Zimbabwe worth a second look

IT WAS noted at the Indaba Mining Conference in February that Africa would stage about 17 elections this year, and that the continent could become a hotbed of political and economic instability.

It was easy to talk in such terms. The civil eruptions of North Africa were already in full flow, even though Hosni Mubarak had yet to be ejected from his 30-year seat of power in Egypt, and Muammar Gaddafi, Libya's dictator, had not launched a bloody war upon his people. Elsewhere, there was escalation in the disputed election result in Cote d'Ivoire but election-related troubles in Nigeria and, to a lesser extent, Uganda, were yet to play themselves out.

And yet, almost astonishingly, commentators see through these short-term problems believing the continent to be the next frontier. Astonishing, because the track record of opinion about Africa has rarely been anything but short-term.

Perhaps, though, stark economic facts are providing an alternative view. Take, for instance, recent research from stockbroker Renaissance Capital, which reported that Africa's global trade has increased tenfold to $129bn since 2000. "By 2015, trade turnover could have reached nearly $400bn, with Africa's surplus around $40bn," it said.

It's also hard to ignore China's activity on the continent. Chinese foreign direct investment quadrupled between 2005 and 2009, totalling $9.5bn. That's according to the Chinese ministry of commerce and is thought to underestimate real investment levels by a span. Again, throwing out estimates to 2015, Renaissance Capital thinks FDI will be $40bn.

In a recent column by Helena Wasserman for Fin24, Miningmx's sister publication, consultancy group McKinsey & Co was quoted to have said the number of households with discretionary income in Africa will rise 50% by 2020, reaching 128 million. By 2030, the largest 18 cities in Africa will have a combined spending power of $1.3 trillion, it said.

As for wider economic growth, the Economist Intelligence Unit expected Africa to maintain 5% per year for the next five years. Seven of the 10 fastest-growing countries forecast for that period are from sub-Saharan Africa.

Set against this context, one wonders how neighbouring state Zimbabwe fares, especially its resources-based economy, given the massive vote of confidence analysts have in Ghana and Kenya which have established political economies?

Undoubtedly, Zimbabwe has turned from bread basket of Africa to basket case, a well-worn aphorism. But it's not quite the mess it was once in. The adoption of foreign currencies, the US dollar principally, has eased liquidity in the country and notwithstanding the creakiness of the Zanu-PF/MDC coalition, there is evidence of private investor positioning in Zimbabwe.

"The introduction of multiple currencies has assisted most of the mining entities within the country to afford purchases of the required machinery, equipment and consumables to increase production output," said Frost & Sullivan's James Maposa. Mining consumables such as fuel, chemical and explosives are now more easily imported from South Africa.

Maposa felt this was a key economic policy reform. Building on the 47% increase in mining production last year (off a very low base), Zimbabwe's mining sector could record a further 44% output improvement in 2011. Platinum, coal, and controversially diamonds, remain the key commodities but the resumption of activities by Zimbabwe's gold industry is also helpful.

Said Renaissance Capital in a recent note: "Mining output presently constitutes 7% of (Zimbabwe's) GDP (gross domestic product); however, we forecast that double-digit growth over the medium term will boost mining output to 12% to 13% of GDP by 2015."

Private equity firm Musa Capital is currently seeking between $45m and $60m to finance development of a suite of assets for a single client operating in Zimbabwe's gold sector. "Some of the assets were once explored by Anglo but mothballed; others are shallow workings while yet another asset is state-owned and provides the client with the opportunity of a management contract," said Antoine Johnson, one of Musa Capital's founders.

"There's no doubt the Zimbabwe government wants to revive the economy and it sees the importance of a more sane economic policy," he said.

Why then rattle investors by scheduling ambitious timetables for indigenisation, Zimbabwe's answer to the empowerment legislation of South Africa? A second gazetting of indigenisation lawmaking recently suggested properties might be expropriated – a shock that shaved off 7% to 8% in one day from the stock prices of prominent platinum miners operating in Zimbabwe.

Johnson believes the risks posed by indigenisation can be navigated by proper structuring. "You have to come up with a mechanism whereby the funder gets the economics that it wants, taking into account past and future capital injections, while complying to the proposed or any other legislation," said Johnson.

"Anyway, Zimbabwe has at least provided clarity on what it wants," he added.

The key to Zimbabwe, perhaps, is that its political risk is so towering that positioning in the country carries no premium. Take Mwana Africa, the AIM-listed junior miner with assets in Zimbabwe. According to London's Ambrian Partners, 51% indigenisation only shaves 3.5 pence off the group's target price which is still more than a twofold premium to its current stock price.

Or I return to the final finding of the Fraser Institute study, the North American research house that earlier this year listed Zimbabwe as possessing one of the world's riskiest mining policies. The finding asked mining CEOs which they thought the more important: mineral deposition or political risk. Nearly 60% chose the former, suggesting that very little has to improve in Zimbabwe, and Africa, to open the taps on increased mining investment.