn as of July 2013. Furthermore , the pervasiveness of political instability in much of Africa will remain a major concern for investors to grapple with, as spotlighted by the recent incursion of rebel attacks in DRC ( see: 'Rising Risks To DRC Investment', July 04 ).
Select - China Mining Investment In Africa
|Source: BMI, Company Announcements |
| Country || Company || Mine || Output || Year |
|Zambia ||Jinchaun ||Mnari ||Nickel: 8.5ktpa ||2013 |
|Zambia ||NFC Africa ||Luanshya ||Copper: Increase from 149-250ktpa ||2014 |
|Cameroon ||Sundance Resources / Hanlong ||Mbalam ||35mntpa ||2014 |
|Guinea ||Bellzone / China Investment Fund ||Kalia ||20mntpa ||2014 |
|Guinea ||Rio / Chinalco ||Simandou ||95mntpa ||2015 |
|Mozambique ||China Kingho ||Maravi ||Coal: Preliminary Results ||n/a |
|DR Congo ||NFC Africa ||Katanga Province ||Copper & Gold: Preliminary Drilling ||n/a |
|Guinea ||Bellzone / China Investment Fund ||Forecariah ||High-grade deposit ||n/a |
|Gabon ||CMEC ||Belinga ||Reserves: 100mnt ||n/a |
|Liberia ||China-Africa Development Fund ||Bong ||Reserves: 110mnt ||n/a |
| || || || || |
Widespread Benefits, But Not Without Criticism
While China's investment has brought abou t important capital inflows and widespread infrastructure developments to Africa, the country's emergence as a major player in the continent has nonetheless draw n criticism over issues such as human rights abuses, corruption practices and illegal operations. To highlight, tens of thousands of Chinese miners were found to be operating illegally in a violent crackdown on illegal mining activities in Ghana in June.
Indeed, neither China nor any Chinese mining company is part of the Extractive Industries Transparency Initiative (EITI), an organisation seeking to promote better transparency of payments by oil and mining companies to government-linked entities. This will only stoke suspicion over the legitimacy of Sino-Africa resource deals, particularly when involving governments notorious for high levels of corruption.