Nord's Lefa Mine Under Review in Guinea! Analysis: Investor cheers fade as Guinea tightens grip on mining
By Saliou Samb
CONAKRY | Tue Sep 18, 2012 5:39pm IST
CONAKRY (Reuters) - Investors cheered when Guinea's President Alpha Conde took office nearly two years ago vowing to revamp its mining sector and end the West African state's decades of investment-curbing turmoil. They're not cheering any more.
Their hopes have been replaced by the harsh reality of a review of existing mining deals and permits, renewed political chaos, and rising security concerns that have put billions of dollars of bauxite, iron, gold and diamond deals on ice.
The government of Guinea - the world's top bauxite supplier and burgeoning iron ore exporter - is now locked in disputes with mining firms over control, ownership and financing of projects, including the giant Simandou development reputed to be the world's biggest untapped iron ore deposit.
While the state says it is simply seeking to fund development and combat poverty in a country that has been riven by decades of coups and conflict since independence from France in 1958, insiders say the push is backfiring.
"The government should come back to reality and avoid unnecessary problems which could complicate the equation in Guinea's mining sector," said Lancei Traore, a Conakry-based mining expert. "The government's current thinking is not aligned with the hard realities of the mining world."
Pushing through with the reforms could be particularly risky for Guinea because rife uncertainty over commodity demand and a slump in iron ore prices has already led many miners to slow or cut back investments worldwide.
Losing investors would be a blow for the country, which depends on mining for more than a quarter of its GDP and over 80 percent of its foreign exchange revenues, though firms that leave now also run a risk of burning their bridges to Guinea's rich deposits once the market recovers.
Guinea's flagship Simandou project, which needs billions in infrastructure spending, is in the spotlight at a time when major producers like Rio Tinto (RIO.AX) and BHP (BHP.AX) (BLT.L) are nervous about spending.
BIGGER PROFIT SHARE
In a bid to boost the state's share of the country's minerals wealth, President Conde last year decided to revise Guinea's mining code, inserting a provision to take the government's share in mines from 15 percent up to 35 percent, the first 15 percent of which is free.
Duties on imports have also increased under the new code from 5.6 percent to 6-8 percent, while mining firms now need to secure investment financing of about $1 billion from $50 million previously, in order to obtain a mining concession.
Of nearly $20 billion of investments that were announced for various projects over the last few years, only about $300 million has been injected to date, with only one iron ore operation, a Bellzone (BZM.L) - China International Fund venture, starting up production.
In a high-profile departure since the new policies were introduced, Guinea said in July that BHP Billiton, the world's largest mining company, planned to pull out of its Mount Nimba iron ore project, one of the country's biggest projects.
While officials explain Conde's decision to increase the state's stake in Guinea's mineral wealth as necessary to raise funds for depleted state coffers after years of misrule, some insiders have criticized the push as too far, too fast.
"Initiating a review of all mining contracts signed by previous governments is futile," said former Guinea minister Mahmoud Thiam, who held among others, the mines portfolio during the military junta that Conde replaced in November 2010.
"The (reviews) causes too many delays and uncertainties, and countries that embark on this route do not always have the means to follow through with it," Thiam, who now works as a consultant, told Reuters.
Thiam was head of the mines ministry at the time when the country signed a controversial mining and oil deal with China International Fund worth about $7 billion. The deal has since been cancelled by Conde's administration.
DISADVANTAGED
While miners and major commodities actors are trying to push back on resurgent resource nationalism around the globe[ID:nL5E8G4FX3], Guinea says it has no choice but to try and change the terms of deals that are unfavorable.
"We are in real disadvantage when you look at some of the deals signed with mining companies in the past. We are obliged to review them," Guillaume Curtis, Secretary General of Guinea's mines ministry, told Reuters.
The government has also launched a major audit of its mining registry, which could mean the cancellation of hundreds of permits that were issued in the past but have not been used.
"As of today, our whole territory is covered by licenses and permits. But unfortunately, not even 20 licenses or permits are effectively exploited on the ground," mines minister Lamine Fofana told a conference last Friday in Conakry.
A senior official at the mines ministry who asked not to be named told Reuters that as many as 1,200 of the roughly 1,500 mining permits granted in recent years will be cancelled after the audit, including some held by major mining players.
Another former mines minister Ibrahima Soumah said Guinea had failed to reassure investors, a task crucial to the country's development after years of instability.
"I do not think that BHP Billiton's departure is related to a change in the company's business strategy only," said Soumah, who is now in the private sector as a consultant.
While mining companies have largely been mum on the issue, analysts have said a key sticking point is whether Guinea should be able to have a 15 percent free stake in projects.
"There is also contract uncertainty for some of the major players as the government conducts reviews so the potential for contracts to be renegotiated or even abrogated is there," said Kissy Agyeman-Togobo analyst at Songhai Advisory.
She added that BHP's departure "will most likely undermine confidence in the business environment as investors weigh up Guinea's internal challenges with the reality of a decline in mineral prices over the medium to long term."
WAIT AND SEE
Adding to investor worries is a deteriorating political impasse that has delayed legislative elections and triggered violent security crackdowns on opposition protesters. Demonstrations around mine sites have also led to the temporary shutdown of three mining operations.
Security forces killed at least five villagers near Vale (VALE5.SA) and BSGR's iron ore joint venture in Zogota last month after the villagers, demanding jobs, attacked the project in late July and brought its operations to a standstill.
A Vale official said the company would still move ahead with the project, once employees evacuated from the site are returned, but suggested the project's future depended in part on the outcome of negotiations over the mining code.
"There is an ongoing discussion about the country's mining code and the company remains awaiting the outcome of these discussions," the official said, asking not to be named.
Gold miner Semafo (SMF.TO), meanwhile, abandoned its Kiniero plant in Guinea for months after a protest in September led it to evacuate all its expatriate workers.
According to the world's top aluminum producer RUSAL (0486.HK), political risks in Guinea have risen sharply, compounding investor worries over the new government's determination to review mining contracts.
RUSAL reported a $167 million impairment loss related to its 640,000 metric tons (705,480 tons) per year Friguia alumina refinery in Guinea, where production has been suspended since April following a strike over wage demands.
Still, miners appear to be taking a 'wait and see' approach for now, instead of packing up, in hopes the rich potential locked for decades beneath Guinea's soil will open up once the investment climate improves.
"We like Guinea as a place to invest because there is the potential to find big things there and to develop big projects that you might not necessarily see in other countries...," said Peter Turner, Managing Director at small cap miner Nemex Resources, during a recent mining summit in Australia.
https://in.reuters.com/article/2012/09/18/us-guinea-mining-idINBRE88H0M520120918