Unlocking Africa’s Mineral Wealth: The Power of Arbitrage, Part 2 of 4
In Part 1 we introduced arbitrage as a fundamental business model that drives innovation and value creation across industries. We highlighted how companies like Amazon, Uber, and Airbnb have successfully used arbitrage strategies to gain competitive advantages.
We focused on the African mining sector, emphasizing its vast potential with 30% of the world’s mineral reserves but only 8% of global production. This discrepancy suggests significant arbitrage opportunities, worth hundreds of billions of dollars.
We discussed the first two forms of arbitrage.
- Geopolitical Arbitrage: Capitalizing on changing political landscapes in African countries, e.g. First Quantum investing in Zambia to benefit from political stability. Investors need to monitor political developments, build local relationships, and consider partnerships to navigate complex environments.
- Technology Arbitrage: Leveraging advanced technologies for exploration and extraction, e.g. the use of quantum gravimetry to estimate ground resources. Investors are encouraged to explore innovative technologies, implement automation and AI, and partner with local tech hubs to develop tailored solutions for African mining operations.
In Part 2 we will talk about two more forms of arbitrage: market timing, and funding arbitrage. But before we do that it is worth taking a brief detour to talk about why arbitrage matters.
Why Arbitrage Matters: A Tale of Two Coffee Shops
In the bustling city of Dar es Salaam, two childhood friends, Amina and Jabari, decided to open coffee shops. Both were passionate about coffee and had similar savings to invest. Their stories, however, would unfold very differently.
Amina opened “Kahawa Kawaida” (Ordinary Coffee) in a popular shopping district. She sourced her beans from a well-known supplier, bought standard equipment, and hired experienced baristas. Her shop was nice, her coffee was good, and she made a steady, modest profit. Amina was content, believing she had achieved her goal.
Jabari, on the other hand, named his shop “Kahawa Tofauti” (Different Coffee) and took a different approach, one rooted in arbitrage thinking.
First, he looked at location differently. Instead of competing for expensive real estate, he found an up-and-coming neighborhood where rent was cheap but foot traffic was growing. He negotiated a long-term lease, locking in low rates before prices inevitably rose.
Next, Jabari traveled to coffee-growing regions in rural Tanzania. He met with small-scale farmers who produced excellent beans but lacked access to major markets. By buying directly from them, he secured top-quality coffee at lower prices while ensuring farmers received fairer compensation.
Jabari also observed that many offices in Dar es Salaam lacked good coffee options. He started a subscription service, delivering freshly roasted beans to businesses weekly. This steady income stream helped him weather slow periods in the shop.
Noticing the growing digital economy, Jabari partnered with a local tech startup to create an app for pre-ordering. Customers could skip the line, increasing throughput during busy hours and improving satisfaction.
Finally, Jabari realized that coffee shop equipment depreciated quickly on paper but often lasted much longer in practice. He bought used, high-end espresso machines at steep discounts, refurbished them, and achieved the same quality as new machines at a fraction of the cost.
Two years later, the contrast was clear. Arbitrage compounds. While Amina’s shop was doing okay, Jabari was thriving. He had opened two more locations, employed three times as many people, and was known for both his coffee quality and innovative business practices. His direct trade relationships had lifted several farming communities out of poverty, and his app had spun off into a successful startup of its own.
This tale illustrates the power of arbitrage thinking. Where Amina saw things conventionally, Jabari consistently identified opportunities to create value:
- Geographical arbitrage: Securing prime real estate before prices rose
- Information arbitrage: Connecting with farmers lacking market access
- Service arbitrage: Filling the office coffee gap
- Technological arbitrage: Leveraging an app to improve efficiency
- Asset arbitrage: Recognizing the true value of used equipment
Jabari’s success wasn’t just personal; it created ripples of positive impact through his supply chain, workforce, and community. This is why arbitrage matters. It’s not about exploiting loopholes, but about seeing opportunities others miss, bridging gaps in the market, and creating value where it didn’t exist before.
As we explore arbitrage opportunities in African mining, remember Jabari’s coffee shop. Each type of arbitrage represents a chance to innovate, grow, and create a lasting positive impact.
Here are the next two sources of arbitrage in African mining:
3. Market Timing Arbitrage
Market timing arbitrage involves identifying minerals that are currently undervalued but likely to see increased demand due to emerging technologies or global trends. In Africa, this often means focusing on minerals critical for renewable energy or high-tech industries.
Ivanhoe Mines’ development of the Kamoa-Kakula Copper Project in the Democratic Republic of Congo, the fourth largest mining complex globally, is timed to meet the increasing global demand for copper driven by the electric vehicle revolution. This project demonstrates how companies can position themselves to capitalize on future market trends.
Pointers for investors:
- Research global trends in technology and industry to identify minerals likely to see increased demand.
- Focus on minerals critical for renewable energy, such as copper, lithium, and rare earth elements.
- Consider the potential of minerals used in emerging technologies, like graphite for battery anodes.
- Monitor policy changes in major economies that might affect demand for specific minerals, such as commitments to electric vehicle adoption.
4. Funding Arbitrage
Funding arbitrage in African mining involves leveraging innovative or alternative funding sources that traditional mining companies might overlook. This can provide a competitive advantage in securing capital for exploration and extraction projects.
While not directly related to mining, M-Kopa, a Kenyan company, provides an excellent example of funding arbitrage in Africa. The company leveraged innovative pay-as-you-go solar technology to access carbon credit financing, allowing it to offer affordable clean energy solutions in East Africa. This model could potentially be adapted for small-scale mining operations or mining-adjacent industries in Africa.
Pointers for investors:
- Explore green bonds or sustainability-linked bonds for environmentally responsible mining projects.
- Consider crowdfunding platforms for smaller exploration projects, particularly in countries with supportive regulations.
- Investigate partnerships with technology companies or end-users interested in securing mineral supplies.
- Look into royalty and streaming agreements as alternative funding mechanisms.
- Research government grants or initiatives aimed at promoting strategic mineral exploration in African countries.
The Arbitrage Advantage in African Mining
As we’ve explored in this second part of our series, arbitrage opportunities in African mining are diverse and potentially transformative. From market timing to innovative funding mechanisms, these strategies offer pathways to unlock value in one of the world’s most resource-rich continents.
The story of Jabari’s coffee shop serves as a reminder that arbitrage thinking can lead to compounding benefits — not just for businesses, but for entire communities and supply chains. In the context of African mining, each type of arbitrage represents a chance to innovate, grow, and create a lasting positive impact.
In our next installments, Parts 3 and 4, we will delve into the remaining types of arbitrage in African mining:
- Information Arbitrage
- Regulatory Arbitrage
- Supply Chain Arbitrage
- Talent Arbitrage
- Small-Scale Arbitrage
- Reclamation Arbitrage
These final pieces will complete our overview of arbitrage opportunities in the African mining sector. As we continue this exploration, remember that the key to successful arbitrage lies in seeing connections and opportunities where others don’t — much like Jabari did with his coffee shop.
Stay tuned for the upcoming articles (follow or subscribe), where we’ll uncover even more strategies for creating value and driving innovation in African mining. Whether you’re an investor, operator, or simply interested in the future of African resource development, these insights will provide valuable perspectives on how to approach this dynamic and opportunity-rich sector.
