Rising input costs, chronic power constraints and elevated regulatory risk are pushing gold miners to become “far more selective” in how and where capital is deployed, highlights consulting firm BDO South Africa audit partner Servaas Kranhold.

From an African operational perspective, he says capital discipline has tightened, shifting from volume growth to resilience and margin protection. Gold projects now need to clear higher in-house hurdle rates, with greater emphasis on shorter payback periods, robust margins and downside protection, rather than peak-cycle returns.

“Even with a strong gold price, companies are increasingly allocating capital towards projects that stabilise unit costs and protect cash generation,” he says.

Other crucial factors reshaping capital allocation considerations include stricter environmental, social and governance (ESG) compliance in water management and environmental monitoring, and mine planning and project risk screening to mitigate energy risk.

This is reflected by more conservative gold project ramp-up profiles and contingency budgets to allow for back-up power generation.

There is also a greater need for mining companies to balance their sustaining capital with their growth capital expenditure, as more capital is being allocated towards sustaining costs, life-of-mine extensions and efficiency improvements, rather than large and long-dated greenfield developments, thereby resulting in a clearer permittable pathway, he adds.

Kranhold also cites the challenge of price inflation regarding heavy equipment, highlighting that the prices of original-equipment manufacturers (OEMs) typically increases by more than 10% year-on-year for mine fleet and plant equipment.

As for project financing, a rise of alternative finance options has been observed, with traditional debt and equity, as well as alternative funding sources, such as streaming and royalty agreements, becoming increasingly popular for financing, particularly among smaller, junior mining companies.

Despite this, Kranhold adds that financing for junior miners or smaller, less established projects, can be more challenging, often coming at a higher cost, owing to perceived risks.

Investor Considerations

Reflecting on BDO’s transaction and advisory work, Kranhold notes an increase in financial institutions that are willing to fund gold projects in Africa, adding that the equity market plays a vital role in attracting funding from new securities exchange listings and the issuing of convertible bonds.

He notes that bankable gold projects currently tend to share a set of consistent characteristics such as higher confidence categories, good drilling density, a clean reconciliation history and experienced operating and management teams with a track record of successful project delivery.

In addition, such projects also present manageable capital expenditure profiles, often phased or modular, rather than large upfront capital commitments, and superior ESG compliance.

In terms of exploration, Kranhold highlights that investor appetite has shifted away from early-stage greenfield exploration towards lower-risk brownfield expansions, as well as mergers and acquisitions.

He says early-stage greenfield exploration is viewed as too slow and risky, leading to a decline in activity in this area. Investors prefer brownfield expansions, owing to often-present existing infrastructure being able to reduce overall project capital expenditure, allow for faster access to cash flow, and better data in terms of geology, metallurgy and operating history. This also offers lower permitting and execution risk.

However, greenfields cannot be ignored, as this activity still attracts capital, especially where the geology is compelling and the jurisdiction is easily investment friendly, says Kranhold.

“The funding provided for greenfield projects is seen to be tighter, owing to the long duration capital required, uncertainty of outcomes and public markets often preferring near-term catalysts,” he adds.

Risk Factors

In the next 12 to 24 months, significant financial and operational risks remain, especially if the gold price pull back and production costs continue to rise.

“This could result in margin compression and balance sheet complacency, whereby strong cash flows encourage aggressive dividends or acquisitions, leaving less buffer if prices correct or operations stumble,” Kranhold adds.

Other risks include declining exploration return on investments despite high exploration budgets; a decrease in the volume of new, large-scale gold discoveries, which make it more expensive to replace gold reserves; and resource nationalism in, for example, Mali and Burkina Faso. Resource nationalism plays a more active role in controlling natural resources, thereby presenting a threat to foreign-owned mining companies.

“The biggest risks might be overcommitting to expansion late in a favourable price cycle, instead of investing in resilience, balance sheet strength and sustainable returns, assuming that strong prices . . . will compensate for operational and structural weaknesses, which history shows is rarely the case,” concludes Kranhold.