Unlocking Africa’s Mineral Wealth: The Power of Arbitrage, Part 3 of 4

In the early 2000s, Africa’s IT landscape was largely uncharted territory, presenting daunting challenges for many. Enter Ashish J. Thakkar, a visionary entrepreneur who saw opportunity where others saw obstacles.

Born in 1981 in Tanzania and later based in Rwanda, Thakkar founded Mara Group in 2000, initially focusing on IT services. His first venture involved importing and distributing computer hardware, seizing the growing demand for technology in a region where access was still limited.

Photo by Wahyu Setiawan on Unsplash

Thakkar’s foresight allowed him to identify and address crucial gaps in the market. Mara Group quickly expanded beyond IT into telecommunications and manufacturing, demonstrating a remarkable ability to leverage market inefficiencies and local needs. Innovations such as the Mara Phone — an affordable smartphone tailored for the African market — highlight Thakkar’s strategic approach of combining deep market understanding with inventive solutions to meet regional demands.

As we delve into Part 3 of our series, Thakkar’s story offers a compelling example of arbitrage: the art of identifying and capitalizing on market inefficiencies and local needs. Just as Thakkar transformed the technology landscape in Africa by applying these principles, mining investors can similarly unlock the continent’s mineral potential by optimizing operations and harnessing local insights.

In Part 1 and Part 2, we looked at four sources of arbitrage opportunity.

• Geopolitical arbitrage (act when things are changing politically)
• Technology arbitrage (access previously uneconomical deposits)
• Market timing (leverage the resource price fluctuations and cycles)
• Funding arbitrage (use innovative or alternative sources of capital)

In Part 3 we look at the final six forms of arbitrage.

• Information arbitrage (superior data analysis or proprietary data)
• Regulatory arbitrage (find favorable jurisdictions or influence change)
• Supply chain arbitrage (vertical integration)
• Talent arbitrage (access superior human capital)
• Small-scale arbitrage (focus on smaller deposits that are uneconomical for others)
• Reclamation arbitrage (find value in reclaiming old sites)

5. Information Arbitrage

Information arbitrage in African mining involves gaining a competitive edge through superior data analysis capabilities or access to proprietary geological data. This can lead to the discovery of valuable deposits that others may have overlooked.

As an example, De Beers, the diamond mining giant, has leveraged its proprietary database of geological information, accumulated over decades of exploration in Africa, to maintain a competitive edge over a long time. This vast repository of data allows De Beers to more accurately predict diamond deposits and optimize their mining operations across the continent.

Pointers for investors:

• Develop partnerships with local geological surveys and universities to access and analyze historical exploration data.
• Invest in advanced data analytics and machine learning capabilities to reinterpret existing geological information.
• Build relationships with local communities and governments to gain access to on-the-ground information and insights.
• Consider collaborating with satellite imaging companies for large-scale geological assessments.

6. Regulatory Arbitrage

Regulatory arbitrage in African mining involves taking advantage of favorable mining laws, tax incentives, or changing regulations in different jurisdictions. It requires a deep understanding of the regulatory landscape across various African countries.

Barrick Gold’s strategic investment in Tanzania’s mining sector in 2020 exemplifies regulatory arbitrage. After years of disputes, Barrick negotiated a deal with the Tanzanian government that included a new operating company, Twiga Minerals, with profit-sharing arrangements more favorable than those of competitors. This deal allowed Barrick to resume operations under a more advantageous regulatory framework.

Pointers for investors:

• Conduct thorough due diligence on mining codes and tax regimes in different African countries.
• Monitor proposed changes to mining regulations and position investments accordingly.
• Consider countries that are actively reforming their mining sectors to attract foreign investment.
• Develop expertise in navigating complex regulatory environments or partner with local experts who have this knowledge.

7. Supply Chain Arbitrage

Supply chain arbitrage in African mining involves identifying and capitalizing on inefficiencies or opportunities within the mineral supply chain. This can include vertical integration, innovative processing methods, or strategic partnerships that create value beyond mere extraction.

Sibanye-Stillwater, a South African mining company, has vertically integrated its operations in the platinum group metals (PGM) sector. By acquiring both mining operations and processing facilities, including the Marikana smelter complex, Sibanye-Stillwater has optimized its supply chain, reducing costs and increasing control over the entire PGM production process.

Pointers for investors:

• Explore opportunities for vertical integration, such as combining mining operations with processing facilities.
• Investigate innovative processing technologies that can handle lower-grade ores profitably.
• Consider partnerships with logistics companies to optimize transportation of minerals.
• Look for opportunities to add value to raw materials before export, potentially capitalizing on local manufacturing incentives.

8. Talent Arbitrage

Talent arbitrage in African mining focuses on gaining a competitive advantage through superior human capital. This involves attracting, developing, and retaining top talent in geological, engineering, and managerial roles.

Anglo American’s “FutureSmart Mining™” program demonstrates talent arbitrage in action. The company has invested heavily in developing local talent in countries like South Africa, combining advanced technology training with traditional mining skills. This approach has allowed Anglo American to build a highly-skilled, locally-sourced workforce, giving them an edge in operational efficiency and innovation.

Pointers for investors:

• Develop partnerships with African universities to access emerging talent in geology and mining engineering.
• Implement training programs to upskill local workforces, potentially in partnership with government initiatives.
• Offer innovative work environments or cutting-edge projects to attract top international talent to African operations.
• Consider creating exchange programs with operations in other countries to develop a globally experienced workforce.

9. Small-Scale Arbitrage

Small-scale arbitrage in African mining involves focusing on smaller deposits or operations that may be uneconomical for major mining companies but potentially profitable with the right approach. This strategy can be particularly effective in countries with artisanal mining traditions.

Robex Resources, a Canadian junior mining company, successfully operates the Nampala gold mine in Mali, a deposit that was too small to interest major mining companies. By focusing on efficient, low-cost operations tailored to the specific characteristics of the deposit, Robex has turned this small-scale opportunity into a profitable venture.

Pointers for investors:

• Research regions with known mineral deposits that are too small for major mining operations.
• Explore technologies that can make small-scale operations more efficient and profitable.
• Consider partnerships with artisanal miners to formalize and scale up their operations.
• Look into opportunities for consolidating multiple small operations to achieve economies of scale.

10. Reclamation Arbitrage

Reclamation arbitrage involves finding value in rehabilitating old mine sites. This can include extracting remaining minerals using new technologies, repurposing land for other uses, or capitalizing on environmental remediation opportunities.

DRDGold, a South African company, specializes in recovering gold from mine dumps. In 2018, it acquired Sibanye-Stillwater’s surface gold processing assets and tailings dumps. By applying new technologies to these “waste” materials, DRDGold has created a profitable business model while simultaneously addressing environmental concerns associated with old mine dumps.

Pointers for investors:

• Identify abandoned mine sites in African countries with potential for mineral recovery or land repurposing.
• Research new technologies that can extract value from mine tailings or low-grade ore left behind by previous operations.
• Explore partnerships with governments or communities interested in environmental remediation of old mine sites.
• Consider the potential for converting reclaimed land to alternative uses, such as renewable energy projects or agriculture.

Key takeaways

As we’ve explored throughout this series, the African mining sector presents a wealth of arbitrage opportunities for astute investors and operators. From geopolitical shifts to technological innovations, from market timing to talent development, each type of arbitrage offers a unique pathway to create value and gain a competitive edge in this resource-rich continent.

Key takeaways from our exploration include:

1. Diverse Opportunities: The ten types of arbitrage we’ve discussed demonstrate the multifaceted nature of value creation in the mining sector. Success often lies in identifying and combining multiple arbitrage strategies.
2. Innovation is Key: Whether it’s leveraging cutting-edge technology, developing novel funding mechanisms, or reimagining supply chains, innovative thinking is at the heart of successful arbitrage in African mining.
3. Local Knowledge is Crucial: Many arbitrage opportunities, particularly in geopolitics, regulation, and information, rely heavily on deep understanding of local contexts. Building strong relationships and local expertise is often as important as financial resources.
4. Sustainability Matters: From reclamation arbitrage to funding arbitrage through green bonds, sustainability is increasingly becoming a source of competitive advantage and value creation.
5. Scalability: While some arbitrage opportunities may start small, many have the potential to scale significantly, potentially transforming entire segments of the industry.

As Africa continues to develop and global demand for minerals evolves, the landscape of arbitrage opportunities will undoubtedly shift. However, the fundamental principle remains: those who can identify and act on market inefficiencies and untapped potential will be well-positioned to succeed.

Looking ahead, we anticipate that technology will play an increasingly critical role in unlocking arbitrage opportunities. From AI-driven exploration to blockchain-enabled supply chain transparency, technological innovations will continue to reshape the industry and create new avenues for value creation.

Moreover, as African nations increasingly focus on local beneficiation and value addition, new forms of arbitrage may emerge around downstream processing and manufacturing. Savvy investors and operators should keep a close eye on policy developments in this area.

Conclusion

While the African mining sector certainly presents challenges, it also offers unparalleled opportunities for those willing to think creatively and act strategically. By understanding and leveraging the various forms of arbitrage we’ve discussed, investors and operators can not only achieve significant returns but also contribute to the sustainable development of African economies.

In Part 4, the final part of this series, we look at some tools that can help a mining arbitrageur develop their unique opportunity set.