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22 june 2009

The relationship between financial institutions and mining firms has been on the spotlight of late in view of the global credit crunch, which started in the United States and spread across the globe.

Most financiers are said to have been reluctant to finance mining projects as prices and demand for commodities remained heavily subdued. Namibian mining firms are not an exception to that.

Rough & Polished had time to talk to Standard Bank Namibia’s Head of Corporate and Investment Banking Jaco Burger to find out the level of exposure of the bank and other local financiers in the mining industry, especially in the diamond sector, and this is what we gathered.

We understand Standard Bank Namibia has an exposure of NAD327 million to the mining industry, can you give details on that?

If you look at our annual report, there is what we call ‘segmentation analysis’, which looks at our loan book; basically what that entails is you take the loan book and break it up into segments, and often it is done as per classification by the Central Bank.

So, the Central Bank here in Namibia will say, please classify according to these categories. Though it differs from country to country but in most African countries you have mining as a segment and you have to report to the Central Bank and also those returns are available.

So, you could see from a banking perspective, the Central Bank should be able to provide all bank exposures to the local mining industry and in our case NAD327 million was our figure at year end (2008) and you will see it is a relatively small percentage of our book.

We also learnt that this amount (NAD327 million) is just about 4 percent of your base asset?

I would say roughly 40 percent of the whole banking industry in Namibia is concentrated in what I call collateralized lending, meaning either home loans or asset base finance. Traditionally this number is small because of the concentration on the other asset classes so we and FNB (First National Bank)  are the two largest banks in Namibia and we have the largest home loan books and because those books are so big, this figure (4 percent) is small.

So in other words are you saying that it is more profitable to provide home loans than financing the mining industry?

No, no, I would not say that this move is profit driven although it has structurally and historically been the case. It is really a question of supply and demand.

Coming to the global credit crunch, we have seen the “collateral damage” it has done to the mining industry, worse in the diamond sector. Has that changed the way banks had been financing the local mining industry?

Look, the global credit crunch has a number of repercussions, one of those repercussions is that the global demand for minerals such as diamonds has dwindled and it also had a huge influence on commodity prices and that also obviously impacted the diamond industry. So globally demand is down. If the United States does not buy diamonds over Christmas, it impacts the whole world, so that has a ripple effect. No country is immune if demand is under pressure.

As a banking group we really recognize that, and we are quite comfortable with it but we do keep a keen interest on the developments in the industry, whether demand picks up, what plans are the big producers putting in place, and remember there is a whole value chain.

You would, however, find that in this country (Namibia) the value chain is not as sophisticated and developed as in other countries, we got guys taking diamonds out of the ground and sea, you got beneficiation, you got distribution, and you got raw retail. In this country, people take diamonds out, they do limited beneficiation. As a country we are quite dependent on the mining industry, but our dependency on diamond mining is less than a couple of years ago. Uranium has really picked up and it is a good prospect for the country, so we are not solely depended on the diamond mining industry.

You would have seen that a couple of years ago, we were very depended on mining exports as a driver of forex generation capability but that has changed.

Yes, the diamond industry is a material industry in the country but we are quite comfortable with our current exposure in the industry. We do not know how long the downturn is going to take, but we are quite optimistic that markets will find equilibrium even at a lower level.

Talking of optimism, of late, there have been reports that changes had been noticed on the global rough and polished diamond market. So with that, does Standard Bank consider re-engaging diamond mining firms on a serious level or are you still playing safe?

Look, I mean, playing safe is a little bit difficult to gauge. We have been very fortunate that we are close to our existing customers. From a local perspective there is really no need to grow our exposure. We are quite comfortable but it is unfortunate they are very few players in this market (the diamond industry), so we are concentrated on larger companies.

How many clients do you have from the local diamond industry?

You would know that the diamond industry here is predominantly the De Beers’ group and we have very limited, if any, exposure to other smaller miners.  

What about the sightholders, I understand Namibia has 11 of them?

Namibia, has considered the same beneficiation route like that of Botswana but it has not yet materially established, but I think Botswana is a good case study. We have played a significant role in the development of Botswana’s market, in terms of beneficiation, so if we played a role in that country then we can do so here.

What is the level of loan repayment, and what sort of strategies are you putting in place to ensure that at least you have a maximum retention of the loans you would have given out?

The mining industry is very concentrated here, De Beers is the biggest player so our exposure to the diamond industry is very concentrated and we are comfortable with our exposure or potential exposure, and we firmly believe that the local players will withstand, in our view, the temporary slowdown. It is not as if there are a number of big players.

We don’t have any non-performing loans in the mining sector, and this is quite a strict criteria all over the world in terms of regulations and in terms of when an asset is deemed to be non performing and we strictly follow those guidelines, in fact these are regulations from the central bank and I can confirm to you that we don’t have any non-performing loans in the mining industry here.

 There has been a huge appetite for the Namibian uranium of late. Is your bank exposed to this mining sector?

We have some exposure, directly and indirectly, and we are quite optimistic about the uranium prospects in this country. I think we were lead to believe by the players in the industry that the demand for uranium and nuclear energy as a source of energy has stable prospects for the future, which goes well for the country.

There has been concern that the Namibian economy has been heavily relying on mining. As financiers, what word of caution can you give on that?

That is more of a micro-economic debate for the government, but from a bank’s perspective and as a financier I can say that hopefully you will see some time from the industry numbers that we do not heavily rely on the mining sector.

I can categorically tell you that about 40 percent of assets are really, residential assets, individual assets. Whether there is huge scope to fund further the exploration that is a call each and every individual bank has to make. It is easier to fund balance sheets than project finance.

Your final remarks as we wrap this interview?

Mining is an important industry to the Namibian economy, but to make the conclusion that banks are overly exposed to the industry, because it plays a pivotal role to the economy, it is probably not the right conclusion.

Veronica Novoselova, Rough&Polished African Bureau editor in Namibia