Mining in Africa: Navigating risk amidst the wave of political change

Investment arbitrations in the mining sector continue to increase

2024 has been a year of growth for investor-State arbitration cases involving mining investments.  A total of 48 new cases have been commenced with the International Centre for Settlement of Investment Disputes (ICSID) (the main institution administering investor-State disputes). Of those cases, nine relate to a “mining concession” (i.e., nearly 20 percent of all cases commenced in 2024). In 2023, five cases related to a “mining concession” out of 53 cases commenced at ICSID (i.e., just under 10 percent).   

Over the past five years, ICSID cases have been commenced against numerous African States, namely Mozambique (twice), the Democratic Republic of Congo, the Republic of Congo (twice), Mali (twice), Mauritania, Tanzania (thrice), Zambia and Sierra Leone.

Increased investment in mining in Africa paired with a rising proliferation of protectionist policies and resource nationalism across the continent means that mining investors will, or at least should, look towards investment treaties to ensure that their long-term, capital intensive investments are entitled to protection from internationally wrongful State conduct.

With the energy transition being a major challenge faced by humanity, the demand for metals and minerals including in particular copper, nickel, cobalt, and lithium is significant. These are vital for energy transition infrastructure, such as wiring and electrification, and the production of battery energy storage systems and electric vehicles. According to the World Bank, the demand for the minerals and metals required for electrification and battery manufacturing is expected to increase threefold by 2040 and sixfold by 2050.

With increased appetite comes increased investment, and Africa likely will play a significant role.  A significant proportion of the metals and minerals required to achieve the energy transition are located across Africa. It is estimated that Africa is home to at least 55 percent of the world’s cobalt, 48 percent of manganese, 25 percent of bauxite, and 22 percent of natural graphite, as well as copper, nickel, lithium and rare earth metals.

Mining projects in Africa have also attracted significant investment from foreign investors. In particular, this includes investors from across Europe (in particular the United Kingdom), North America (in particular Canada) and Asia (in particular China and Japan).  

However, while Africa is mineral rich, investments in certain African States can entail significant political risk. Investments in mining projects are both time and capital intensive and have long-term profit horizons. For example, the average time it takes to develop a copper mine from discovery to production is around 16 years. During this period, investors may have to contend with political and regulatory change that could affect the economic viability of their investments.  This can be unpredictable, and relationship-driven means of mitigating political risk may no longer be effective following (in particular) a change in government.

As described further below, when State interference affects a foreign investment it can lead to claims under investment treaties as investors seek to protect their position. Investors investing in mining in Africa would be well-advised to ensure that they are entitled to protection. For example, the increasing interest in Japanese investment in Africa can be reflected in its investment treaty practice. Three of the last five bilateral investment treaties signed by Japan have been with African States.

Political transitions and mining overhauls

2024 has been marked by a wave of elections around the world. Africa was no different. Across the continent, 15 national elections have already taken place at the time of writing, with three more scheduled before the end of the year. These elections, along with others worldwide are tracked on the Hogan Lovells 2024 Elections Hub, available here.

With political change comes policy change, including promises of reform in order to gain votes. In Africa, candidates have frequently run for office on a platform of seeking to ensure that the State gains more of the benefits from its natural resources as compared to foreign investors.

Senegal

Senegal, one of the world’s largest producers of phosphates in the world, is one example. Swiftly after being elected into office in March 2024, Senegal’s new President, Bassirou Diomaye Faye, turned electoral promises into actions by setting his sights on the mining sector. Since his election, Senegal has announced its intention to renegotiate key contracts in the mining sector (as well as the oil and gas sector). It also announced the establishment of a Special Commission to deliver on the audit and contract review in the sector. The aim of this is to make mining more “transparent.” It has not yet been disclosed which contracts will be under review and/or subject to renegotiation.

Burkina Faso

Burkina Faso, a major gold producer, is another example of how political instability can disrupt mining projects. In October 2024, the leader of the military junta which has been in power since 2022, announced his intention to withdraw mining permits from foreign companies. The reason for this has not been made clear, nor has it been clarified which mining projects will be targeted.

Two sides of the same coin

The Senegalese and Burkina Faso approaches to the reforms were different. Despite noting that the exploitation of natural resources will receive particular attention by government, the Senegalese President reassured investors that they are welcome in the country and that their rights will be protected. In Burkina Faso, however, the message was very clear. Why let foreign companies do something that can be done domestically?

Yet, the differences in approach represent two sides of the same coin. Both can ultimately affect the economic viability of projects. Foreign investors navigating the political landscape in those countries, and indeed other countries undergoing a change of government, are susceptible to political risk.

With a number of elections still coming up over the next year, companies must be alert to the risk that they face, and to the fact that they materialise very abruptly.

The wave of elections continues

Here is snapshot of the upcoming elections in Africa in the remainder of 2024 and 2025: 

Key challenges facing the mining industry

With political change looming for these countries in Africa, political risk to mining projects is very much on the table. The three primary areas of risk that could lead to disputes are:

1. Resource nationalism: with increased demand for minerals and metals to achieve the energy transition, mineral-rich countries may seize the opportunity to adopt protectionist measures. This can range from outright expropriation of mining projects, to more creative ways of exerting control such as increased tax pressures, renegotiation of contract terms, a hostile regulatory environment, export bans, or international sanctions.
2. Environmental regulation: governments may enact environmental regulations to curb the environmental impact of mining activities. Issues such as deforestation, land degradation or disruption to the ecosystem have sometimes prompted local communities to take matters into their own hands, leading to local protests and blockades at mining sites which disrupt mining projects. Where such regulations are enacted hastily, without sufficient thought or time, mining projects will be more significantly impacted.
3. Increased politicisation of mining projects: electoral candidates may face increasing pressure to take strong positions on the mining industry as part of their election campaigns. Making promises of reform in the extractive mineral industries can be one way of gaining votes, particularly from local communities who may believe that the country’s resources are being exploited by foreigners. Where candidates make hard-edged promises relating to the mining sector, backing out or coming to agreements with foreign investors post elections is something they would likely find very difficult to do.

Of course, risks faced by companies investing in mining projects are not limited to times of election or political change, although political change certainly can act as a catalyst.

Cameroon, which will head to the polls next year, introduced a new mining code at the end of 2023 which, among other things, upped the role of regulatory bodies in the mining sector, and requires mining companies and their subcontractors to now prioritise companies governed by Cameroonian law when it comes to their mining operations. Amendments made to Mali’s Mining Code in 2023 caused serious issues for foreign investors, leading to the detention of executives and the requirement for mining companies to make significant payments to the government to bring their existing projects in line with the tax requirements set out in the new Mining Code.

What should investors do to mitigate political risk? 

Investors in the mining sector can mitigate the risk by ensuring that their investments benefit from the protections contained in investment treaties. These treaties contain substantive investment protection standards which protect the “investments” of “investors” from internationally wrongful State interference. If a State interferes with an investor’s investment, and if there is an investment treaty in force between the home State of the investor and the host State of its investment, that investor may be able to bring a claim against the State under the treaty before an international tribunal. If successful, an investor may be able to recover substantial damages, placing it in the position it would have been in but-for the internationally wrongful conduct of the State.

If there is no investment treaty in force between the home State of the investor and the host State of their investment, it is possible to restructure investments in order to bring a company incorporated in a State with an investment treaty with the host State that is in force. Investors would be well-advised to seek to structure (or re-structure) their investments in order that the ownership structure of the investment includes an entity incorporated in a State with an investment treaty in force with the host State of the investment. This often can be achieved in a manner that is complementary to corporate and tax considerations.

Investors may be reticent to bring a claim against a State in which they have operations.  However, investment treaties can be effectively used as a dispute avoidance tool, bringing governments to the negotiating table through the application of mandatory negotiation periods.  Equally, on some occasions, if State conduct means that an investor is permanently prevented from continuing operations or is unable to safely continue operating, bringing a claim may be the only way of recovering value for shareholders.

Authored by Markus Burgstaller, Scott Macpherson, and Sarah Tayara.