OPINION | Good governance a ticket to attract capital for SA minerals

Although a global mining powerhouse, SA is failing to attract the capital required to secure its future as a dominant player in the resources sector.

To reverse an alarming decline in investment, and capitalise on the global demand for critical minerals, the country needs a coherent long-term strategy built on good governance, a pro-exploration policy, and urgent infrastructure renewal.

Over the last decade, SA’s share of global exploration investment has plummeted to a mere 1%. This drought in exploration funding is a critical threat, as finding and developing new deposits is essential for growth. The investment climate is further chilled by recent Reserve Bank data showing foreign direct investment contracting by 0.2% of nominal GDP in September 2024, a sharp reversal from the 0.9% growth seen in the previous quarter.

Securing funding for mining projects is a formidable task. The initial costs are at least partially sunk and effectively irreversible, while future rewards are fraught with uncertainty. Bringing a single mine into production can cost billions of dollars, creating a major financing headache for companies.

Capital is typically raised through three channels: development finance institutions, bond markets, and private financing. Yet, global private equity funds hold about $17bn (R303bn) in specialist mining capital, and of this, just 2.8% is focused on Africa.

This scarcity of private capital highlights the intense competition SA faces for investment. However, with call for building sustainable society through the SDGs and global energy shift, renewable energy is key competitive for investment as renewable energy FDIs are concentrated in SA, Morocco, Egypt and Kenya, accounting for around 75% of all renewable energy FDIs in Africa since 2010, at $46bn.

As former JP Morgan investment banker Colin Coleman noted at a Chatham House event in Sandton this week, attracting capital from the West is not simply about government policy. Good governance, he argued, becomes a key lever for success, assuring investors their capital is safe and that the regulatory environment is stable.

Crippling inefficiencies in state-owned enterprises (SOEs)undermine the entire mining value chain, and deter investors from China’s perspective, as China’s investment is state-driven through the state enterprises.

This is where SA falters. Crippling inefficiencies in SOEs , particularly the freight rail challenges at Transnet, and the disastrously slow turnaround times at port terminals, undermine the entire mining value chain and deter investors.

To unlock its potential, SA can look to Indonesia’s success in its nickel industry. Facing a similar challenge of exporting raw materials with little value-add, Indonesia took decisive action. In January 2020, it implemented a complete ban on unprocessed nickel ore exports.

The strategy was to force investment into domestic processing and capture more value locally. It worked. The ban catalysed a wave of investment, led by Chinese smelters, into building a domestic refining industry. These new facilities proved highly innovative, making it commercially viable to process previously overlooked nickel-ore deposits.

The results speak for themselves: Indonesia’s share of the world’s refined nickel production has doubled to roughly 50% since the ban was enacted. In 2023, Indonesia exported $22bn of processed nickel, accounting for 9% of its total exports, up from just 2% in 2019. The nation is now positioned to specialise in higher-value parts of the electric vehicle supply chain, such as battery precursors.

SA's mineral wealth is immense. It ranks in the top three globally for platinum-group metals (PGMs), vanadium, and manganese ore, with its gold and coal industries remaining in the top 10. According to the IMF, SA, Gabon and Ghana collectively account for more than 60% of global manganese production. These resources, especially the critical minerals essential for technology and defence, are in high demand.

The IMF forecasts that these minerals could add 12% to Africa's GDP by 2050. Yet, this potential will remain locked in the ground without a clear vision. Other nations are not standing still. The French government, for example, has pledged €500m to a critical metals fund to secure its supply chains.

For SA, the path forward requires an integrated strategy. This must include creating a stable and predictable regulatory regime, offering compelling incentives for exploration, and aggressively tackling the infrastructure crisis by liberalising non-core operations of SOEs.

Drawing lessons from Indonesia’s bold beneficiation strategy could provide a blueprint for turning raw potential into tangible economic prosperity.