News Digest: Africa Mining Comment & Analysis – Ghana

Ghana's Deputy Finance Minister Seth Terkper on 24th November insisted that dialogue 'will continue' over the government's plan to increase mining royalties to a standard rate of 6 per cent. The new rate has yet to be applied systematically to enable the government to discuss the changes with those companies in possession of stability agreements. Terkper's comments follow the release of the government's 2011 budget plan, which also provided for monthly - as opposed to quarterly - royalty payments.

Chris Melville, Africa mining consultant with Menas Associates today commented:

“The revival of the debate on royalty rates is hardly a surprise. The government has done fairly well in reducing the fiscal deficit, but its spending plans are ambitious and royalties represent the most significant contribution the mining sector makes to government revenues.”

“Mining royalties are an important source of funding for local communities, so it's also no surprise to see civil society support for upward revision of rates, especially in the context of high gold prices and recent EITI reports on inadequate reporting of production and prices by mining companies.”

“Aware that its reputation for investment openness is on the line in some quarters in the aftermath of the Kosmos showdown, the government seems keen to adopt a softer approach to the mining companies, but pressure for a more robust line is likely to rise ahead of elections in 2012.”

“However, the issue of mining royalty rates is unlikely to go away. Royalty-based systems are often unresponsive to increased prices and agreements with mining companies – especially those with stability clauses – can quickly come to be seen as unfair, increasing the likelihood of disputes with companies anxious to protect the sanctity of their contracts.”

© 2010 Menas Associates

Guinea poll organisers propose date

Guinea's electoral commission has proposed holding the delayed presidential run-off election, meant to transfer power to civilians from soldiers, on October 31 but one candidate said on Tuesday that that was too soon.

The poll, the first free vote in the mineral-producing former French colony after decades of authoritarian rule, has been postponed repeatedly since September because of a lack of preparation and street clashes among rival political camps.

Electoral commission chief General Siaka Sangare told reporters he had proposed the date during a meeting with acting President and junta leader General Sekouba Konate on Monday. Konate is expected to ratify it.

But Cellou Dallein Diallo, one of the two candidates, said October 31 was too soon after a wave of violence between supporters of the rival political camps.

Diallo, a former prime minister, said 18 busloads of his supporters had recently been evacuated from Haute Guinea, a region loyal to his rival Alpha Conde, after they had been harassed.

“The biggest problem is to resolve the issue of displacement of this group,” Diallo said. “I think October 31 is too soon.”

Conde said he hoped the date would hold. Independent analysts said the decision to hold the vote as early as this weekend appeared to be a bid to keep ethnic tensions at bay, even though preparations might not be complete.

“I think that while there may still be issues over whether the election is free and fair and according to best practice, there are clearly dangers in allowing this impasse to continue,” said Chris Melville, senior associate at Menas Associates.

“What it means to Guinea in the medium term in terms of legitimacy of the process is another question,” he said.

Guinea, the world's biggest supplier of aluminum ore bauxite which has drawn billions of dollars in planned iron ore mining investment this year, has been run by a military junta since a coup in December 2008.

Konate has since won international plaudits for agreeing to hand power back to civilians, and has expressed frustration over a series of delays to the run-off after the first round vote passed relatively smoothly.

At least two people have been killed and dozens injured in political and ethnic clashes in recent weeks. Human rights groups said on Tuesday that security forces were not using enough restraint.

Sangare was chosen to lead the electoral body last week after Diallo accused the previous election chief of bias in a row that derailed the most recent October 24 poll date. Both Diallo and Conde have said they support Sangare's leadership of the electoral body.

Source: Reuters

For more news about Nigeria, please visit the Menas Associates Newsroom.

Stakes rise with Guinea election gamble

A move by Guinean authorities to hold a delayed presidential run-off on Sunday marks an attempt to contain rising ethnic tensions in the West African country but could store up trouble for later.

The landmark vote, meant to end nearly two years of military rule, has been repeatedly postponed since the first round in June amid outbursts of violence between rival political camps and a lack of adequate preparation.

The newly-appointed electoral commission chief surprised observers on Tuesday by proposing to hold the vote on Oct. 31 -- a move widely seen as a bid to stifle rising conflict and the potential for a new military coup.

"There are clearly dangers in allowing this impasse to continue," said Chris Melville, senior associate at Menas Associates, a London-based consultancy watching Guinea and its large bauxite and iron ore mining sector.

But the attempt to rush the vote could lead to a chaotic election aftermath in a country that has drawn billions of dollars in investment from firms like Rio Tinto and Vale.

Junta leader General Sekouba Konate has yet to ratify the date and one candidate, ex-premier Cellou Dallein Diallo, said the date was premature -- raising worries that his supporters would vigorously contest the outcome if he lost.

TRADE-OFF

Diallo took 43.69 percent in June's first round, relying on support from his ethnic Peul, who make up about 40 percent of the country. Veteran opposition leader Alpha Conde, one of the Malinke who make up about 35 percent of the country and have tended to enjoy political power since independence, took 18.25 percent of the first round.

But Diallo's lead may not be as strong as it appears.

Diallo said on Tuesday that recent ethnic clashes in regions that favour Conde had displaced large numbers of his supporters and no measures had yet been taken to ensure they could vote.

Conde has burnished his support with alliances with defeated first-round candidates Papa Koly Kourouma and Jean-Marc Telliano -- both of whom did well in the large Guinea Forestiere region -- and has strong support in Malinke stronghold Haute Guinea.

After complaints in the first round that some voters had to travel 20 miles (30 km) to vote, election officials have been adding new voting stations in those regions -- in theory making for a stronger turnout for Conde.

"The first round showed Diallo as the clear front-runner. But it will be interesting to see if the machinations of the political elite in between will affect those results," said Tara O'Connor of Africa Risk Consulting.

Analysts said the Peul would be in no mood to accept defeat this time around given their view that other ethnicities have ganged up to exclude them from power since independence from France in 1958.

But there has been pressure from Paris, the United Nations and neighbouring states on Guinea not to delay the election any further. Assuming Konate accepts the Oct. 31 date, the trade-off will be in favour of reducing the risk of violence before the vote in the hope of being able to contain it later.

"The damage to the electoral system has already been done," said O'Connor of an electoral process that was billed as being Guinea's first democratic vote since 1958.

"It is just better that they are getting on with it."

Source: Reuters

For more news about Nigeria, please visit the Menas Associates Newsroom.

Congo resolves dispute over copper mine

Freeport-McMoRan, the US copper mining group, has resolved a long-standing dispute with the Democratic Republic of Congo over control of a vast copper mine by giving cash and shares to the government.

The Tenke Fungurume project, which could be ranked among the world's top 10 new sources of copper, has been plagued by uncertainty since 2007, when Congo's government decided to review all mining licences signed during the war in the country between 1998 and 2003.

More than a year of negotiations, thought to have involved the US government in support of Freeport, led to changes to the Tenke licence. Under the new terms, Gecamines, the state mining company, will own 20 per cent of Tenke, an increase from 17.5 per cent.

Freeport will pay $30m to Congo “in six instalments after reaching certain production milestones”, as well as $5m in “surface area fees”.

Freeport started producing copper at Tenke in south-eastern Katanga province in March 2009 and is still working towards full production. But until last Friday it did not have a clear licence.

Perception of risk surrounding the Tenke licence increased in August when Canada's First Quantum Minerals was stripped of the last of its assets in Congo.

The “international outcry” caused by this dispute might have “accelerated the settlement by strengthening Freeport's position and giving the government a greater incentive to show that it is not all bad”, said Chris Melville, an Africa mining specialist with Menas Associates.

Source: The Financial Times

For more news about Nigeria, please visit the Menas Associates Newsroom.

Bellzone razes risk in Guinea

Bellzone Mining has continued to eliminate the mining risk at its Kalia iron ore project in Guinea with a further increase and upgrade of its mineral resources. With only more good news expected on the resource front in the coming months, the remaining risk centres around the would-be operation's challenging infrastructure demands and existing country-risk.

The updated resource follows work over both Kalia I and Kalia II and has increased the total magnetite resource by 56.5% to 3.74 billion tonnes. More importantly from a risk perspective, 670 million tonnes from an entirely inferred initial resource has been converted into measured and indicated resources. There is also a maiden resource on the way in the fourth quarter for the higher quality oxide ore, on which Bellzone is relying to deliver a direct shipping ore (DSO) element within its planned operation.

The current resource would support a 50Mt per annum operation with a life of 60 years as envisaged by Bellzone, which would be reached with a staged approach. Stage one would see 20Mtpa of DSO produced as early as 2014 and 10Mtpa of concentrate by 2015 before the DSO production climbs to 30Mtpa by 2017 with 20Mtpa of concentrate.

The price tag for stage one has been set at $US3.8 billion, most of which is attributed to related infrastructure requirements – a 285km rail and coastal port, primarily – that China International Fund (CIF) has committed to fund in exchange for a 100% offtake agreement at Kalia.

This is just part of the picture. The current resource at Kalia has been delineated from just 6km of the 19km combined strike length at Kalia I and Kalia II. Bellzone predicts the total magnetite resource could reach more than 13Bt in addition to possible oxide resources of 2.9Bt. In this case, the mine life and production would be increased.

Bellzone managing director Nik Zuks said while the company would continue to look at expansions to the overall resource, focus had turned to producing the oxide resource in the December quarter. Investment bank CanaccordGenuity indicated in a research note last week that the upgraded magnetite resource figures had reduced the discount applied to Kalia and that an oxide resource would have the same effect when released next quarter.

“This upgrade and the major steps achieved over recent months towards project completion reduce the completion risk on this project and, as such, allow us to reduce the 'haircut' we applied previously to our net present value estimate for the completed project,” the bank said.

“We point to the importance of the higher-grade near-surface hematite at this project as a source of DSO. Our site visit and familiarity with these deposits suggest to us that JORC classification of the hematite cap is little more than a formality. When it comes later this year, we will be able to upgrade its contribution to value in Bellzone.”

In addition, Zuks said that both the infrastructure agreement and government agreements in place had “hugely de-risked” the project.

“The detailed agreement with CIF, the presidential decrees which lawfully secure the Kalia convention and exclusive infrastructure development rights, and a proven substantial JORC magnetite resource has hugely de-risked Bellzone's aspirations of building a 50Mtpa iron operation in Guinea,” he said.

With such a large and expanding resource in hand along with a financial partner in CIF, CanaccordGenuity broker Mike Cook believes that delivering an economic feasibility study for the infrastructure component of the development remained the major hurdle for Bellzone.

“[Kalia] is being de-risked because Bellzone is managing to tick a number of boxes,” he said. “The next step to de-risk it further is the feasibility study both on infrastructure and the mine itself. The feasibility for the mine will be the easy bit. The tricky bit is going to be getting the rail to traverse across some fairly tricky terrain – it's not flat like Western Australia but then again we're not talking about the Himalayas.

“The risk is that the feasibility study comes up and says that it's actually going to cost too much and will erode the return on the project; and that it's going to take five years to build the project rather than three. And that's a possibility.”

He said coming up with a positive feasibility over the next 12 months and building the mine and infrastructure over the following three years would be “quite a big ask”.

There is also an element of risk hanging over Guinea – a country that has had its share of troubles over the years and which loves a good military coup. Chris Melville from risk consultancy Menas Associates said the move toward democratic elections (in progress) after a year of military rule and a further nine months of interim government was a positive step for Guinea, but the outlook was uncertain. He said both presidential candidates were similarly accepting of foreign investment in the mining industry, with the frontrunner, Cellou Dalein Diallo also having increasingly strong links with the Chinese.

“This is a country that has been locked down and stagnating under the authoritarian rule of Lansana Conte from 1984 to 2008,” he said. “A lot of the ethnic and political dynamics that were contained under his rule have the potential to re-emerge under a newly democratic order. There is also a risk going forward, given how close the election process has been, that whoever loses it will seek to overturn the result through popular protest or potentially unconstitutional means.

“In a highly personalised and contested political environment such as Guinea's, the personalities of the people in power are hugely important for mining companies, especially those who have signed agreements during a transitional period. A lot of deals have been signed in this period, which creates an underlying level of risk when a new fully legitimate and constitutional government is inaugurated. The key question for the players who signed deals is to what extent have they been able to embed themselves with personalities who will remain important in the post-election period.”

Guinea is seen by many, including the usually conservative Rio Tinto, as a country where the mineral wealth outweighs any risk. Bellzone's position in Guinea and its ability to progress rapidly towards production make the junior one of the standout emerging iron ore players in the market, according to Renaissance Capital.

“Given its growth potential and the fact that the region is now game-on in terms of iron ore development, we think investors should see Bellzone as a highly favourable risk/reward investment,” the bank said. “At the time of Bellzone's IPO, the market was sceptical about management's ability to progress the project over a compressed timeline. This is no longer an issue.

“The project has been de-risked, and actually accelerated, due to the elimination of the usual lengthy period of funding required for a project of this nature.”

Source: HighGrade

For more news and analysis about mining, please visit the Menas Associates Newsroom.

South African Mining Investment Risk Grows as Anglo, Lonmin Lose Rights

Anglo American Plc and Lonmin Plc, who employ 100,000 people in South Africa, say the government has deprived them of mine rights, threatening investment and job creation in the country's biggest export industry.

The disputes over the rights, some of which are now in the hands of former government officials, add to investor concern that their investments in South Africa aren't safe. The ruling African National Congress (ANC) is preparing to discuss mine nationalization at a September congress.

“These could be the first indications of a worrying trend,” said Chris Melville, an analyst at London's Menas Associates. “The key question is whether the government looks to resolve this uncertainty and close the loopholes or whether we begin to see politically connected individuals and companies systematically exploiting them.”

South Africa, which boasts the world's biggest platinum and chrome deposits, is already struggling to attract foreign investment as laws to redress the inequalities of apartheid compel the sale of stakes in mines to black South Africans, increasing investment costs. Canada's Fraser Institute, a research agency, ranks the country ahead of only the Democratic Republic of Congo and Zimbabwe in terms of the ease of mining exploration investment in Africa.

The ANC's youth wing and labor unions, the groups that propelled Jacob Zuma to the presidency last year, are calling for the country's citizens to benefit more from mineral resources, valued by Citigroup Inc. at more than $2.5 trillion. At stake is investment in an industry that employs 491,000 people and accounts for 5.2 percent of the country's gross domestic product, according to Statistics South Africa.

Employing Black Managers

The disputes have arisen as companies renew mining rights to comply with laws that stipulate targets for black ownership, the employment of black managers and women, and the economic development of communities near their operations. They form part of legislation designed to make up for the use of cheap black labor during white rule in the country's mining industry.

“It's a piece of legislation that's still being tested in application,” said Sandile Nogxina, director general of the government's Department of Mineral Resources, in an interview. “I don't believe it should frighten investors away as we have courts of law in the country to deal with disputes.”

Anglo and Lonmin say they have been wronged.

Prospecting Rights

In March, the department awarded a fifth of the prospecting rights in London-based Anglo's Sishen iron ore mine to Imperial Crown Trading, prompting a lawsuit from Anglo subsidiary, Kumba Iron Ore Ltd. Imperial's biggest shareholder, Jagdish Parekh, has been involved in contract mining and uranium investment with Zuma's son, Duduzane. The other five shareholders include ANC members and a former ANC employee.

While Pretoria-based Kumba said in an e-mail that “it is the only company that should be granted these rights,” Imperial maintains it has done nothing wrong. Jacinto Rocha, a former department official, said Kumba's application was improperly submitted.

In May, London-based Lonmin lost the prospecting rights to some of the metals mined alongside platinum to a unit of HolGoun Group, led by a former Public Enterprises Ministry director general and Lonmin director, Sivi Gounden, his wife, Vanessa, and Miriam Sekati, an official in South Africa's Security Ministry. Lonmin said the award of the rights was “wrong.” Vanessa Gounden said by e-mail the company had acted “with integrity and within the ambit of the law.”
No History in Mining

Both Imperial and HolGoun are closely held, partly black- owned, and don't control any operating mines in South Africa.

The new holders aren't well known because black South Africans were barred from investing during apartheid. The fact that some are followers of the ANC is irrelevant because many people belong to the party, said Nogxina of the government's Department of Mineral Resources.

“South Africa is trying to promote the entry of historically disadvantaged people into the economy,” he said. “Of course, they will have no history in mining.”

Already the new owners are benefiting. Last week, Imperial agreed to sell its Sishen rights to ArcelorMittal South Africa Ltd., which previously lost the rights after failing to renew them on time, for 800 million rand ($110 million). At the same time ArcelorMittal South Africa agreed to sell a stake to black investors including a group lead by Duduzane Zuma.

“Why should someone benefit to the tune of 800 million Rand because of the exploitation of an oversight?” said Peter Davey, head of mining research at London's Ambrian Capital Plc. “That there are similar names that keep appearing is worrying.”

'Terrible Message'

Lonmin was also temporarily banned from selling byproducts from all of its platinum mines after the department said it missed a deadline to renew some of its rights. Platinum group metals are mined from the same orebody as gold, nickel, chrome and copper.

Lonmin shares fell 5.1 percent in London on Aug. 6, the biggest decline in five weeks, in the first trading session after the announcement.

“It sends a terrible message to investors,” Peter Leon, chairman of the London-based International Bar Association's Mining Law Committee, said from Johannesburg. It says “political connectivity trumps good commercial sense.”

Source: Bloomberg

News Digest: Africa Mining Comment & Analysis - South Africa

London-listed PGM miner, Lonmin, on 5 August announced that it had been instructed by the South African Department for Mineral Resources (DMR) to immediately cease sales of PGM-associated minerals in South Africa. The instruction was issued after the DMR granted prospecting rights for associated minerals within Lonmin's holdings to a second company - Keysha Investments 220, which is reportedly linked to a former Lonmin director.

Chris Melville, Africa mining consultant with Menas Associates today commented:

"This is the second case in less than six months where the DMR has awarded prospecting rights over an area of an existing mine to largely-unknown third parties. For it to happen once could be an isolated case; for it to happen twice, it looks worryingly like the start of a trend".

"Such decisions by the DMR are only likely to reinforce the concerns of those who regard the MPRDA and the Mining Charter as a retrograde step for security of tenure in South Africa's mining industry".

"Moving to a system based on government licence was always going to expose licence awards to the more uneven discretion of ministers and departments of state. Likewise, the requirement to transfer mining titles into 'new order rights' will always create opportunities for third parties to get their foot in the door".

"The concern going forward is whether such gaps become systematically exploited by vested interests, in a manner we've witnessed in a number of other, less well-institutionalised mining regimes in Africa and elsewhere. This isn't inevitable in the South African context, but we may be at something of a crossroads, both politically and in terms of the evolution of the regulatory environment in South Africa".

Background

According to its media release, Lonmin applied for 'new order rights' over the PGM-associated minerals in late 2009, having formerly mined and marketed associated minerals from its operations as it was entitled to under previous legislation. The company claims it was unable to obtain these rights because a prospecting permit over a small portion of its property had been applied for in March 2009 by Keysha Investments 220. This right was awarded in May 2010. Keysha is reportedly connected to HolGoun, whose CEO is Dr Sivi Gounden, a former Lonmin director, who left the Lonmin board in October 2009.

© 2010 Menas Associates

Guinea election leader secures backing for run-off

The candidate who came top in the first round of Guinea's presidential election, Cellou Dallein Diallo, became strong favourite on Wednesday (28th July) to win the decisive run-off by securing the backing of a leading rival.

Diallo signed a deal with third-placed Sidya Toure, making him the likely next president following the elections, which are are meant to pave the way for a return to civilian rule in the world's top exporter of the aluminium ore bauxite.

Toure became a possible king-maker after he secured 13.62 per cent of the vote in the first round in June behind Diallo, who won 43.69 per cent, and second-placed Alpha Conde.

No date has been set yet for the run-off between the top two candidates in Guinea, which has been gripped by political uncertainty since a coup in late 2008.

"I express my thanks to Mr Sidya Toure for having agreed to ally himself with us," Diallo said after the pair signed the agreement in Conakry.

No details were made public but sources in Diallo's UFDG party said Toure's party had been promised the post of prime minister and 30 per cent of cabinet jobs in return for its support, should Diallo win.

"(The choice) for the second round is difficult. But our priority is that Guinea should at last launch its economic development. That is why we made the choice (we made)," Toure told reporters journalists after the signing ceremony.

Toure told Reuters last week that he would negotiate with the two leading candidates to try to secure an alliance.

Sixth-placed Ibrahima Abe Sylla's NGR and the PUP former ruling party also signed the agreement to support Diallo, a 58-year-old former minister and prime minister under the late President Lansana Conte.

Months before Guinea held its election, Rio Tinto and Vale surprised many by saying they would spend billions on iron ore projects there. Analysts expect some contracts will be reviewed after the elections but a Diallo victory could ease fears.

"We don't believe that Conde will put together a comparable coalition and we expect Diallo to be the next president of Guinea, barring any unexpected reintervention from the army," said Chris Melville, senior associate at Menas Associates.

"Diallo has spent recent months getting close to members of the transitional government and his victory would provide some reassurance to mining companies that have signed agreements with the (transitional government)," Melville told Reuters.

Voters following orders?

Results from the first round showed the importance of ethnic allegiance, with Diallo and Conde taking votes from their own large ethnic groups - Peul and Malinke, respectively.

Toure's Diakhante minority makes up just one percent of the population but if he can repeat his first round performance, and there is no significant anti-Peul mobilisation, Diallo looks set to win.

"I think that (Toure's) supporters will do what he tells them to do. I don't think there will be a lot fading off," a diplomat who follows Guinea told Reuters.

Conde has opposed all three recent and generally unpopular leaders - Captain Moussa Dadis Camara, who seized power when Conte died but was replaced by an interim leader after being shot last year, Conte himself, and Sekou Toure.

European and US observers broadly praised conduct of the 27th June first round vote following months of political tension and wrangling, which included the killing of dozens of pro-democracy demonstrators last year. But the process revealed a number of logistical problems which experts say poll organisers need to fix before a potentially tense and close second round of voting.

Source: Reuters

For more news and expert analysis about West Africa, please visit the Menas Associates newsroom.