African Mining January 2023 | Page 25

MINING INDABA •

In 2022 , the economic landscape has somewhat changed . The mining sector has not escaped rising inflation which has not only led to higher commodity prices but also higher operating costs and capital expenditures . Anecdotal evidence suggests that mining inflation in Africa reached c . 20 % by mid-2022 . This will undoubtedly have offset some of the windfall revenues from soaring metal prices and may prompt mining executives to rethink green-lighting certain capital projects .

Additionally , ongoing interest rate hikes have made existing debt obligations more expensive and any planned debt funding may need to be reassessed . Commodity prices , although still at higher levels relative to 2020 , have softened in recent months , further impacting the margins of producers . More expensive liabilities , lower revenues and possible reduction or delays in capital projects will ultimately reduce the expected future cash flows of most assets . If economic contraction continues in the medium term , it is possible that new acquisitions , acquired during favourable economic conditions and booming commodity prices , may struggle to generate the expected returns , especially if purchased at a premium to fair market value .

Purchase Strategy While overvaluation may not be a concern for all transactions , particularly for a long-term growth strategy in battery metals , investors may view operating assets as too expensive and look for cheaper opportunities earlier in the project lifecycle . Market activity for all mining participants in the period 2021-2022 demonstrates this , where c . 38 % of transactions were at Feasibility stage . Late-stage projects are closer to generating returns and overall considered less risky for the investor .

Recession fears , uncertain global economics and volatile geopolitics will impact upon new mine investments in the near term ( as discussed by S & P Global Commodity Insights , © 2022 by S & P Global Inc .). Despite surging demand for energy transition metals , the broader bearish economic environment , together with countryspecific operating pressures , will continue to weigh in on the pursuit of high-quality assets . In Africa , movement towards resource nationalism , a high tax environment , fiscal instability , and operating cost pressures will influence investor decisions .

Despite the volatility of commodity markets and near-term economic headwinds which may dampen investor confidence for deals in the short-term , the upside for battery metals still exists and some investors may be willing to proceed with acquisitions and weather any impact on short-term value generation . A recent moderation in commodity prices may provide a small window of opportunity to ‘ buy-in ’ before the market recovers and the alarm of practically generating critical minerals and metals for green energy rings out .

With underexplored and underdeveloped critical minerals assets , Africa is a frontier with significant potential , providing new investment opportunities , and supporting mining companies in achieving long-term competitive advantage . Africa can reshape or reinforce the supply chain for major commodity trade , building supply . •

However , anecdotal evidence suggests that portfolio growth for large miners may not necessarily focus on acquisitions of junior development assets , as they often require cash up front ( S & P Global Commodity Insights , © 2022 by S & P Global Inc .). Majors may look to develop resources in-house as a more economic alternative ( S & P Global Commodity Insights , © 2022 by S & P Global Inc .).

Supplied Deloitte

Luke Peters : Valuations manager Deloitte .

Ian Benning : Associate director Deloitte .

Recession fears , uncertain global economics and volatile geopolitics will impact upon new mine investments in the near term .

An investor strategy on market entry will dictate the stage of development of the acquisition target . Either a company can buy a late-stage development project or a producing mine for quicker value generation albeit at a premium , or seek mineral projects earlier in the lifecycle , with less confidence in the resource , but at a significantly lower price .

Major producers target Tier 1 assets , where grade and scale are key success factors . However , these deposits are increasingly more difficult to find and develop . Advanced exploration or development projects in Africa could therefore command the attention of majors .

About the Deloitte Technical Mining Advisory Team : The Deloitte Technical Mining Advisory Team is Deloitte ’ s unique and market-leading competency to provide technoeconomic and techno-strategic advisory services to the mining and metals industry . The team is recognised for comprehensive technical abilities in the evaluation of acquisition and divestiture opportunities , the estimation of Mineral Resources and Mineral Reserves and preparation of corporate project disclosure documentation . The team combines technical mining advisory skills with strong financial and commercial due diligence , transaction services , valuation and post deal integration services . With significant and credible experience advising mining companies and investors on the technoeconomic merits of mineral projects and extensive experience in mineral project transactions , the team is able to assist clients in accelerating their business to a better mining future with the professional expertise spanning the full mineral value chain , powered by independent technical mining advisory that delivers commercial advantage .