Those who dismiss Africa as an investment destination are way off track. The Dark Continent is actually one of the most exciting growth stories in the global market.
A quick look at recent trends shows a remarkable turnaround. Africa’s growth has consistently exceeded the global average since the beginning of the decade. Figures from the International Monetary Fund (IMF) show that the continent’s economy grew by 6.2% last year. And the IMF forecasts that it will to expand by 6.3% in 2008. That’s 12 times faster than the U.S. economy is expected to grow this year.
Economic growth is being driven by the continent’s huge reserves of natural resources and sustained by a growing middle class, and improved education and communications.
And Africa is also benefitting from the massive infrastructure investments being made by its new best friend—China. To give you some scale of the size of this, just consider that China has already invested more than $35 billion in Africa’s oil and gas industry alone. China’s entry has completely changed the rules on the ground in a way that most Western investors still haven’t grasped. And it’s one of the reasons that I’m so bullish on Africa.
This new interest in Africa is being driven by the continent’s legendary mineral wealth.
In 2005 it produced half the world’s platinum, 46% of its chromium, and 29% of its gold. Then there are the diamonds: half the global supply comes from Africa. But it is also a major source if energy. Africa holds 10% of the world’s proven oil reserves and 8% of proven gas reserves.
And given the sort of price increases for natural resources that we have seen in the current commodities super-cycle, Africa looks set to keep booming for decades to come.
The best way for savvy investors to buy into the continent’s remarkable turnaround is through the London-listed conglomerate, Lonrho Plc.
This company is rapidly emerging as an African powerhouse by strategically positioning itself in the industries that are vital to the continent’s development.
Lonrho is focussed on investments in African infrastructure. It now owns stakes in airlines, shipping, the water industry, mining, and oil and gas. And it has recently taken control of an important port.
The crown jewel in Lonrho’s emerging empire may be the Luba Freeport in the tiny West African state of Equatorial Guinea.
Often called the “Kuwait of Africa,” this tiny West African country is the continent’s third-largest producer with 1.1 billion in total proven oil reserves. To put that into perspective, this country holds more oil per head than Saudi Arabia.
Buying into Lonrho now is an ingenious way of profiting from this bonanza. The Luba Freeport sits right in the middle of the oil rich Gulf of Guinea region on the West Coast of Africa. This region is rapidly emerging as the latest global energy hot spot. In fact, the U.S. is expected to source 25% of its oil imports from this region by 2012.
And the companies that already operate here read like a who’s who of the oil industry—ExxonMobil, Texaco, Baker Hughes, and Amerada Hess are all in there. As the oil majors continue to flock to the region as an alternative to the volatile Middle East, demand for space and facilities at the Luba Freeport is set to soar.
But it doesn’t end there…
The company is also a leading player in the rapidly growing bottled water industry. It owns leading water bottling companies in Mozambique, Angola, and South Africa. Safe drinking water is such a basic need that the bottled water industry is set to grow exponentially as Africa develops.
It also owns a leading low-cost airline in Kenya and Angola under the Fly540 brand name. On a continent where there are still few roads worth the name, demand for air travel is growing quickly. It also controls a South African shipping company that is perfectly positioned to profit from the fast growing trade between Europe and Africa.
It has also got a stake in the mineral industry that is at heart of Africa’s revival. It holds a 21.94% stake in an Australian-listed diamond miner with a major diamond concession in Angola. Angola has emerged as one of the world’s biggest diamond producing countries. And Lonrho mining now owns one of the most lucrative mining concessions in that country. The long-term potential here is huge.
Lonrho is still a small company. It has a market capitalization of about $211 million. Its shares have risen in value by some 104% over the last three years.
But its share price has fallen by some 46% since their peak in January as global markets have panicked. That gives us a fantastic opportunity to buy in.
Lonrho’s strategy is starting to deliver. The company had revenues of £11.2 million in the financial year to September 2007. And in the first six months of the current financial year to March 31, Lonrho had total revenues of $17.8 million—that’s 59% higher than for all the last financial year. But it showed a loss of £4 million, mainly due to heavy investment in its shipping and airline businesses.
Those investments have laid the groundwork for the company’s sustained growth. Despite the short-term turbulence, Lonrho is a brilliant play on one of the biggest growth stories of the century—the revival of Africa.
Lonrho Plc quick facts
| Market | London Stock Exchange AIM |
| Ticker | LONR |
| Market Capitalisation | £118 Million |
| 52 Week Range | 22p to 49p |
| ISIN Number | GB0002568813 |