Africa Hardest Hit as Miners Trim $20 Billion Spend in 2015

The rout in commodity prices to the lowest in 12 years will spur deeper spending cuts by the world’s biggest mining companies in Africa, hurting a region more reliant on mineral exports than any other on the planet.

Miners will scale back spending by $20 billion this year, according to Macquarie Group Ltd., as they cut growth plans amid waning demand for raw materials. With projects planned during the decade-long commodities boom now being shelved, Africa is likely to bear the brunt of the cuts, investors say.

“People are cutting back on Africa more than say Australia because Africa tends to be high on the cost curve,” said Andrew Lapping, who helps manage $39 billion at Allan Gray Ltd. in Cape Town. “Suddenly they’re having to cut capital and decide which are their best projects. There are less of those in Africa than in other regions.”

Unrest in the Democratic Republic of Congo as well as uncertainty over mining taxes in Zambia -- the two largest copper producers on the continent -- has added to investor unease in recent weeks. The pullback presents a challenge to nations such as Botswana and Guinea which, according to the International Council of Mining & Metals, derive more than 60 percent of their exports from minerals.

Spending Estimate

Prices of minerals and metals dropped to the lowest since August 2002 on Jan. 29, according to the Bloomberg Commodity Index. Companies are contending with the slump in the wake of an era of debt-fueled expansion that’s left some balance sheets stretched. Macquarie estimates total spending this year of $79 billion is 39 percent down on the industry’s peak outlay of $130 billion in 2012, it said in January.

As a result, the world’s biggest mining companies are moving away from the continent that hedge fund Harbinger Capital Partners LLC called “the last untapped resource frontier left on earth” in 2010, before the prices of iron ore and gold peaked a year later.

BHP Billiton Ltd., the world’s biggest mining company, is moving to spin off its Africa-focused assets into a new company called South32, while Rio Tinto Group, the second-largest, exited its Mozambican coal business last year after writing it down by $3 billion.

Glencore Plc’s South African coal unit will cut annual output by half amid a “continued deterioration in the export coal price,” it said last month. Anglo American Plc is looking to sell platinum mines in South Africa and its iron-ore unit is planning to reduce capital expenditure 20 percent.

Projects Hit

“Traditional mining areas, even places like Australia and Canada, will all be hit but particularly in Africa where you’ve got big projects being built,” said Clive Burstow, who helps manage $44 billion at Baring Asset Management in London. “Companies have become very Darwinian in how they look at capex. Projects have to make a return.”

West Africa-based producers of iron ore, which has declined 54 percent to $61.64 a metric ton since the beginning of 2014, have been particularly hard hit.

London Mining Plc was planning a $400 million expansion of its Marampa operation in Sierra Leone in July but by October it had called in administrators. African Minerals Ltd., which also produces the steelmaking ingredient in the country, shut its mine in December.

In Zambia, First Quantum Minerals Ltd. and Glencore are among companies that have suspended projects valued at more than $1.5 billion in Zambia because of a tax dispute, while Barrick Gold Corp., the biggest producer of the metal, has started the process to put its Lumwana mine under care and maintenance.

Zambia Tax

Vedanta Resources Plc, founded by Indian billionaire Anil Agarwal, is reviewing its Zambian copper unit amid a 23 percent slump in the price of the metal to $5,663 a ton since the start of 2013 and higher taxes introduced last month.

“We are facing a very, very difficult situation,” Chief Executive Officer Tom Albanese said in a panel discussion in Cape Town Monday. “We will have to make some very difficult decisions even with the support of the government.” A “situation where the government is chasing capital and chasing investment away it makes our job even harder,” he said.

Minerals from Zambia, Africa’s largest copper producer after Congo, comprised 69 percent of the country’s total exports in 2012, according to ICMM.

Property Rights

“At a time when commodity prices are falling, Zambia goes and tries to increase its tax take,” said John Moorhead, a London-based fund manager at Pictet & Cie., which has $472 billion of assets. “Companies need property rights and a clear and fixed tax regime to make long-life investments.”

If copper prices fall to $4,600 a ton, extensive cutbacks may be seen, Vanessa Davidson, group manager at CRU Group, said on Monday.

While the 19 percent decline in 2014 in capital spending in Africa was in line with the rest of the world, the cuts will have more impact in the continent due to its reliance on resources, according to PricewaterhouseCoopers LLP.

Of the 20 countries most reliant on mineral exports, 10 are in Africa, the ICMM said.

The Nedbank Africa Mining Index, which consists of 20 companies including Johannesburg-based Impala Platinum Holdings Ltd. and AngloGold Ashanti Ltd., touched a six-year low in December, indicating investors’ negative outlook for the continent’s prospects.

“Africa has such potential and resources to be developed,” Pictet’s Moorhead said. “But to realize that, you need to spend a lot of cash and that’s a story, in general, investors don’t want to hear right now.”

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