THE AFRICA MINING VISION A Tool for Structural Transformation?

1. THE AFRICA MINING VISION A Tool for Structural Transformation? AEC 2011– Green Economy and Structural Transformation 25 – 28 October 2011 Wilfred C. Lombe Regional Integration, Infrastructure and Trade Division

2. Presentation structure • What is the AMV • What are its tenets • What are the key drivers • A SWOT analysis of Africa and mining • Implementing the AMV – process and findings to date • The main enablers 2

3. WHAT IS THE AMV? • A vision adopted by the African Heads of State and Government in February 2009 • Created by a technical task team comprising UN agencies, the AfDB, AMP, RECs and AUC • Its goal is to create a - “Transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development” • It is essentially seeks to use Africa's natural resources sector to transform the continent's social and economic development path 3

4. THE TENETS – focus areas • Development of a diversified and globally competitive African mineral industry which contributes to broad economic and social growth through creation of economic linkages • Fostering a transparent and accountable mineral sector in which resource rents are optimized and utilized to promote broad economic and social development • Promoting good governance of the mineral sector in which communities and citizens participate in mineral assets and in which there is equity in the distribution of benefits 4 4

5. THE TENETS – focus areas • Optimizing knowledge & benefits of finite mineral resources at all levels of mining & for all minerals • Harnessing the potential of small scale mining to improve rural livelihoods and integration into the rural and national economy • Fostering sustainable development principles based on environmentally and socially responsible mining, which is safe & includes communities and all other stakeholders. • Building human and institutional capacities towards a knowledge economy that supports innovation, research and development 5 5

6. KEY DRIVERS OF THE AMV Africa has a comparative advantage but most minerals exported as raw materials - potential for resource based industrialization has always been high Eleven African countries are actually among the top ten global resource countries in at least one major mineral. Source:Deutsche Bank; US Geological Survey (USGS); World Nuclear Association, cited from McKinsey Global Institute Analysis (2010)

7. The mining value chain and Africa The value chain in Africa ends here, at best Developed countries complete the chain Least value Most value Exploration Mining Mineral processing Smelting & refining Semi – fabrication Final product manufacture • 1. Inputs • Consulting services (surveying, drilling, design, bulk earthworks) • Specialized equipment • Utilities and raw materials • Finance • Output/Sellable Product • Run-of-mine ore for sale to miners • 2. Inputs • Run-of-mine ore • Consulting services • Specialized equipment • Raw material inputs • water and power • Labour • Output/Sellable Product • Concentrate for sale to traders • 3. Inputs • Concentrate • Consulting services • Specialized equipment • Raw material inputs • water and power • Labour • Output/Sellable Product • Refined product for sale at metal exchanges • 4. Inputs • Refined product • Consulting services • Specialized equipment • Raw material inputs • water and power • Labour • Output/Sellable Product • Semi-fabricated product for sale to manufacturers • 5. Inputs • Semi-fabricated product • Consulting services • Specialized equipment • Raw material inputs • water and power • Labour • Output/Sellable Product • Final manufactured product for use Source: Adapted from Lydall, 2010

8. KEY DRIVERS OF THE AMV China leads current global consumption Source: Ericsson (2009) citing Chinese statistics and metal forecasting, Macquarie Commodities Research, Macquarie Capital Securities (2008). Demand for mineral commodities has soared since about 2003 Gold Copper Iron ore Nickel Lead Zinc PGMs Other Source: Raw materials data (2010)

9. What is driving demand? Some economists believe a super cycle is taking place - a prolonged long-trend rise (10 to 35 years) in commodity prices, driven by industrialization of a major economy The 6 most traded metals on LME are Al, Cu, Pb, Ni, Sn and Zn, inputs in construction, transportation and heavy manufacturing Consumption vs. GDP per capita The super cycle Consumption vs. GDP per capita U.S Japan, EU 9 Source: USGS - Platts; US Department of Labor. (cited Citigroup, 2005) Source:Source: Raw Materials Group, 2011

10. KEY DRIVERS OF THE AMV Selected commodity prices Mineral commodity prices have increased exponentially since 2003 Source:PWC review of global trend sin the mining industry (2011)

11. KEY DRIVERS OF THE AMV High demand and mineral commodity prices have created strong geopolitical competition for minerals - has led to large investment in African mining China now imports $100 billion worth of base metals per year Has invested in both acquisitions and greenfield projects Also in mineral processing (7 EPZs) facilities and infrastructure Major Chinese mining investments in Africa (2009) 11 11

12. KEY DRIVERS OF THE AMV Extractive mining operations with Canadian interests Cumulative Canadian Mining assets in Africa Growth in Canadian assets 1989 – 233 million 1995 – 635 million 2008 - $25.8 billion Mines in production, including advanced development projects as of December 2008. In 2007 Canada present in 35 countries

13. KEY DRIVERS OF THE AMV ASX-listed companies with operations in Africa Some 150 ASX listed or Australasian based mining and exploration companies are active in 40 African countries Their collective investment in last ten years is believed to be in excess of $20 billion – 87% of deals in last 10 years!

14. Is a scramble taking place? • India has also expanded its FDI into the African extractive sector, driven by large multinationals like Vedanta in copper and Tata in steel • Brazilian companies are aggressively investing in Africa’s mining sector – eg Vale in Guinea, Mozambique and Zambia • Concerns about security of supplies led to EU defining the Raw Materials Initiative • And the US and Japanese strategy based on “criticality” of high technology materials eg rare earths considered more important • Criticality defined by importance & availability (US) • The EU, like the US has no stock pile. But systematically monitors markets and supply – Raw materials initiative • .

15. Who are the major players? • BHP Billiton • Mines copper, iron, gold, and coal, and has proved oil reserves • Strategy of owning and operating large, long-life, low-cost, upstream assets • Intends to diversify into potash Source:Capital IQ, cited from PWC review of global trend sin the mining industry (2011)

16. Performance …for whom?? Share of revenue by commodity % Revenue by customer location 2005-2010 Average returns for the top 10 ($bn) Returns to the company - net profits Payments to governments – taxes and royalties Payments to employees – salaries, wages, bonuses Top 40 Results: • Revenues up 32% – breaking $400 billion for the first time • Net profit up 156% to $110 bn • Op cash flows grew 59%, with > $100bn cash on hand at year end • Total assets →$1 trillion • Net debt down to $46 billion, resulting in gearing of only 8% Source:PWC review of global trend sin the mining industry (2011)

17. A SWOT analysis of Africa and mining • Strengths • Unquestionable mineral endowments • Unexplored areas • An increasing regional market share • Political and economic reform • Improved macroeconomic stability and capital markets recognition • Weaknesses • Negative perception for investment • Infrastructure deficiencies • Heavy reliance on commodities combined with low capacity for contract negotiation • Low capacity to audit value chain • Weak policy capacity • Opportunities • Expand mineral production to meet demand through foreign and domestic investment • Explore opportunities for linkages with local industries • Invest in infrastructure development • Explore resource corridors to facilitate FDI flows • Threats • If China’s growth slows down there will be a fall in mineral prices • Global recession leading to high interest rates and low capital markets activity for financing exploration and development • Lack of local participation in the value chain Source:WBMS, Raw materials group data (2010)

18. IMPLEMENTATION – process and findings Two main phases: an analytical first phase to develop body of knowledge, actions and recommendations to guide phase II Implementation phase II will develop toolkits, policy guidelines, templates and targeted capacity building programmes Phases are not mutually exclusive: actions can be fast tracked depending on internal and external factors Phase I: An international study group was established to explore how Africa’s mineral regimes can transform mining into a tool for broad economic development Work of the ISG group is complete and an analytical framework report compiled 18 18

19. IMPLEMENTATION – process and findings Main findings of ISG Report: • Exploit global competition and resource glut by encouraging development contracts that are fair • Optimize tax revenues through strategic use of royalties, resource rents, and other imposts • Explore diversification alternatives along the value chain • Strengthen environmental and social practice through greater local and community participation • explore legislated CSR to provide certainty and uniformity • Embed CSR in a broader social development agenda • Strengthen effectiveness of environmental and social impact frameworks 19 19

20. IMPLEMENTATION – process and findings • Improverevenue transparency, sharing and use on developmental projects through improved governance eg EITI, EITI++ , Dodd Frank Law, New EU legislation, are they enough? • Strengthen capacities to manage mineral sector especially in tax structuring, contract negotiations, value chain auditing, monitoring transfer pricing, investment agreements, etc • Boost the contribution of ASM • Embed ASM in mainstream rural economic activities • Work towards converting ASM into viable businesses eg through cooperation and mentorship by LSM • Adopt a regional approach to bridge technical and financial challenges • Encourage regional cooperation to share capacities eg developing regional economic and social infrastructure 20 20

21. IMPLEMENTATION – process and findings Explore use of price discovery instruments eg auctions or contracts that include development objectives – eg infrastructure (R4I), economic linkage (processing zones) and more PPIs 21 21

22. IMPLEMENTATION – process and findings R4I contracts combine mining contracts and infrastructure projects to offer FDI benefits greater than provided by the sum of the two contract types. 22 22

23. IMPLEMENTATION – process and findings In optimizing mineral linkages, pay attention to collateral economic and social use to promote integrated spatial resource use 23 23

24. IMPLEMENTATION – process and findings An Action Plan is being developed by AUC, ECA and ADB to implement the AMV – requested by Heads of State Recommendations the international study group being included in Action Plan ISG Framework Report and Action Plan to be presented to African Ministers of Mining in December 2011 The ministerial outcome will be used to report back to Heads of State The Plan will then be implemented under the supervision of the AUC by various partners 24 24

25. ENABLERS – success factors AMV was developed by African Leaders for Africa and is the reference Framework Collective ownership by Governments, regional institutions (AUC, RECs, AUC, AfDB), NGOs and private sector important Need very strong coordination capacity – Mineral Centre? Partnerships are critical – Bilaterals have offered support EU using AMV as a basis for EU-AUC partnership cooperation programmes ACP countries giving support World Bank has offered partnership & support Capacity building of Africans to better manage the mineral sector in critical areas 25 25

26. THE AFRICA MINING VISION Natural Resources and Structural Transformation THANK YOU ! 26 26