South Africa cannot afford to wait any longer for new exploration projects to come online, writes Leon Louw.
Better late than never is how we should feel about the South African government’s new emphasis on exploration.
Boasting that mining is a sunrise industry, while beating it into submission at the same time, has done the country a great disservice. Failing to recognise that exploration is the only way to revitalise an ailing sector in a constraint economy, has further added to its woes.
It does seem, however, that the Department of Mineral Resources (DMR), under a competent Minister Gwede Mantashe, has turned the corner.
At the Investing in Africa Mining Indaba, held in Cape Town earlier this year, Mantashe hinted that exploration companies might be absolved from the 51% black ownership requirements that his predecessor, Mosebenzi Zwane, decreed without second thought. After Zwane published his disastrous 2017 Charter, exploration activities in South Africa dropped to levels not seen in more than 50 years.
Mantashe has reiterated government’s new commitment to focus on exploration at numerous occasions since his enlightened utterances in Cape Town, the latest being at the annual Junior Mining Indaba, held in Johannesburg in June 2019. There, Mantashe called upon exploration companies to invest in South Africa, and again said that prospecting rights fell outside the obligations laid out in the new Charter that he proclaimed in September 2018.
Is it too late?
But, despite all Mantashe’s good intentions, the damage might already be done. Exploration, for one, is an extremely risky undertaking, and if venture capitalists take flight, they don’t return in a rush. Second, prospecting is a long-term game. Developing a greenfields mine can take anything from three to 10 years. The question is whether South Africa has the time to wait this long for new projects to come online.
The one thing on its side though, is its superior geology. South Africa has, without a doubt, one of the best mineral endowments in the world, explorers know that, and as the saying goes, money follows a good ore body. But global investors seem to have lost their risk appetite, and even in countries like Australia and Canada, junior exploration companies are finding it difficult to raise money.
William Witham, CEO at Australia-Africa Minerals and Energy Group, said at the Junior Mining Indaba that exploration is tough at the moment and globally there has been a reduction in money spent on early exploration projects. “It doesn’t seem that investors have the same risk appetite they had 20-odd years ago. We need to put a positive spin on mining and make especially young people excited about mining again,” he said during a panel discussion.
The constrained operating conditions in South Africa had another unintended consequence: they stymied the growth of homegrown exploration companies. Hopefully that changes in the future. In the meantime, all Mantashe can do is hope that he can lure international explorers, and that the money indeed follows the geology. But there are many challenges, and as long as risk trumps reward, hope for a new dawn in exploration will remain just that.
The riskiest of all
“Prospecting is without a doubt the riskiest investment of them all, and more than 90% of exploration projects fail, said Errol Smart, managing director and CEO of Orion Minerals. Smart spoke to Mining Mirror ahead of the Junior Mining Indaba. Orion is developing the Prieska Zinc-Copper project in South Africa’s Northern Cape Province.
Orion is one of a handful of new projects in South Africa that has been developed from scratch. The company started its work in the Northern Cape even before Zwane’s reign, so Smart knows all about the difficulties of operating under a business averse regime.
“We took a bet and it paid off, but always thought something would change. Investors would have shunned the project if it wasn’t such an exceptional ore body,” he said. Investors are well aware that projects in African countries are, in most cases, extremely high risk. On the other hand, investing in early stage exploration is the one class of investment capable of providing shareholders with many multiple returns. An investment in greenfields exploration will not realise the same conservative sort of returns that banking or pension fund type funds are hoping to achieve, but the risk is 10 or 20 times higher.
Australia and Canada can be considered as incubators for junior exploration companies. That is because the business-friendly environment has made it possible to establish and nurture a culture of investing in risky exploration projects. People in these countries invest a small portion of their savings or their pension funds in those types of ventures with the premise that they would be successful.
If a person thus invests in something as risky, and is then told that he or she would not own the project 100%, as the previous Charter envisioned, it is clear why investors left our shores. In fact, other African countries, like Ghana, Botswana or Namibia became a lot more attractive for investors.
We all know what happened in Zimbabwe when government entertained the same thoughts. It’s a simple equation. If a junior exploration company takes 100% of the risk, and only gets 74% of the reward, no company in its right mind would explore. With the new Charter, where prospecting rights are exempt from these onerous ownership requirements, it puts South Africa back on the map, and we can compete with our African counterparts on a level playing field.
In fact, Smart says that South Africa now becomes extremely attractive, ironically because of the lack of exploration in the last 10 years. Operating mines in the country have been expanding their current reserves instead of investing in new exploration to replace those reserves. “South Africa’s geology is superb, it has great technical skills and has the ability to very quickly turn on great discoveries,” says Smart.
Mantashe’s reconciliatory stance is slowly paying dividends. There are several listed companies that have made good discoveries, and the investment is trickling in. But as far as we could establish, there are still only 13 new exploration companies active in South Africa. One of these is a private investor who has put his faith in the gold fields of the Witwatersrand Basin. Furthermore, a number of historical sites are being revitalised, such as mines in Pilgrim’s Rest, Barberton and on the old working on the Wits Basin.
In comparison to countries like Australia and Canada, South Africa, and in fact Africa, lacks a culture of nurturing its own exploration companies. South Africa has been a producer for so long, that it seems the country has lost the urge to explore for new deposits, which is critical for the growth and sustainability of the mining industry. The main reason for this is that there are absolutely no government incentives or concessions to encourage exploration activities.
The governments of Australia and Canada offer tax incentives for junior exploration companies based on the flow through share model, no matter where in the world they decide to venture. It is also much easier to list on the ASX, TSX or AIM than on the JSE, and in fact, the few junior South African companies that do exist have opted to rather raise money on foreign stock exchanges. But, contrary to general perceptions, Smart says there is an appetite in South Africa to invest in higher risk projects. “Orion recently listed on the JSE and a large number of South Africans already own shares in the company.
It is telling to look at a few stock exchanges and compare the junior mining companies listed on their boards. There are 1 200 junior mining companies listed on the TSX in Canada, 700 on the ASX in Australia and 70 on the SSE in Chile. There are only 10 junior mining companies in South Africa, and of the 10 only one can be regarded as purely an exploration company. In contrast, most of those junior mining companies in Australia and Canada, do nothing else but explore. The big difference is that in South Africa a company is regarded as a junior mining company when it is already digging dirt; in the rest of the world about 75% of juniors are explorers that don’t have any revenue stream, and are 100% reliant on equity investment from risk investors. Their only success will come once they’ve made a discovery, proved it and then either raise the capital to build the mine or sell it to a bigger mining company.
Besides ownership, the time it takes to be awarded an exploration licence has hamstrung exploration companies. In some known cases, it took up to three years. Most countries in the world make use of an online cadastre system. In Australia it takes a few minutes to look at the map, identify the area where you want to explore, and determine if that site has been allocated. The ease of getting licensed in a country like Botswana, for example, has directly resulted in the country becoming one of the favourite destinations for exploration companies in Africa.
According to Charles Siwawa, CEO of the Botswana Chamber of Mines, more than 1 000 prospecting licences have so far been issued to entrepreneurs. “Of these 1 000 companies, the majority are junior exploration companies,” Siwawa said at the Junior Mining Indaba.
An exploration licence in Botswana is valid for seven years and Siwawa said that it takes, on average, less than one month to be awarded a prospecting licence. Mosa Mabuza, CEO of the South Africa Council for Geoscience, said in a panel discussion at the Junior Mining Indaba, that the literature in Botswana is excellent and that South Africa can learn a lot from them, including the time it takes to award the necessary licences.
Focus on mapping
“Exploration is critical for the South African mining industry. For every USD1 that one invests in exploration, there is a possible return of USD25 in five years. In South Africa we have neglected geoscience, and we need to relook the mapping of the country. The key to unlocking our potential is to make information, including historic and new data, available. Mining companies need to assist in providing us with information as well, and we need to improve the timelines to make this information available,” Mabuza said. He added that there is light at the end of the tunnel, and that government has made R20-billion available for mapping over the next 10 years.
Although many believe South Africa has been fully explored, there are still many unknowns hidden beneath its surface. There is a growing feeling amongst geologists that all the gold ore bodies have not been found, and areas in the Free State like Kroonstad, Bothaville and east of the Vredefort Dome are currently under scrutiny.
Mantashe keeps on mentioning coal in the Springbok Flats in Limpopo, while Gerick Mouton, senior vice president at Ivanplats, said at the Junior Indaba that the Northern limb of the Bushveld Igneous Complex has not been fully explored for its Platinum Group Metals.
Ivanplats is about to bring the Platreef project, close to Mokopane in the Limpopo Province, into production. Platreef borders Anglo American Platinum’s prolific Mogalakwena mine, and Lonmin owns the rights to a project 65km north of Mogalakwena.
Mouton pointed out that the entire 65km remains unexplored. There are also areas in the Northern Cape manganese fields that have not yet been looked at, and of course there are the Waterberg coalfields, about which a lot is known, but the scarcity of water is holding back further development.
Funding the main concern
South Africa has the potential to once again become the exploration hub of the word, and Mantashe and company know it. But there are challenges, with funding being the number one concern for exploration outfits. However, as Smart points out, if the project has good geology, it will be funded, no matter where it is. “The major problem is that there are still too many regulations. The only way to get funding is to have fewer regulations to comply with,” says Smart.
With traditional institutions reluctant to fund exploration projects, new financing models will become increasingly important to develop mines of the future, according to Olebogeng Sentsho, CEO of the Simba Mgodi Fund.
Sentsho says her company has been looking at alternative methods like crowdfunding and blockchain technology to finance projects, and has assisted nine companies, mostly in the coal mining space, since its inception.
“Exploration companies also have to become better at telling their stories, so that non-traditional funders have a better understanding of what they do,” she said. Sentsho spoke at the Junior Mining Indaba.
But it’s make or break for the mining industry in South Africa. If the drill rigs are not unleashed in the next year or two, it is difficult to see the country maintain its status as one of the top mining destinations in the world. Let’s hope the governing party, and all its factions, are aware of this.