The World’s Next Battleground – Junior Miners Get Out
From rare earths to the world’s highest grade copper deposits to untapped oil fields Africa is ripe with opportunity in the natural resource sector. Over 50% of the world’s platinum and palladium production comes from the continent (primarily South Africa) and roughly one-third of the world’s gold production. Unfortunately, aside from a handful of nations within the continent, this is no place for North American junior resource companies to operate. For the most part, North American companies are no longer welcome in Africa.
Even in South Africa, which was once considered a mining-friendly jurisdiction,
there is major tension between labor and Western miners, resulting in recent illegal strikes and deadly protests. And now the South African parliament has passed a Mineral and Petroleum Resources Development Amendment Bill that could see the state acquire 20% of new resource ventures. For a junior to enter South Africa, at this point, would be ridiculous. This is an anti-business and anti-West maneuver.
Without geopolitical leverage, most of the money spent on exploration by juniors in Africa will be in vain.
So Who Will Capitalize?
Africa is a very dangerous place to work and is filled with government corruption, guerrilla warfare and lawless regions. In light of that, for the last several years, global Superpowers have been strategizing and deploying military assets to the continent to control its rich natural resource assets. Leading the charge has been China, Africa’s largest trading partner since it took the top spot from the US in 2009.
Pandering to the Corrupt
With its slew of corrupt and greedy governments exploiting their own people and natural resources for personal gain, Africa has been an easy target for Chinese influence. China has been throwing its money around, providing development aid and giving out interest free loans to African nations, all in its quest to gain ownership of key natural resource reserves within the continent. What’s more, China has managed to quietly take control of key oil and mineral rights within the continent with little to no negative media coverage and virtually no bloodshed. Furthermore, over the next decade, it plans to invest $1 trillion in Africa to develop infrastructure and natural resource projects.
Only for the Powerful
Nearly 27% of Chinese investment in Africa has gone to mining plays consisting of gold, uranium, copper, iron ore and rare earths. 20% has gone to oil and natural gas development. Another 25% of the country’s entire investment in Africa has gone to infrastructure projects such as rail, ports and roads to help get the natural resources back to China.
China has made its most significant African investments in Nigeria, Zambia, Ghana, Tanzania, Uganda, Chad, Ethiopia, South Africa, Angola, Algeria and Mozambique. If you look at a map of Africa, you will see that China has invested heavily in the oil rich central region of the continent as well as the coastal countries to help get the product offshore. It’s a well thought out plan on their behalf, but challenges and confrontation are now imminent.
From a geopolitical perspective, conflict is going to escalate in Africa, especially with the troop drawdown in Afghanistan by Western nations. Competition for the continent’s natural resources is going to intensify.
What was once a stretched-thin US military, having to fight two wars, is now one with an impending personnel glut. CBC reported in January that,
“U.S. troops in Africa will reach full brigade status this year (5,000 soldiers).
They will also have a presence in 38 of Africa’s 54 nations and could conduct as many as 100 separate missions on the continent, often supported by teams of U.S. State Department specialists and private contractors.”
It’s not as if any African nation invited the Americans in either. With its control over USAID and the World Bank, America is pushing its way into Africa. The CBC continued,
“No African nation has agreed to host the full U.S. command given all the security headaches that would entail.”
Even the British and French are moving into Africa now that they have withdrawn from Afghanistan.
A few months back I was chatting with a friend who is a crew member in the RAF (Royal Air Force). He flies the massive VC10s and Voyageur planes which transport tanks and other military equipment (bigger aircraft than the Hercules planes). For the better part of the last decade, his crew has been flying in and out of Afghanistan with military equipment. Now that British troops are leaving Afghanistan, he explained how they have been flying out military equipment for a quick servicing, and then directly dropping that same equipment off in South Sudan, Africa – a country home to massive oil fields.
As Western nations begin to move into Africa more aggressively than in recent decades and somewhat uninvited, expect local governments to take their frustrations out on smaller North American oil & gas companies and mining/exploration companies. They’ll use sovereignty as their excuse to nationalize natural resource assets. It’s the oldest trick in the book, and one we’ve seen happen all over the world of late. This will please the Chinese as well, opening the door for them to take over some of these assets which were explored and developed at the expense of Western shareholders.
The untapped wealth of Africa is locked in underutilized agricultural land and untapped mineral deposits. Its present developmental gap – the difference between the infrastructure it has and what it needs, stands at an estimated $350 billion. This provides opportunities, the same ones that came with the American frontier centuries ago and gave rise to men like Carnegie and Vanderbilt. And both American multinationals and Chinese state-owned enterprises will be competing for infrastructure contracts. So far, the Chinese are winning…
This is one of the two reasons why America wants a security/military presence in 38 of the 54 nations within Africa, supported by teams of U.S. State Department specialists and private contractors. US multinationals can’t secure contracts and conduct massive construction projects without protection, nor can any Chinese groups. China has a security and military presence in the 28 African nations it has invested in. Of course, there will be significant crossover between the African countries both super powers have interests in.
Key Fact: In 2006, the US created the organization AFRICOM which, according to Vice-Admiral Robert Moeller, has a goal of “protecting the free flow of natural resources from Africa to the global market.”
Here’s where things get interesting…
Erik Prince, the ex-Navy Seal, American Patriot and founder of the Private Military Contractor, Blackwater has thrown his hat in the ring, and he isn’t working with the American State Department (his one-time biggest client with Blackwater).
Wrapped in controversy, and a clear foreshadowing of the tensions expected to heat up in the Africa natural resource land grab, Erik Prince has taken his case to the Chinese – those with the money and the nation who is actually being welcomed by Africa’s corrupt governments.
Prince’s new organization, Frontier Services Group, of which he is Chairman, is an African-focused security and logistics firm that is publicly listed in Hong Kong; most importantly, its investors include Citic, the Chinese Government’s investment arm, which holds key positions on the board of directors. Johnson Ko Chun Shun, a wildly successful Chinese entrepreneur, is also a major backer behind Prince’s company.
Prince, astutely, has his sights set on the Chinese Government’s one trillion dollar budget, earmarked for spending in Africa over the next decade. The setup is serendipitous for him.
Erik Prince – The Man
Erik Prince was the founder of the United States’ top private military contractor. He is an innovative, risk taking entrepreneur from Michigan. Prince, 44, set up Blackwater in 1997, and bagged the US State Department as a client, garnering roughly $2 billion in contracts as a private military contractor mainly in Iraq and Afghanistan.
Prince himself is an ex-Seal, ex-CIA asset and someone who is highly motivated, with an uncommon level of discipline. Now, with the same zeal and vision he had with Blackwater, Prince has decided to take on the development of Africa, and he is partnering up with the cash-rich Chinese government to do it.
Prince’s role is to mitigate the logistics and security risk for the Chinese investments in Africa. While he says he is open to work with other nations, his main financial backer is the Chinese government. Obviously, this is a good partnership for the Chinese government as its military lacks the skill-set and combat intelligence of Prince. With competition, and potential sabotage, from other Superpowers expected to intensify, Prince gets a healthy cut for providing logistic services unmatched by any other outfit in the world.
If you do your research on Blackwater, as I have, you’ll see that its ability to protect diplomats and important assets was unmatched. Blackwater never once lost an asset in over 100,000 missions for the Pentagon. Prince knows the security and logistics game better than anyone in the world.
While this may seem to be an unlikely business partnership between Prince and the Chinese government, it clearly demonstrates what is needed to control natural resources in Africa. In order to successfully extract natural resources in Africa one needs tremendous government connections and a lot of muscle. (This is why I believe it is no place for a junior explorer to be operating on its own)
China’s Eye on Africa
China is Africa’s biggest trading partner with an expected trade level to reach $385 billion next year, according to the Wall Street Journal. The Chinese government wants its interests protected given the rising risk and powerful competition.
China is not backing down from the United States’ heightened military presence in Africa. There is way too much to gain in natural resources, and China doesn’t have the resources within its own borders to support its growth ambitions.
Securing Its Future
More than 80% of the current trade between Africa and China involves oil and minerals. As more oil fields open up, and more discoveries are made in Africa, China’s economic security improves. In the same way as the communist nation sees oil, copper and iron ore as a strategic imperative, China’s strategists also view Africa as a significant asset in their plans for food security. Africa currently has an estimated 20% of the world’s arable land.
Africa is the final frontier, and competition for the continent’s under-developed natural resource assets is now a geopolitical issue with the world’s Superpowers vying for position. China clearly has a leg up on the competition, as its relationships with corrupt African governments blossomed over the last decade while America has been fighting two wars in the Middle East.
A New Conflict Looms, and Possibly War
The race to control Africa’s natural resources has the potential to be the catalyst for the next major war.
Given the power of the parties involved, Africa, for the most part, is no place for a junior resource company to try and play ball. There is a reason the world’s best military organizations are setting up shop in Africa.
Unless partnered with a major American multinational or Chinese state-owned enterprise, steer clear of juniors operating in this hotbed. They’re out of their league and the geopolitical risk is far too great.
The positive takeaway from this is that domestic, advanced-staged exploration assets in the precious metals sector are becoming even more attractive acquisition targets for majors looking to operate in stable regions. And given how cheap some of the advanced-staged juniors have become, the risk is most certainly worth the potential reward. In this particular investment climate, I’m seeking out juniors with 100% ownership in high quality precious metal projects (must have an attractive NI 43-101 resource). Buyout potential aside, these types of juniors have the unique ability to shop their project around and likely be carried through to a production decision (eliminating significant dilution) without having to give up more than 50% of their project.
All the best with your investments,
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This article represents solely the opinions of Aaron Hoddinott. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
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