By Tinyiko Mahange and Craig Brewer
In the frenzy of an auction, it’s often the last bidder who pays the most, lured by the momentum of the crowd and the fleeting promise of winning. The moment the gavel strikes, reality sets in – the price wasn’t a reflection of value, but of emotion, timing, and misplaced confidence.
The same dynamic plays out in Africa’s mining industry.
Historically, during bull markets in commodities, mining companies have often found themselves flush with cash due to surging prices and increased investor confidence – persuading them toward aggressive capital allocation decisions, particularly in mergers and acquisitions.
The rationale is understandable: high commodity prices create the illusion of sustained profitability and robust long-term demand, leading to a perceived urgency to expand production capacity or secure additional reserves. However, this pattern has repeatedly led to strategic missteps, as companies tend to execute these acquisitions at the peak of the cycle, when valuations are inflated and the competitive pressure to act is at its highest.
The problem compounds as the cycle turns. When prices begin to fall, the value of newly acquired assets typically declines in tandem, resulting in immediate write-downs and impairments. This slippage means that companies are unable to recover the full value of their investments, either through operation or eventual disposal.
To break this cycle, mining companies must adopt a countercyclical approach to capital allocation. This means exercising restraint during bull markets, prioritising organic growth, and building financial resilience to capitalise on opportunities during market corrections, when valuations are more favourable.
One need not look further than current market conditions to understand how this plays out.
The prices of several critical minerals have experienced sharp declines, according to the World Economic Forum, despite robust long-term demand projections. For example, after surging by over 400% in 2022, the price of lithium plummeted 75% in 2023, while cobalt has shed two-thirds of its value from its 2022 peak. These price corrections come at a time when demand for critical minerals is expected to double or even quadruple by 2040, with potential supply deficits forecast as soon as 2028. This contrast between immediate price movements and future demand projections underscores the perils of short-termism and highlights the need for mining companies to adopt capital allocation strategies that balance market realities with long-term opportunities.
This demands a disciplined approach, leveraging periods of price softness – such as the current one – to invest in future production capacity at more favourable valuations. This countercyclical mindset allows companies to secure strategic resources while avoiding the pitfalls of overpaying during market peaks.
While the medium-to-long-term outlook for critical minerals is overwhelmingly positive, the timing of demand surges and the impact of technological advancements or policy changes could significantly alter market dynamics. Investments should therefore prioritise assets with scalable production capabilities, allowing companies to respond flexibly to market shifts without overextending during periods of volatility.
However, timing isn’t the only challenge. The extended lead times for developing new supply sources – often a decade or more – create a disconnect between market signals and production readiness. This underscores the importance of risk-sharing mechanisms such as joint ventures, partnerships with downstream industries, and government incentives to derisk early-stage projects.
Moreover, as demand for critical minerals increases, so will scrutiny over how they are extracted and processed. Investments in sustainable mining practices, low-carbon technologies, and supply chain transparency will not only future-proof operations against regulatory risks but also position companies as preferred suppliers in a competitive market. The implementation of these initiatives requires a level of capital discipline equal to, if not exceeding, traditional mining investments and demand a long-term perspective.
The capital intensity of renewable energy infrastructure, advanced equipment for precision mining, or digital traceability systems can be substantial. Companies must rigorously assess the return on these investments, considering both direct financial benefits – such as lower operating costs or access to premium markets – and indirect advantages, like enhanced reputation and reduced regulatory exposure. It’s also important to understand that sustainability-focused investments take years to yield their full value. This means incorporating forward-looking metrics into capital allocation frameworks, ensuring that the full lifecycle benefits of sustainable practices are captured and communicated to stakeholders effectively.
Given the scale of investment and risk involved in modernising mining operations, partnerships will be essential for future-proofing African mining.
Collaborations – whether with governments, downstream manufacturers, or investment vehicles and financial institutions – can help distribute costs, accelerate innovation, and ensure that the benefits of transformation are shared across the value chain. Sovereign wealth funds, for example, provide long-term, patient capital and strategic alignment with governmental priorities, while downstream manufacturers bring resources and a vested interest in securing sustainable, decarbonised supply chains.
Such collaboration ensures mutual benefits: mining companies access funding and reduce their environmental footprint, while investors and manufacturers secure reliable, ESG-compliant sources of critical minerals.
In this sense, the true advantage lies not in being the highest bidder at the peak, but in setting the terms of engagement early, ensuring that Africa’s mineral wealth drives global innovation while delivering lasting benefits at home.
Tinyiko Mahange, director, investment banking, and Craig Brewer, managing director: Co-Head Origination, Investment Banking at Absa CIB.
BUSINESS REPORT