My interest in mining is mainly twofold. Firstly, mining is considered the only sector currently capable of autonomous growth. Secondly, I am convinced that the exploitation of horizontal linkages with mining to stimulate growth in other sectors such as agriculture, manufacturing and energy holds a lot of promise.
My interest in mining is mainly twofold. Firstly, mining is considered the only sector currently capable of autonomous growth. Secondly, I am convinced that the exploitation of horizontal linkages with mining to stimulate growth in other sectors such as agriculture, manufacturing and energy holds a lot of promise. Given the compelling possibilities around mining, I recently decided to broaden my horizons and spent some time at the Zimbabwe School of Mines studying for a certificate in Mineral Resources Valuation. In partial fulfillment of the studies, I carried out a study of the banking sector’s engagement with the mining sector and the challenges faced by the former in financing the latter. Of the 17 banks I sampled, 12 kindly agreed to take part in the study, whose key findings I share with you in this installment.
Opinion by Omen Muza
- The overwhelming majority of surveyed banks (92%) still do not have dedicated mining finance sections or departments manned by qualified staff who speak the language of miners, yet there is a positive correlation between existence of such infrastructure and the size of mining finance portfolios. The three financial institutions that confirmed employing staff with mining qualifications were, according to exposure to the mining sector as at June 30, 2012, ranked in the top six.
- There is significant scope for banks to grow their mining finance portfolios, still below $10 million for close to 50% of the banks. However, of note is the fact that bank financing of the mining sector for the half year ended June 30, 2012, had already exceeded financing for the full year ended 2011 by a whopping 30%.
- Against the background of a short-term deposit base coupled with limited access to external lines of credit as well as a high liquidity risks, lending by banks to the mining sector has largely been of a short-term nature in the range of 180-360 days. This deprives the mining sector of capital intensive projects which are imperative for sustainable sector-specific growth.
- Though the involvement of the banking sector in the mineral resources sector value chain outside traditional financing is still limited, there are several encouraging initiatives in that direction by some financial institutions. These include active Tetrad Holdings’ gold-buying, custom milling/processing and acquisition of coal concessions as well as ZABG’s acquisition of a licence for direct gold purchases from small-scale miners. A number of banks actively sponsor mining events such as the Mining Indaba.
- There are no specific sector-wide measures restricting Zimbabwean banks’ exposure to the mining sector, apart from those limitations imposed by liquidity challenges. Where limits are in place, they are of a prudential nature and are for the sole purpose of managing concentration risk. This is unlike in agricultural lending where the Reserve Bank has previously urged banks to orient their lending so that at least 30% of their portfolios are exposed to agriculture. However, the new reality is that mining is the new game in town. The study suggests that it is cliché to maintain that the economy is still agro-based.
- The financing activities of the banks in the mining sector are still overwhelmingly biased towards large-scale mining operations due to the considerable risk associated with lending to the small-scale mining sector. This has resulted in a highly skewed mining industry in which mine sizes and production are divided into the haves and have-nots — thousands of small-scale miners on the one hand and a few large-scale miners on the other — with an almost non-existent conversion rate between the former and the latter.
- There is considerable underfunding of exploration activities in Zimbabwe since banks typically leave project promoters to finance such early stages of the mining cycle given their unfavourable risk profile. Banks should, however, consider complementing Government’s initiatives to revive the Mine Promotion Corporation under PPP initiatives.
- Faced by challenges in accessing offshore lines of credit due to perceived high country risk profile, the local banking sector is largely dependent on depositor’s funds to finance the mining sector. This is not a sustainable situation as the tenor of short-term deposits is not suitable for the financing requirements of mining, which are typically of a long-term nature and can be for periods of up to 10 years.
- The new capital requirements for the banking sector are expected to improve availability of funding for the mining sector due to enhanced market liquidity and availability of longer dated financing. However, there are fears that in the short-term there will be a shortage of financing in particular for the small-scale mining sector as banks initially concentrate on meeting the new capital requirements and become risk averse in order to preserve capital against the background of rising credit default risk.
- The study also suggests that adoption by mining industry stakeholders of the Extractive Industry Transparency Initiative (EITI) and listing of mining companies operating in Zimbabwe on the Zimbabwe Stock Exchange will increase transparency and accountability both of which can encourage banks to avail
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- Omen N Muza writes in his personal capacity. He is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd, a Harare-based financial advisory, research and training company with interests in banking, technology and agriculture as well as the convergence area among them.
