West African Mining Investment: Do The Rewards Outweigh The Risks?

Interview conducted by G.P. ThomasOct 25 2012

In this interview, Melvin Glapion, Managing Director of Kroll Advisory Solutions, talks to AZoMining about the emergence of West Africa as a mining hotbed and the benefits and drawbacks of this.

Could you explain the type of work that Kroll Advisory Solutions does and how it relates to West Africa?

Kroll advises clients throughout the investment lifecycle. We have provided market entry analysis and political risk analysis for clients looking to establish or expand in various African countries. We have conducted integrity due diligence on hundreds of individuals and entities to explore the reputational risks facing our clients. In Africa, this is particularly important given the strong overlap between the government and business communities.

Furthermore, we have conducted financial and forensic investigations as they relate to fraud committed against our clients. Africa holds the distinction of the region having highest cost of individual fraud as a percentage of revenues. We are also seeing growth in work we do on behalf of High-Net-Worth Individuals from Africa who are seeking access to Western capital markets. In these cases, we provide an independent self due diligence that provides the context and comprehensive human intelligence that is required. This solution, Reputation Management, provides a level of transparency to individuals and companies that had heretofore been considered opaque.

Why would you suggest that West Africa is becoming an increasingly attractive place to invest?

West Africa has long been an attractive place to invest. What we are noting however is that the types of investments are shifting dramatically to the sectors that depend upon a growing middle class (services, telecoms, fast moving consumer goods). We conducted a study of consumption per capita that compared various regions in Africa with the BRIC economies. Notwithstanding issues around concentration of wealth, the high, low and average figures for Western Africa compared very favourably to the BRICs. This is further supported by the number of Africa focused funds closing in the last 18 months and the number of deals being executed in the region. Look for this to continue and for the size of deals to ramp up exponentially.

Which West African countries are most suited for FDI (and what specific resources do they have at their disposal?)

I often try to stay away from picking and choosing winners and losers, but what I will say is that the answer truly depends on the investor. What proves to be a prime investment destination for one investor may not be suitable for another. The issues to consider are: what are the requirements for investment in the country ( i.e., local partner considerations), which sector has the greatest opportunity; to what extent does the country’s legal framework support the foreign investor, what level of access to human and financial capital is available and what are the opportunities for a smooth and profitable exit.

What are the primary risks involved with investing in West Africa?

I would point to three central risks posed by West Africa—the overlap of government and business, the renewed interest western regulatory bodies have in Africa in general and the absence or incompleteness of information in the public domain and.

As I mentioned previously, the interconnectedness of commerce and government is difficult to uncover and investigate and yet should be a necessary element of research for anyone concerned about corruption and bribery. Investors subject to the increased scrutiny by UK and US regulatory bodies should be even more circumspect. Also, the issue of information is not only a fact of life but a serious risk. Public domain information is limited in most African countries. The way in which investors compile, supplement, and interrogate the information that is available is of paramount importance but is often grossly overlooked.

How do these risks impact on the stakeholders concerned?

It is often erroneously assumed that these are solely issues of integrity or reputation. While those are significant risks in and of themselves, the above mentioned risks are decidedly commercial, financial and operational in nature.

For instance: how do you compete in a market where government (disclosed or not) is a key competitor, supplier, investor? How do you determine an investment hypothesis where access to information about markets, customers, pricing, or financials is incomplete or inaccessible? How does you valuation account for the significant risks of regulatory sanction or disbarment in a country and sector that are perceived as corrupt?

How do you advise these risks should be managed?

I think investors should address each of the key risks in turn. Reputational due diligence with a particular emphasis on analysis of politically exposed persons is critical. Investors should use an integrated approach to commercial, reputational and operational due diligence to determine align the diligence practices with the realities of the environment. Investors should be prepared to continue investigating and monitoring the company, key individuals and key associated parties on an ongoing basis. Finally, investors need to work with management teams to ensure that a culture based on transparency and fair play is directed from the top of the organisation, but practiced throughout.

Could you describe the principal similarities and differences between West Africa and the BRIC nations in terms of investment?

I would say that principal similarities revolve around the opportunities, first in resources and then in burgeoning middle classes. However, what must be understood as a difference for the both West Africa and the BRICS is that while for convenience we lump countries together, each investment and each country needs to be evaluated individually. West Africa is a vast region and comprises countries with vast differences in economic and demographic bases, glaring differences in rule—some autocratic, some advance democracies. The key consideration as one invests in each of the regions and countries is that adaptability and flexibility will become more necessary, not less so.

What previous experience has Kroll had within the African Mining sector?

Kroll has worked for mining companies—majors to some of the smaller firms. Our work covers the entire spectrum of issues mining companies could face in the region. In a number of ways, the work we do for mining companies is a leading indicator of the types of work we will do for clients in other sectors in the years that follow. Our mining clients challenge us to expand our jurisdictional presence, to enhance our strategic offerings, and to adapt our approach with each engagement.

How do you see the future of mining investment in West Africa over the next 5 years?

Mining investments will continue to present exciting investment opportunities. The amount of forecasted FDI over the next 5 years is expected to exceed 10% in many West African nations. A large portion of this will be related to mining.

Where can people go to find more information about your services?

People can find more information at www.kroll.com or contact me directly at [email protected].