Financing Solutions Matter
March 22 - The extractives industry continues to be a vital part of the Zambia economy. The sector accounts for upwards of 10% of the country’s GDP and about 70% of its exports. Zambia is in the top 10 largest producers of copper and cobalt in the world. While this position is enviable it also poses some challenges. Zambia is in a similar position to other African countries. It requires investments in order to fuel these important sectors.
Whether you’re talking about copper or oil extraction, both require capital infusion. In particular, suppliers, who are often based in countries outside Africa are under increasing pressure from their financiers to provide higher levels of collateral. If they are able to supply the mines at all, they will likely have to pass the increased charges to the mines.
As a response to the financing glut, 30 global lenders came together under the umbrella of two lead arrangers and a global investment manager to put in place a $2.5 billion facility. The fund benefits the Zambian extractives industry – providing refinancing on existing facilities, capital expenditures and working capital to upgrade mines. The facility, which opened in 2015, is expected to run for three years.
For suppliers another solution helped to ease their financing shortfall. In an East African country, a company involved in the extraction of copper cathodes took matters into their own hands. They reached an agreement with their UK-based buyer to advance them up to $5 million with the understanding that the repayment will be made in copper cathodes in place of cash.
We’ve been playing a role in this area for a number of years. As our reputation increases, we are receiving more and more requests from the financial markets to cover transactions of this nature in the extractives industry. Our role is quite simply to cover the non-payment risks associated with these financing mechanisms.
We all agree that diversification is an important objective in order to move our countries away from dependence on commodities, but the reality is that we cannot afford to throw out the baby with the bath water. What we need to do is ensure the health of an industry that is providing a lion’s share of jobs in many economies. We can’t forget an important fact here - must eat as we seek out alternatives.
Financing is important but it is often overlooked as an area that requires constant attention in the industry. Putting in place effective financing solutions will be key to ensuring the health of the vital extractives sector in many African economies.