For further insights on investing in the mining sector in Africa, please email Consultant Anna Westwell on [email protected].
All eyes are on Botswana next month, as the country’s sales agreement for diamonds with De Beers comes up for renewal. President Mokgweetsi Masisi has threatened to end the Debswana project – a partnership between Botswana and De Beers in place since 1969 – unless Botswana receives a bigger share of diamond revenues. The negotiations have reignited discussions around whether a new mining order is being established in Africa – one where African governments have more bargaining power to change the terms of ageing mining contracts and legislation.
In this month’s insight, Africa Matters Limited examines why Botswana is considering abandoning its five-decade long agreement with De Beers, and whether it reflects a trend seen across Africa. Looking at recent developments in the Democratic Republic of Congo (DRC), Madagascar, Tanzania and Zambia, this insight will discuss the balance that African governments need to strike in their mining sectors. Although these governments are seeking better terms and larger royalty returns, posing risks for investors, they must also create a welcoming investment climate. Investors are increasingly being invited into equitable partnerships, to play a prominent role in contributing to the economic development of their host nations.
Botswana and its neighbours are reshaping the mining order
President Masisi’s threat to terminate Botswana’s agreement with De Beers has taken many by surprise. The partnership has largely been recognised as a fair and mutually-beneficial one by civil society and international observers, and an example for other African governments to follow. But now, Botswana is making clear signals that it wants to re-shape the way its diamond industry operates, and reduce De Beers’ grip over the sector. The state-owned diamond trader, Okavango Diamond Company (ODC), is also seeking to increase the percentage of rough stones that it can sell. Furthermore, the government has recently taken a 24 percent stake in Belgian gem trader HB Antwerp. ODC will also supply rough diamonds to HB Antwerp under a five-year agreement, and the deal offers Botswana an opportunity to market finished diamond products, accessing the next level of the value chain.
Botswana is not the only government in Africa that has reconsidered its role and share in joint ventures (JVs) with mining investors in recent years. As one example of many, in the DRC, the government has been reviewing its mining contracts with China under the Sicomines project, and is seeking to increase its 32 percent stake in the JV (see AML co-Managing Director Indigo Ellis’ insight piece on this topic from September 2021 here). Reuters reported on 24 May that the DRC wants to boost its stake to 70 percent. Madagascar is introducing a new mining code, where state royalties from mining resources will increase from two to five percent. Namibia, too, has followed Botswana’s example and is now seeking to improve its partnership terms with De Beers.
African governments have increased bargaining power
Just as it is important for investors in Africa’s mining sector to be cognisant of how governments are reconsidering the terms of new and old projects, it is equally pressing to understand why this trend is growing. There are unique circumstances in each African country that prompt increased government intervention in the mining sector, yet some similar themes can be seen across the different jurisdictions.
Most paramount of these themes is the rising global prices for each country’s minerals, due to a variety of factors.In Botswana, sanctions on Russian diamond firm Alrosa have driven up demand for De Beers’ products, and diamond sales at Debswana hit a record-high in 2022. Similarly, since 2020, the global price of other key minerals and metals has risen. Particularly, for countries rich in critical minerals like lithium, cobalt and nickel, there has been a sharp rise in demand for projects to extract these green energy transition metals. The increased interest in minerals in Africa gives governments more bargaining power, and the ability to be more selective as a flurry of new mining investors look to enter the scene. Botswana, with its new partnership with HB Antwerp, has signalled to De Beers that if terms are not met, there are plenty more investors waiting to enter the space and market Botswana’s diamonds. The DRC is also now engaged in talks with HB Antwerp about its entry into the cobalt market. Governments are more confident in dictating the terms of engagement with foreign investors.
African governments want to ensure their countries benefit from these trends, especially as they face economic pressures and the electorate’s dissatisfaction. This revived interest in the mining sector has boosted potential royalty terms for African governments, who are facing increasing fiscal pressure in the wake of COVID-19. Botswana is heading into an election year in 2024, and the country’s economic growth has been relatively disappointing over the past decade – risking Masisi’s re-election prospects. This year, elections are also coming up in the DRC and Madagascar, and governments are keen to demonstrate their commitment to economic development to win votes. These conditions mean that, in many ways, African governments are pressured to use their increased bargaining power in the mining sector to secure re-election for incumbent administrations.
Balancing act needed to maintain pro-investment climate
African governments in core mining markets are aware that they must balance the growing interest in Africa’s mining space with remaining conducive and welcoming to foreign investment. Although the increasing government intervention in the mining space can pose risks for investors, such as higher royalty rates, the current shifts in the mining order do not need to be feared as ‘resource nationalism’. African governments have to adhere to international standards for investment in order to gain necessary state revenue to alleviate fiscal and economic pressures. We have seen in Tanzania how former president John Magufuli’s economic warfare on mining investors – whom he accused of draining the country’s mineral wealth – eventually stifled foreign investment. This was also the case in Zambia, where the outflux of foreign investment under protectionist former president Edgar Lungu contributed to the country’s debt crisis.
Now, current presidents Samia Suluhu Hassan of Tanzania and Hakainde Hichilema of Zambia are working to reverse their predecessors’ legacies and open-up their mining sectors to investment, whilst striking a balance to maximise profits for their own countries. President Suluhu, for example, recently signed new JVs with three Australian mining firms. However, she retained the legislation introduced by Magufuli in 2017 that Tanzania must own a minimum 16 percent stake in mining projects. President Hichilema is working hard to restore confidence in Zambia’s mining sector by agreeing to many private sector requests – with a view to meet his ambitious economic growth pledges. Notably, Hichilema made mining royalties tax-deductible again in 2021 as one of his business-friendly reforms, which mining company First Quantum described as “realign[ing] Zambia with international best practice.”[1]
Effective stakeholder engagement key to securing mutually beneficial mining deals
The trend of African governments negotiating from a position of strength whilst reconsidering mining contracts and legislation will not reverse in the near-term. However, governments – such as those in Botswana, the DRC, Tanzania and Zambia – also need to foster investment friendly environments. Without participation from the private sector, governments will lose out on key sources of revenue to advance their country’s economic development and win support amongst their electorate.
As this balancing act continues, private investors need effective stakeholder engagement to understand government priorities for their mining sectors. If government priorities are met, investors are less likely to face backlash over small details, or unfair and sudden taxes. It is important that investors have concrete messaging for interactions with government and other key stakeholders, to dispel suspicion that they intend to ‘steal’ the host country’s mineral wealth without leaving anything behind.
