Invest in Africa: Why and How Mining is a Good Strategy
The Africa of the past, described as the lost continent, is changing and stands ready to fulfil many of the world’s economic requirements emerging from seismic geopolitical shifts and climate change.
Investors are drawn to its combination of abundant mineral, energy and agricultural resources and an increasingly business-friendly environment. However, the continent is vast, with 54 countries, and each offers an entirely different investment proposition ranging from poor to up there with the best.
Investors interested in participating in the opportunities set to emerge on the fastest-growing continent must do robust country-by-country due diligence if they hope to partake in some of the best returns on foreign direct investment worldwide.
We look at where the greatest investment opportunities lie on the continent, why invest there in the first place and what steps you need to take before taking the plunge.
Table of Contents
Where to invest in Africa?
Africa’s abundance of high-value metals and minerals puts the continent in a prime place to serve some of the world’s biggest geopolitical and climate change shifts during the decades ahead. The sectors most likely to benefit, and thus the best industries to invest in, are mining, infrastructure and fintech.
The rise in geopolitical tensions between the West, China and Russia has seen developed world governments put in place measures to onshore what they deem to be strategic industries, which provides ample opportunities for Africa. These include high-tech goods, such as semiconductors, automotive parts, and defence equipment, which rely on the metals and minerals in abundant supply in Africa.
Africa has a third of the world’s mineral resources and 35% of its uranium reserves. Investors asking, “Should I invest in gold mining companies in Africa?” will be pleased to know that Africa has half of the world’s gold reserves and some of the world’s leading gold mining companies.
The Democratic Republic of the Congo is the largest producer of tantalum, which is used in manufacturing mobiles and laptops. South Africa and Botswana are major diamond producers, and South Africa has 90% of the world’s platinum reserves.
China is currently the world’s biggest producer of rare earth elements (REE). However, Western countries are looking for alternative suppliers to reduce their reliance on China, which presents investment opportunities in Africa. The mining industry in Africa is uncovering rich deposits of REE in Malawi and Namibia, and according to the Brookings Institute, South Africa’s Steenkampskraal Mine has one of the world’s highest grades of rare earth elements. The mine contains 15 elements and 86 900 tons of rare earth oxides.
The Economist Intelligence Unit believes that the African mining industry offers “enormous long-term potential” even though several challenges still face investors in the sector. In a research report on the future of the African mining sector, it says that “Africa will play a crucial role in bridging the gap between the supply and the demand of technology-critical metals and minerals, which will see international mining companies intensify their competition by expanding existing mines, developing new ones and designing more efficient extraction and production facilities.”
Fintech, which has already been an exponentially growing industry on the continent, will continue to offer compelling investment opportunities in alternative payments and other financial services.
A significant portion of Africa’s rapidly growing population remains under-banked, and, given the high mobile phone penetration ratios across countries, disruptive fintech technology is facilitating much-needed financial inclusion.
The energy sector is also set for massive growth as governments prioritise transitioning to a clean energy future. The continent has the lowest electrification rates in the world and ample solar, wind and hydroelectric resources to power renewable energy. The International Energy Agency quantifies the number of people who lack access to be 600 million people, most of them in sub-Saharan Africa.
Based on the agency’s Sustainable Africa Scenario (SAS), which would see universal access to affordable electricity achieved by 2030, 90 million people would need to be connected to electricity a year – triple the current rate and a massive opportunity for investors looking to capitalise on Africa’s energy transition.
Before looking to unlock the opportunities in these sectors, however, investors must investigate the investment environment of the different countries. There are 54 countries on the continent, each with vastly different regulatory requirements, business and economic conditions and political risks.
Countries that are considered top investment destinations are Egypt, Morocco, South Africa, and Kenya. Others may pose greater challenges for investors, but the opportunities are immense. For instance, Nigeria is the wealthiest and most populous country in Africa, offering virtually limitless investment potential, but it has high levels of crime, kidnapping for ransom and terrorism. The Democratic Republic of Congo is rich in tantalum, cobalt and copper but is prone to armed conflict.
Egypt
Egypt is ranked as a top FDI destination by UNCTAD because of its many advantages, which include its proximity to the Middle East, Africa and Europe. It has many prerequisites for a favoured investment destination, offering investors predictability and transparency, a sound and sustainable investment climate and a government committed to welcoming private investment.
In addition to its positive investment environment, it has the skilled human capital lacking in some other African countries, given that many skilled workers immigrate to developed economies. It also has a large domestic market and has plans to become a green energy hub.
Morocco
Morocco is favoured for its stable political framework, well-developed infrastructure and low labour costs. Located in North Africa, it has easy access to Europe. The Moroccan government has paved the way for investors by implementing business-friendly policies, such as tax incentives, free trade, and special economic zones. It has a robust legal framework, a crucial consideration for investors.
Its economy is still largely reliant on the agricultural sector, but there’s a growing automotive industry, real estate is growing, and the renewable energy sector shows great promise. The country’s dependence on agriculture is a potential concern for investors, but the government is committed to supporting the diversification of economic activities.
South Africa
South Africa has always been viewed as the gateway to Africa, with a highly developed private sector, diverse economy, world-class financial sector, robust government institutions and an independent judiciary. Recent challenges to investing in South Africa are the intense load shedding, undermining economic growth and business sentiment.
However, the government is fully committed to partnering with the private sector in its ambitious infrastructure investment programme. The commitment to transitioning to renewable energy is playing out. South Africa mobilised an initial USD 8.5 billion commitment at UN COP 26 Climate Change Conference by a group of developed countries to a just energy transition by funding decarbonisation initiatives.
South Africa’s rich mineral metal and mineral resources also offer compelling investment opportunities, and its first-world technology sector has birthed many innovative fintech initiatives.
A US Department of State investment climate assessment defines South Africa as “a destination conducive to US investment as a comparatively low-risk location in Africa, the fastest growing consumer market in the world”, despite its structural challenges.
Why invest in Africa?
Throughout history, Africa has had the advantage of abundant energy and natural resources but has had a turbulent history. First, there was colonisation, which saw these resources commandeered by the colonisers, leaving few of the proceeds for the African countries. Corruption has also held sway in many African countries post the colonialisation era.
But why is Africa a good investment place to invest? The tide is shifting in most African countries, with governments adopting investor-friendly policies that pave the way for investors to get sustainable access to these resources while ensuring the country receives the financial benefits of these riches too.
Metals and minerals
The graph below shows the richness and diversity of minerals across the continent.
The following graph shows the mineral producers that dominate the production of minerals on the continent.
Energy resources
The IEA says Africa is home to 60% of the best solar resources globally, and solar PV is the cheapest source of renewable energy in many parts of Africa. However, the continent has only reached 1% installed solar PV capacity, giving investors many blue-sky opportunities.
Wind’s potential as a source of renewable energy is mixed across the continent, with coasts, deserts and channels most favourable for investment in wind farms. Regions with promise are Sudan,
Chad and Niger’s rugged, desert-like regions and the mountains and coasts of South Africa, Zambia, Malawi and Lesotho.
Agricultural riches
Africa has abundant arable land, 60% of which is uncultivated. The continent is agro-ecologically and climatically diverse, ranging from tropical forests in West and Central Africa to the dry and arid zones of the Sahel.
With global food demand forecast to increase by 70% by 2050, according to the World Bank, unlocking Africa’s agricultural riches using modern farming practices would put the continent in a position to feed its own population and become the world’s food basket.
Modern farming practices that enhance soil health, irrigation and crop varieties would go a long way towards meeting the World Bank’s forecast 70% increase in global food demand by 2050.
Favourable demographics
Besides its abundant energy and natural resources, Africa is also home to the fastest-growing population in a world where the developed economies and China are experiencing aging demographics. According to the World Bank, Africa’s working-age population is expected to grow by 450 million people, or close to 70%, by 2035. At current rates of growth, Africa will grow by France’s population every two years and will account for 40% of the world’s population by 2100, according to AFSIC.
Regional demographic trends
Regional demographic trends
https://ourworldindata.org/grapher/historic-and-un-pop-projections-by-age
A young, growing population translates into faster-growing economies and a growing middle class that bolsters consumer spending and demand for services. If the government’s focus is on fostering competitiveness and productivity, these favourable demographic dynamics have the potential to transform the continent for the better.
In its favour is that Africa has the highest rate of entrepreneurship of any continent, most of which are women. Entrepreneurship is a powerful engine for economic growth but relies on a well-educated labour force and a more dynamic and business-friendly operating environment. The countries with these ingredients will have great long-term growth prospects.
Business-friendly initiatives
Governments in many African countries are going to great lengths to encourage foreigners to invest in Africa by creating more business-friendly environments.
They’ve reduced bureaucratic obstacles, embarked on privatisation programmes and implemented proactive investment measures.
Nine African countries featured in the Open for Business Index of the 85 best countries for thriving entrepreneurship. The Open for Business score is an equally weighted average of a country’s bureaucracy, manufacturing costs, corruption, tax environment and transparency of government practices.
The countries included Morocco, Tunisia, Kenya, Cameroon, Ghana, Zambia, Egypt, South Africa and Algeria. One example of an investor-friendly government-led initiative is Zambia’s establishment of its Office for Promoting Private Power Investments (OPPPI), which provides research, identifies investment projects and helps businesses obtain permits.
Regional demographic trends
Regional demographic trends
How to invest in Africa?
Investors looking to unlock Africa’s enormous potential by engaging in foreign direct investment or finding African companies to invest in must first do their due diligence. As FTI Consulting says, “The African growth story is not homogenous; it takes place in many different centres, with multiple participants, regions, cultures and languages involved.”
While Africa may offer the highest return on Foreign Direct Investment (FDI), according to the Overseas Private Investment Corporation, it does so to compensate for the higher risk of investing in a continent that is shifting to a more investor-friendly environment but is still grappling with how to ensure some of the benefits of investment are retained for the benefit of the home country.
There is a vast difference in regulatory and political landscapes across the continent. Thus investors need to consider each country’s regulatory regime and political risks, which may include the risk of nationalisation, predatory tax policies, political uncertainty, corruption or the potential for political conflicts.
It’s also crucial to gauge the ease of doing business in a prospective country and how committed government is to facilitating private sector investment because this will affect the cost and time frame of any investment. Governments may also provide incentives to invest in specific industries that align with national objectives. These would contribute to a greater potential return on investment in the long run.
Conclusion
Africa has much to offer investors in a world where geopolitical tensions and fragmentation drive Western developed nations to seek alternative sources of metals and minerals as they onshore strategic industries, like semiconductors, automobile manufacturers and the defence industry.
The global energy transition and technology trends are also working in the world’s second-largest continent’s favour because it is rich in the energy and mineral resources needed to facilitate these global shifts.
More and more African governments are recognising the opportunity to benefit from investor interest. They are creating more business-friendly environments to attract investors interested in capitalising on these trends. However, the continent still has its fair share of challenges and, thus, risks that investors need to navigate.
Investors looking to achieve sustainable long-term returns need to go in with their eyes open after doing robust due diligence on potential investments and the countries in which they are situated.
FAQs
Why is mining a good investment?
Africa has a third of the world’s mineral resources, half of the gold, and 35% of the uranium reserves. The Democratic Republic of the Congo is the largest producer of tantalum, which is used in manufacturing mobiles and laptops. South Africa and Botswana are major diamond producers, and South Africa has 90% of the world’s platinum reserves.
China is currently the world’s biggest producer of rare earth elements (REE), but Africa is uncovering rich deposits of REE in Malawi and Namibia, and South Africa has a mine with one of the highest grades of REEs in the world. Countries in the West seek alternative suppliers to reduce their reliance on China, which presents great long-term investment opportunities in Africa.
The Economist Intelligence Unit says that the African mining industry offers “enormous long-term potential” even though several challenges face investors in the sector.
Why is mining so important to Africa?
Africa’s metal and mineral wealth is crucial to unlocking the growth potential of a continent with the fastest-growing population in the world. By attracting mining companies to invest, African countries will enjoy the spillover effects of employment, skills creation, wealth generation and consumer spending it generates.
Is investing in Africa profitable?
According to the Overseas Private Investment Corporation and UNCTAD, Africa has offered the highest return on Foreign Direct Investment (FDI).
While this is mainly in compensation for the higher risks prevalent on the continent, governments in many countries are addressing some historical risks. These have included a lack of transparency, corruption, and unpredictable government policy and regulations, which should see the risk-reward profile of investing in Africa improve markedly.
Which countries are viewed as the top investment destinations in Africa?
Countries that are considered top investment destinations are Egypt, Morocco and South Africa. However, others are rising up the ranks, including Kenya and Rwanda.
Which sectors offer the most investment potential in Africa?
The sectors most likely to benefit, and thus the best industries to invest in, are mining, infrastructure and fintech.
The rise in geopolitical tensions between the West and China, and Russia has seen developed world governments put in place measures to onshore what they deem strategic industries, providing ample opportunities for Africa. These include high-tech goods, such as semiconductors, automotive parts, and defence equipment, which rely on the metals and minerals in abundant supply in Africa.
The transition to a net zero economy also means the energy sector offers ample investment opportunities in Africa. The continent has the lowest electrification rates in the world and ample solar, wind and hydroelectric resources to power renewable energy. Also, Africa has mineral resources that are needed globally to facilitate the transition to renewable energy, including cobalt used in the production of lithium-ion batteries.
About the Author: Sharon Wood
