Mines and money mauritius

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Mines and Money : 'Mauritian Immersion :With fears of nationalism in Africa rising and capital markets remaining tight, Mauritius is shaping up to be a critical cog for resource companies and investors seeking safety in the region – and to provide an important channel for Asian investment. '

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Mines and money mauritius

  1. 1. 12 COVER STORY mines & money mauritius mauritian immersionWith fears of nationalism in Africa rising and capital markets remaining tight, Mauritius is shaping up as a critical cog for resources companies and investors seeking safety in the region – and to provide an important channel for Asian investment. The Mauritian flag. JUNE/JULY 2014 RESOURCESTOCKS
  2. 2. 13JUNE/JULY 2014 RESOURCESTOCKS WORDS BY ANTHONY BARICH T HE LAUNCH OF Mines and Money Mauritius this month heralds an emerging trend in mining investment in one of the world’s fastest growing markets and signals where much investment focus lies at the moment. In recent times we have seen massive unprecedented gas discoveries offshore east Africa, unconventional opportunities in southern and eastern Africa as well as in the northwest, the well- known and still relatively immature Zambia-Democratic Republic of the Congo copper belt and the gold in west Africa that has captured the imagination and investment dollars of Aussies over the past decade, to name a few opportunities. The significance of Mauritius as a safe financial centre to structure deals for African projects with foreign capital is sure to rise: Standard Bank London mining and metals head Vaughan Wickins told Mines and Money London last year that while all the talk around Asia’s middle class had dominated the previous Australian Labor government’s Asian Century slogan, at current growth rates Africa would overtake China in population by 2030 – and this expanding population wanted to live in cities. Many African nations are starting to realise they have the upper hand and are either considering or implementing policies miners and investors warn are nationalistic in spirit, jeopardising investment and the prosperity of the continent. This is another impetus for foreign investors to structure their African deals in Mauritius, as the island state has signed 19 investor protection treaties and 17 double taxation avoidance agreements with Sub- Saharan African governments. Either way, it doesn’t seem to be stopping Asian investment. According to the China-Africa Economic and Trade Cooperation document produced by China’s Cabinet last August, Africa has seen a decrease in foreign direct investment (FDI)but an accelerated growth of direct investment from China over the same period. From 2009-2012, China’s direct investment in Africa increased from $US1.44 billion to $2.52 billion, while China’s accumulative direct investment in Africa increased from $9.33 billion to $21.23 billion. “The rapid growth of China’s direct investment in Africa is indicative of Africa’s development potential and investment appeal and also points to the mutually beneficial nature of China-Africa cooperation,” China’s Congress said. “While increasing aggregate investment, China is also improving the level of its investment in Africa. “Currently, over 2000 Chinese enterprises are investing and developing in more than 50 African countries and regions and cooperation fields have expanded from agriculture, mining and building industry to intensive processing of resource products, industrial manufacturing, finance, commercial logistics and real estate.” By the end of 2012 China had also signed bilateral investment treaties with 32 African countries and had established joint economic commission mechanisms with 45 African nations. With energy and minerals “The rapid growth of China’s direct investment in Africa is indicative of Africa’s development potential and investment appeal.” CHINA’S CONGRESS
  3. 3. 14 JUNE/JULY 2014 RESOURCESTOCKS being the main impetus for African countries’ economic growth, China’s Congress said its enterprises had helped them establish an “upstream- downstream integrated industry chain”, actively participating in “local public welfare infrastructure construction” like highways and hospitals, for example, in the Democratic Republic of Congo while extracting copper-cobalt ores. Meanwhile, Japan recently committed to investing $2 billion in mining and energy projects in Africa, in an apparent attempt to catch up to China’s long-term investment in Africa that led in 2011 to the International Monetary Fund revealing that 29% of all China’s FDI was directed at mining. With this in mind, it was a no- brainer that RESOURCESTOCKS publisher Aspermont expanded its London-Hong Kong-Beijing- Melbourne Mines and Money mining investment conference franchise to this year launch Mines and Money “Access Africa” Mauritius 2014. “We are running Mines and Money in Africa because we’ve identified Sub-Saharan growth as growing from a low base, the second fastest growing region behind Asia at 6% annualised,” London-based Mines and Money conference director Andrew Thake told RESOURCESTOCKS. “That was the first stepping point for us. Africa is a big mining market – it has lots of natural resources to be exploited, lots of really high grade deposits and presents lots of challenges.” With a number of Mines and Money events already being undertaken around the world, the need for an Africa-focused one was a gap that needed filling. “While the mining market is changing quite a lot, we felt there was a need for an event that only focuses on financing, investment and mining in Africa,” he said. “Asia is the big player in Africa now. A lot of the Chinese state-owned entities and private investors are there. The reason we’re running it in Mauritius is it’s emerging as the funnel for Asian money into Africa. “Mauritius is also the largest conduit for Indian money being invested abroad. All the money that comes via Mauritius from India goes through their international finance centre in Mauritius. “Mauritius is ranked number one for ease of doing business in Africa by the World Bank [and ranked 23rd globally], while HSBC, Deutche Bank, Barclays etcetera are all there, plus international law firms … you have everything you need to wrap up a deal in one day which you can’t get in the majority of other countries in Africa.” A compelling but perhaps unsurprising fact is that Mauritius Board of Investment chairman Maurice Lam’s family hails from mainland China. Lam spoke to RESOURCESTOCKS exclusively at Mines and Money Hong Kong and said his father migrated from mainland Hong Kong and married a Mauritian woman. Lam and his siblings were born on the island, which has about 30,000 Sino- Mauritian residents out of a total of just under 1.3 million. Lam noted that the Mauritian link with Asia was historical. “We have people who have migrated from India and China, so we have ancestral and cultural links,” he said. “So when I say ‘we are Africa’, in terms of geography, yes – in terms of population, no. The population is mainly Asian – Indians and Chinese, some Africans and Europeans, which means we offer a unique value for people from Asia to meet with people with Asian ancestry. “At the same time, we have people from Africa who understand the continent, so it’s an ideal bridge between Asia and Africa.” Chinese door. Mauritius is a gateway for Chinese funds into Africa. “We want to develop the financing of mining operations from Mauritius. We have a special section on the stock exchange with more flexible listing rules for mining companies.” MAURICE LAM MAURITIUS BOARD OF INVESTMENT
  4. 4. 15JUNE/JULY 2014 RESOURCESTOCKS Lam noted that Mauritius offered investors and miners an island of stability, with an established democracy that had been an independent nation for 48 years and had elections every five years. “Whoever is in power loses peacefully,” he said, adding that its rule of law and legal system was very important, with a very independent judiciary. “And we have been lucky to have been a French and British colony, so we have a combination of French law and British common law. That offers both access to French-speaking Africa and English-speaking Africa,” he said. “The most important thing is final court of appeal is the UK Privy Council, which is unique for this part of Africa. Anyone who wants to raise a family in Africa can feel very safe in Mauritius [with its] good health care, school system and housing and good lifestyle. “The business climate is very conducive for the private sector, which the government strongly encourages. It has a very simplified tax system, with a 15% rate across the board – corporate tax, personal tax and sales tax, so there is no confusion.” As to why somebody would come from Asia to conduct mining business in Africa via Mauritius, Lam said Mauritius had “an African strategy”. “We don’t have any mines in Mauritius, so we say [Mauritius offers the opportunity for] risk mitigation: as a government we have signed investment protection treaties with many African countries, which means Mauritian companies investing in African countries have some comfort, with government-to-government dealings if there are any problems,” he said. “Second, we have a very strong financial services sector, which offers risk insurance, that is, risk management. “Then we have an arbitration court in Mauritius, so if you do any contracts in Africa, you can have an arbitration clause to give you that comfort.” “We also want to develop the financing of mining operations from Mauritius. We have a special section on the stock exchange with more flexible listing rules for mining companies. “Our banks are willing to finance operations in Africa [and] are comfortable taking African risks. “More importantly we have the whole ecosystem – lawyers, accountants, brokers, who can advise companies how to structure deals and raise money in Mauritius.” There are special regulations on the Mauritian exchange for enabling junior mining companies to list. Perth-based Peak Resources is one example of a company doing business in Mauritius. It has just released its prefeasibility study in phenomenal time just four years after its virgin Ngualla rare earths discovery in Tanzania in 2010. “One way of funding the ongoing development of the Ngualla project though bankable feasibility study is to sell down a small interest in our Mauritian holding company,” Peak managing director Darren Townsend told RESOURCESTOCKS. “This prevents dilution of Australian Securities Exchange-listed Peak Resources at the current stock price. Peak Resources currently owns 100% of a Mauritian company that in turn owns 100% of a Tanzanian company that has the rights to the Ngualla licences in Tanzania.” Townsend noted that Asia was boosting its infrastructure investment in Africa to help secure resources for the future. “[China’s] business model from what I can see tends to be to go in and put in infrastructure but using their own people and technology, so a lot of the money is coming back into China,” Townsend said. “So it’s a circuiting process, which helps with China’s GDP and keeping the economic cycle strong in China. With GDP at about 6%, which is apparently slow but it’s still a very good number, it’s also about getting in the good books with African governments to be able to access the continent’s resources.” He said there were historic concerns in Africa about some minerals just being shipped out in an unprocessed form and not a lot of value-add and technology being put into Africa. “There have also been some terrible transfer pricing problems from the past,” he said. “The reality is some of the behaviours of some of the western mining companies in the past have actually been quite bad, taking stuff out of Africa and not paying their fair dues. “African governments are putting in place mechanisms to ensure that doesn’t happen, which is fair enough. It’s about striking a balance between how much development you do in Africa versus the end user market.” He said as a general rule, the Chinese generally preferred to use as much processing capacity as it already had installed back home where possible but some African countries had started setting in place rules around in-country processing requirements. Peak’s PFS base case is centred around further processing onsite at Ngualla all the way through to separated RE products. “There are opportunities to look at different ways that could be structured. We could do some beneficiation onsite, an acid separation on the coast near Dar es Salaam,” he said. “At the end of the day, the demand for minerals like this are Asia but I think you will see some development in the Middle East to get more exposure to these sort of metals. “The Middle East is diversifying out of a pure petrochemical economy – their key oil and gas revenues – into other industries. One of the key benefits of rare earth processing is you do need to use reagents and a lot of reagents are by-products of petrochemical processes. So there are some smart synergies with the chemicals and by-products coming out of the Middle East.” There is also interest from the Middle East in Africa via Mauritius, illustrated by the presence of Oman Investment Fund chief economist Fabio Scacciavillani speaking at Mines and Money Mauritius. Townsend said African countries setting up regulations around localised value-adding to mined products was unlikely to dissuade the Chinese and they had been in Africa long enough to have established positive relationships. “The raw materials are important and the Chinese need to get that supply,” he said, adding that it was just a case of establishing an open dialogue to determine where investments were located. “But at the same time ensuring there’s no crazy transfer pricing activity happening which is to the detriment of African governments. It’s very important to get that right,” he said. CHINESE CHECKPOINT Past experiences of being burned by bad mining investments and some Chinese executives’ reputations of being good on doing deals and providing money “It’s about striking a balance between how much development you do in Africa versus the end user market.” DARREN TOWNSEND PEAK RESOURCES
  5. 5. 16 JUNE/JULY 2014 RESOURCESTOCKS but not so good at executing in the very unique African playing field meant Asia’s new breed of strategic investors were more savvy about where they would claim their next foothold. Private equity firm Denham Capital director Bert Koth told RESOURCESTOCKS that China’s industrial slowdown, while still growing at a considerable rate, combined with its past investment experiences in mining, meant juniors would have to think laterally when seeking offtake deals and/or funding. “There is a risk of a housing real estate crisis in China,” he said. “We also see that a lot of the Chinese engineering firms and ship builders are operating at really low capacity utilisations, to such a degree that they actually require emergency funding by the government. So there are a lot of on-the-ground indicators that would suggest that China is not on an economically perfect standing. While China traditionally funds projects via offtake deals, so much Chinese capital has been lost in projects that are not viable. “We know Chinese entities that have lost 90% of the money that they invested in mining and if you lost 90% of your investment, next time when people come to you trying to persuade you that their project is worth this or that, they might just not believe you anymore. “And don’t forget that a lot of the Chinese investment was primarily targeting bulk minerals – iron ore and coal. Now, with most forecasts predicting a long-term glut in those commodities, the Chinese strategic rationale of securing at any price a strong supply foothold in those is not as strong as it was before. “Combine this with the fact that a lot of those entities that were major players in that space have lost so much money because they invested in the peak of the market based on inflated expectations and also the fact that the infrastructure growth in China is going to be much slower going forward, the need for iron ore is not as pressing as it was before.” Koth believed many Chinese companies didn’t know how to execute in Africa, so selling a company to a an Asian counterparty required selling the technical execution along with the asset. “This means you need to leave your technical team with the asset for an extended transition period,” he said. Merchant banking company Endeavour Capital director Paul Stevens was still optimistic on Chinese investment in Africa. “In terms of ongoing Asian investment, we believe it is fair to say that the ‘hot money’ being ploughed into the African continent, where the Chinese in particular were prepared to invest in the long game to secure minerals, has abated somewhat but there is still plenty of interest in the right opportunities but perhaps with a higher degree of selectivity,” Stevens told RESOURCESTOCKS. China’s growth rate at the time of writing (April) was 7.4%, with most analysts predicting a further deceleration to circa 7% for 2014 and 2015. China’s appetite for base metals remains strong, accounting for around 50% of global demand. With this in mind, Stevens said Endeavour believed China Inc would continue to be a significant investor in the mining space. “Particularly in undeveloped markets where logistics and infrastructure is key to unlocking mineral wealth,” he said, adding that it would underpin solid demand for base metals in future years. www.hopgoodganim.com.au BRISBANE +61 7 3024 0000 PERTH +61 8 9211 8111 Make your resources business boom Asia Pacific Equity Capital Markets Review – Full Year 2011 Australia/NZ Equity IPO Issuer League Table – First Half 2012 With offices on both the East and West coasts of Australia, and on-the-ground expertise in China, HopgoodGanim’s growth-oriented clients can more easily access our local and international capital markets expertise. With 40 years’ experience, even in tough markets, we know how to help our clients fund their future projects through domestic, international, primary and secondary listings and capital raisings, including on the ASX, TSX-V, TSX, AIM and NSX. Let us help you find the capital to make your company grow. SHANGHAI +86 1381 680 4743

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