So, you want to do business in Africa?

There are always a multitude of obstacles to consider when expanding or starting a business, or just taking a job in another country. However, how do you do this successfully when business challenges are compounded by widespread poverty, political turmoil, or a lack of infrastructure? Companies operating in parts of Africa often have to overcome these obstacles before becoming viable. Nevertheless, capitalism knows no bounds—and promotes national wealth creation when executed properly. 

Characterized by a traditionally difficult socio-political environment, Africa’s business climate has changed drastically since the mid-90s, and investment is thriving. However, there is a sense in some industry circles that a drastic change needs to happen in the approach of conducting business, running it and succeeding in the continent. Mining is one of these industries.

Notwithstanding the fact that external investment into a country’s resources always carries risk, business pioneers have gone into Africa to seek new opportunity—and have succeeded where many have failed. But the continent has long been a place where corporations have taken advantage of the profit potential, without acknowledging the consequences of exploiting resources in the form of people power, natural resources, or political will.

Mark Bristow, CEO of Randgold Resources, is a native South African and a friend to business development in the region. Bristow travels the world promoting his gold mining business in Africa, but also speaks to the power of social investment and the appropriate way to mitigate risk in a place where risk is often ignored in favour of the bottom line.

Randgold Resources’ is truly an African business success story. Major discoveries to date include the 7.5 million ounce Morila deposit in southern Mali, the +7 million ounce Yalea deposit at Loulo in western Mali and the +4 million ounce Tongon deposit in the Côte d’Ivoire. Randgold Resources financed and built the Morila mine which, since October 2000, has produced more than 5 million ounces of gold and distributed more than US$1.3 billion to stakeholders. It also financed and built the Loulo project which started as two open pit mines in November 2005. Moreover, Bristow’s company is a leader in social and sustainable development.

George Media’s Sara Kopamees has met with Bristow on several occasions to discuss the ins and outs of operating in Africa, and recently spoke with him in an exclusive interview to find out how, and why, companies in mining and in other industries should mitigate risk. Mining makes up a large part of Africa’s GDP, and so serves as a perfect example of how corporations, politics and culture mix in today’s business landscape.

Sara Kopamees: How do you evaluate risk?
Mark Bristow:  Well, if first I was to analyze risk, I think it can be divided into three categories: expectation, capacity, and delivery.

SK: Let’s start with the first element: expectation.
MB: If you look at Africa (and I think this is transportable into any developing continent), there’s an expectation that mining brings with it huge windfall benefits immediately. Unfortunately, it doesn’t. The industry has created that expectation because trailblazers (early-stage), Canadian and other national mining companies have some money, go into the mining industry at a time when the market’s running, and they don’t have any long-term strategy or commitment because they’re never intending to build a mine.

SK: So we’re talking explorers and early-stage mining enterprises then.
MB: Yes. What happens is that they cut some deals with some local entrepreneurs, and they flash around their money, and then it doesn’t last. There’s this concept that if you get a mineral right, it will turn into a mine.  But then that doesn’t always happen. That expectation is created by over-active promotion designed to realise short-term speculative gains.

SK: What are the other stages, recognizing that we’re in the expectation element or category of risk?
MB: There are three phases in the value curve or the evolution of a mining enterprise in a country. The first is exploration, the second is development and third is profitable operation. Unfortunately, what we have often seen is the reverse of this value creation curve, where the focus has been on early-stage hype and promotion, not backed by substance and not accompanied by any real intention to develop.  The result is inevitably disappointment for the host country.
There were times in the early ‘90s when companies were listing on exchanges on the value per kilometre of mineral rights and then they didn’t deliver [what they said they were going to do]. The governments thought that this investment was going to be the best thing since sliced bread. But suddenly the gold price changed and people went bust and voila—the realization that that process wasn’t all that clever.

Now, the governments have a dose of reality and they have lowered expectations—now they can get timelines right. West Africa, for example went wild in the base metals industry in the last two years. Everyone was suing everyone—kicking people off mineral rights, making deals with governments (in Senegal, Liberia and Guinea, in particular). Then suddenly, the commodity price fell out of bed and poof—everything changed. The promotional phase of a new business is the product of everyone becoming greedy.

SK: Right. So going in, promoting, making money on the markets, and pulling out.
MB: The same thing happened in the DRC—in the ‘90s, despite the war, everyone promoted it like it was downtown Jo’burg. So much money was made in the markets but very little, if any, money was spent in the country, on the country. Suddenly one day the DRC government woke up—they said, ‘we’ll change the rules and exploit the game’, but then were disappointed as the market responded by pulling out and saying, ‘now we don’t want to be there’. Suddenly the DRC was looking at a different game entirely.

SK: So we’ve explored the promotion stage of expectation. I would imagine this happens in many industries. What’s next?
MB: So then we get to the disappointment stage of exploitation—whether you’re in gold, diamonds or base metals. The emerging markets world is in that stage at the moment (if we can generalize for a moment). With it comes the motivation to change mining legislation to make sure that the emerging markets can get something out of [exploration].

Mining companies promise the earth and talk about the risk they’re taking. But when it comes down to it, the government takes the biggest risk. They only get benefits when miners build an actual mine, and make a profit. The developer takes the most risk.
But that’s the thing—it’s during that position of disappointment that is the best time to go in and invest—not as a pioneer.

SK: Which is perhaps something an explorer doesn’t have the foresight to recognize?
MB: Well, we move into the capacity stage of risk. If you’re pioneering in a country that doesn’t have capacity (infrastructure, political, people resources—many emerging markets have none of that), that is a huge risk. People try to rate the risk, but they underestimate those factors.

It comes down to this: you can build a mine and it’s profitable or you cannot build a mine and you fail—the risk is absolutely on a knife edge. The only way you can really make a return is to build a profitable mine. The problem in the mining industry is that, typically, most gold mine investments are repaid by equity-raising and not by profits.

SK: Which would be significantly easier to do—to pay your loans through equity rather than building, and risking, and then taking a profit.
MB: If you take that logic further, very few mining companies [in Africa] have paid profits tax to their host governments, and that’s the only way a host government can participate [in the business]: royalties and profits tax.

Any government is happy with you if you pay profits tax, and then they can distribute that money into their electorate. If you don’t pay taxes, you run the risk of being an exploiter. You exploit the lack of capacity—sometimes inadvertently. These are companies who arrive in a developing country, bringing with them all their support from international branches and service providers, and they enclose themselves in a cocoon around their deposit.
Their mines may or may not have paid taxes, and then they leave and probably have not made a difference whatsoever. This damages the mining industry image.

SK: Or, I can imagine, any other industry that’s trying to grow. How can companies be better, more integrated corporate citizens?
MB: If a mining company comes in, like we do, and says, ‘We are not going to bring any service providers in with us. We are going to find the best service providers and entrepreneurs in the country, and we’re going to give the local guy the contract,’ then that forces the international services provider to transfer the skills to the local guy.

SK: And making those efforts—transferring the skills and work to the local guy. Doesn’t that just improve the political climate for you?
MB: Absolutely. It integrates one in the economy and the socio-economic and political arenas. Local skills are better. Even if the local person is only 80 per cent as good as an expatriate, they are better because the local person goes home every night—has a sound base. An expat engineer only goes home every one month or two months, whereas employing locally means you start developing senior executives in the countries you operate in, who eventually climb up the social ladder. You need to start developing infrastructure, and through taxes to governments make the nationals more powerful politically.

SK: What’s so important about taxes?
MB: The first question people ask me when I do presentations around the world, is: what are my social and economic policies? What do I do for the community? Look at the fact that Randgold only spent $100,000 on social programs last year, but then see that our two mines in Mali paid to the government $90 million in royalties. That is 900 times more than what it would cost to build a clinic and a school—a significant contribution.

SK: That’s because your approach is not a ‘let’s build and get out’ approach.
MB: That’s right. My shareholders make a dividend on a profit and the government collects taxes.  We focus on profitable, well-structured development. (Mining has to be a long-term business if it’s going to be profitable.

SK: And if it’s going to be sustainable?
MB: We operate in very poor countries. We have to invest in skill development early on. And the best way to put back into the economy is to employ and train people.

I think the single biggest impediment to world development and sustainability is poverty—nothing to do with climate change, or what have you. Liberate a person with a job—that is the best way economically and politically.  

SK: But makes a huge difference in the day-to-day business environment.
MB: Well, our real risk right now, in the DRC for instance, is the third element of risk—delivery. If we deliver, we’ll be fine, but there are impediments, like logistics. Not just physical logistics, but also security etc.—that is the biggest risk. The country is definitely past that rabid corruption phase. The DRC has a legitimate government.

SK: So now governments are being more accountable as well?
MB: If you look at Africa and how it’s changed, especially in the last 15 years, after the cold war, then you see politicians starting to turn towards the electorate—and seek decisions and actions that are at least considered against the needs of the masses. This is when the risk profile changes.

SK: In closing, you’ve explained what risk looks like to you in the areas you operate in. What would you say, considering your exemplary history in Africa, are the most important things to deliver?
MB: The small things are the important things. One of the most powerful things we deliver is potable water to villages. If you take a village and give it potable water you completely transform the mortality rate of young children. You stop disease. That is the most fundamental thing to deliver and it’s not expensive. The other things? I’d have to say primary education and primary health. Our biggest single impact in Mali has been malaria reduction.

SK: So, making a difference is aligned with limiting risk. Overall, that’s a good thing.
MB: Overall, you’ve got to be genuine and you’ve got to be long-term. You’ve got to be a long-term investor.