ESG risks cast pall over quest for African critical minerals

Gas supply disruption due to the Russia-Ukraine war has accentuated the urgency, particularly in the EU, to accelerate the transition from fossil fuels to cleaner energy sources. But this energy transition will come at a cost, as it will require a steep rise in the supply of critical minerals.

To make things worse, current production is highly geographically concentrated, for instance graphite, silicon and rare earth elements in China, cobalt in DR Congo and platinum group metals (PGM) in South Africa. Such geographic concentration heightens the risk of supply disruptions in the case of sudden geo-political tensions or other adverse events in producing countries.

Meanwhile, poor recyclability (as in the case of lithium), high price volatility (iron ore) and high demand growth (tantalum) are just a few examples of the myriad other challenges that can impact the production of key commodities (see Figure 1). Supply chain risks are even greater in mineral processing, which is dominated by just one country: China.

Diversifying via new mining projects in Africa is a potential solution to reduce this dependence on a handful of key producers. However, doing so will be less feasible at the processing level, and will come with the region’s own lot of environmental, social, governance and political (ESG+P) risks.

There is room for non-Chinese companies, especially those committed to higher ESG standards

Sub-Saharan Africa is well positioned to help diversify supply due to its vast critical mineral resources. As shown in Figure 2, it already dominates global supply of platinum group metals, cobalt, tantalum and manganese. However, it also has large known reserves of bauxite, graphite, iron ore, and to a lesser extent lithium, nickel and copper.

Despite significant Chinese presence in the region, there is an opportunity for investors, particularly those with stronger commitments to domestic beneficiation, infrastructure and the development of local communities. This is true even in China-dominated industries, such as the production of bauxite in Guinea, copper and cobalt in DR Congo and lithium in Zimbabwe, as African governments are starting to demand more in return for their investment.

The reluctance of Chinese firms to invest in local beneficiation, given their home country’s dominant role in processing, threatens to weaken their grip on the region’s critical minerals. For example, rising pressures from the Guinean authorities to invest in local alumina refineries have strained relations with Chinese companies that have developed bauxite projects with the sole purpose of exporting ore. The stalemate between the China-led consortium and the Rio Tinto-led consortium to develop the Simandou iron ore infrastructure jointly is another point of contention for the Guinea government.

In DR Congo, President Félix Tshisekedi’s government has been scrutinising Chinese miners’ compliance with mining regulations in a bid to mobilise revenues and dismantle the influence of his predecessor, Joseph Kabila. In July 2022, Kinshasa’s order to suspend exports from Tenke Fungurume copper and cobalt mine marked a new low in the long-rumbling dispute between China Moly (CMOC) and the government. DR Congo also signed an agreement with its neighbour Zambia to explore avenues to produce batteries locally, which means governments will likely push companies to invest in processing facilities alongside mine production.

While significantly invested in bauxite and copper-cobalt, China is yet to make inroads in platinum group metals in Southern Africa and manganese in Gabon. South Africa provides 70% of global platinum supply, which is mainly produced by UK-based Anglo American and local companies such as Impala Platinum and Sibanye-Stillwater. Meanwhile, Gabon hosts the world’s second largest high-grade manganese project in Moanda, which is owned by French-based multinational miner Eramet.

Also, we are already witnessing Chinese and non-Chinese companies scrambling for new critical mineral deposits in the region. For instance, Eramet, Anglo-American and UK-based Pensana are looking for manganese, nickel, cobalt, lithium, and rare earth elements in Angola, Australian BHP has invested in a nickel project in Tanzania and Australian Firefinch, in partnership with Chinese giant Jiangxi Ganfeng Lithium, in a lithium project in Mali.

Complex ESG+P landscape will be challenging for operators and investors

Greater geographic diversification of critical mineral production will decrease the risk of global supply disruption and China’s dominance. However, African mining jurisdictions come with their own set of ESG+P risks that investors and operators need to be aware of to minimise their impact on mining operations (see Figure 3).

For instance, several mineral-rich areas face extreme risk of drought hazard, exposing miners to heightened water stress and the threat of clashes with local communities over access to water resources. These include most of Guinea and Mali and Angola’s nickel and copper-rich Huambo, Huíla and Moxico provinces.

Meanwhile, mining projects in countries such as South Africa and Guinea face increased risk of operational disruption due to industrial action and protests by local communities. In South Africa, strikes often turn violent, with a strike in August 2012 at the Marikana platinum mine presenting the deadliest clash between miners and the security forces in the country’s history. In Guinea, protesters tend to turn their anger over a lack of basic services and jobs at miners, whom they perceive as not doing enough to address these problems.

High levels of corruption and poor governance expose miners to the risk of being accused of land grabs and a lack of consultation by local communities. The risk is particularly high in DR Congo, Mozambique, Zimbabwe and Angola. We consider cobalt as the second highest risk for commodity-related land grabs due to frequent land expropriations, inadequate compensations and almost inexistent consultation of affected communities by the government and miners in the main global producer DR Congo. Miners in the country also face heightened risk of complicity in child labour and poor labour standards due to a high number of artisanal miners. However, a heavy-handed approach by the public and private security forces against illegal miners encroaching on mining concessions exposes businesses to the risk of being complicit in human rights violations.

Rising global fuel and food prices pose the risk of greater political instability and civil unrest across most of sub-Saharan Africa. In addition, Mali, Guinea, Madagascar, Gabon and Zimbabwe face heightened risks of a military takeover. A number of key electoral milestones over the coming five years will likely also lead to greater mining policy uncertainty, with both decisive and closely-fought elections on the horizon in all major producing countries.

Companies willing to challenge China’s dominance in processing will have priority

Africa can help diversify critical minerals production, decreasing the risk of global supply disruption and weakening the dominance of key producers, particularly China. But mining projects in this region will still face myriad ESG+P risks. Even if these are mitigated, and foreign investors can cover the huge project capital requirements, including project infrastructure, Africa is still unlikely to become a major processing hub in the near future. A chronic lack of reliable energy, domestic know-how and access to a skilled workforce will prevent the region from loosening China’s grip over critical minerals processing. Nonetheless, companies committed to local processing and higher ESG+P standards are likely to secure preferential access to critical minerals.