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In Africa, China emerges as growing risk for Western miners

Of all the risks that Western mining companies face in Africa, here's one that might surprise you: China.

Pierre Fournier and Michael Fini at National Bank Financial released a fascinating report this week looking at the myriad threats to mining operations on the continent.

There is no shortage of them: Social tensions can ignite because of low living standards, infrastructure is poor, governments are prone to raise taxes and the African economy remains vulnerable to economic shocks in developed countries, which can have a big impact on mining profitability.

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But China is also a risk to Western mining companies, and the threat is growing as the country's investment in Africa's mining sector expands rapidly. China is Africa's biggest trading partner and invested $15.6-billion (U.S.) in the mining sector in 2011 alone, with seven projects worth more than $1-billion each.

"These investments are typically welcomed by corrupt and less-corrupt governments alike as they come with no-strings-attached, a result of Beijing's preferred foreign policy of 'non-interference,'" Mr. Fournier and Mr. Fini said in their report.

To their credit, the Chinese are doing a number of things right. They can spend big money on infrastructure projects in Africa and have a habit of seeing things through even during economic downturns.

Bob Geldof, the anti-poverty activist and the organizer of Live Aid and Live 8 concerts, has been a vocal supporter of doing business in Africa and believes the Chinese have been good for the continent, for the most part.

The problem for Western mining companies? First, Chinese state-backed companies are a big competitive threat because they can outbid Western companies for the most sought-after concessions.

"This poses a serious medium to long-term risk for miners with African-focused growth plans, as they will be hard-pressed to successfully compete with politically connected and capital-flush Chinese firms," the National Bank authors said.

The second problem, according to Mr. Fournier and Mr. Fini, is more serious: In the more corrupt African states, Western-owned projects and contracts can be expropriated and sold to companies that enjoy a cozier relationship with these regimes – Chinese companies top the list.

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This is more than a theoretical threat. One recent example that lingers as a terrible moment for investors is Katanga Mining Ltd., a copper and cobalt miner that trades in Toronto.

In 2007, the Democratic Republic of Congo forced Katanga to hand over two permits during a contract review process. The government then handed those permits to Sicomines Co. Ltd., a joint-venture between Gécamines Company and China Enterprise Group.

Before the handover, Katanga shares traded for about $20 (Canadian). On Wednesday afternoon, they traded for 44 cents.

This is not to say that all Western mining operations in Africa face similar setbacks. But as Mr. Fournier and Mr. Fini noted, competition for high-quality projects is on the rise, and it is sending companies into more volatile regions. And that comes with risks.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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