The Nigerian Opportunity: Going for Gold, But the future holds a lot more. Nigeria today is in a wave of market reforms in many segments of its Economy including the privatization of government-owned companies and mining assets. After years of dithering and being weighed down under squandered oil revenues and rising debt levels, the government finally demonstrated the political will to implement market friendly policies.
To this end, Nigeria, over the past couple of years, deregulated fuel prices, began privatizing the country’s four oil refineries and began a program of fiscal and monetary management. More recently, the country has attempted to modernize the banking system, reduce inflation through mechanisms such as curbing rampant wage increases, and has begun to develop a mechanism for a more equitable transfer of its oil revenues, which has become a source of major internal conflicts. Nigeria is also undergoing a political transformation of enormous proportion. For the past eight years, the country has seen uninterrupted civilian rule, which is the longest since independence.
The April 2007 elections saw the first civilian-to-civilian transfer of power in the history of the country, making its attempts at economic reform all the more meaningful. One of the major failures of the previous military regimes was the inability to diversify the economy away from its dependence on oil revenues. Developing the country’s solid mineral wealth promises to have a considerable impact on the economy since mineral deposits are geographically spread across more than 450 communities in the country. The oil industry on the other hand has concentrated in the swamps of the Niger delta.
According to Steve Vaughn, a partner at Heenan Blaikie Business Law Group and a leading expert on international mining law, Nigeria’s mineral sector has not historically received “enough attention as other countries in the region did from investors, but that is changing now’”. Some potentially serious investors, however, have sounded a note of caution on the type of companies that may be attracted to Nigeria’s new liberal mining environment.
‘Nigeria will have to derive rules to keep out the suitcase companies, i.e. those that simply enter to acquire lucrative licenses only to sell them later at a huge profit”, says J. Howard Bills, senior exploration manager, Axmin Inc, a Toronto-based gold mining company. World Class Minerals The mineral spread in Nigeria is significant with evidence of 34 different minerals distributed in Nigeria’s richly endowed geology. Though not all the mineral occurrences will ultimately have enough reserves to be of viable interest to mining companies, the Nigerian government is leaving no stone unturned in its increasingly sustained efforts to delineate and objectively demonstrate the potential and encourage investments in all .
“Nigeria has excellent and very significant deposits of tantalite, which are world class. It also has good quality lead and zinc properties with good commercial potential”, says Barey Guarnera of Behre Dolbear & Co Ltd, a consulting company dedicated to the minerals industry. However, the west African geology is replete with gold deposits. Gold is a miners dream right now considering the huge spread between gold prices and production costs and that is precisely the mineral that is attracting the most attention as far as Nigeria is concerned. The government is also keen on following a strategy that would bring in the miners quickly. “we have to be realistic about focusing on the most promising minerals”, says Nigeria’s former minister of mines, Leslye Obiora.
New Greenfield mines are not the only option. Nigeria has several previously explored mines that could be re-opened. The gold mining opportunity in Nigeria could be very much like that of Ghana, where abandoned mines could be re-developed, says Steven Dattal, a financier and former CFO of Barrick Gold. “Nigeria has several high grade gold mines but with modern technology we could also work the low grade mines, thus significantly increasing the country’s mining potential,” he added. The biggest investment that Nigeria needs to make is in it’s infrastructure. Without adequate power, roads and ports, the development of the mining industry is going to remain a pie in the sky.
Power shortages are endemic in Nigeria and the gap between peak demand and production is 7,000MW. The government’s energy plan for the next few years has been worked out and the contribution from coal-fired plants has been puts at 25 percent of the total energy requirement. The government is pipelining efforts to ensure that the energy sector needs are being addressed parallel to developing its mining opportunities. Coal Mining: A Key Focus Given the implications that continued power shortages have for the Nigeria economy, coal mining seems to be an area of immediate development concern, especially considering that Nigeria has proven deposits of over 1.5 billion tons, after only partial exploration. The advantages of coal mining is that though it is open to mining companies, the government is not dependent on them.
Thermal power-generating companies would happily takeover the responsibility of developing coalmines since it would automatically, build fuel linkages with their power generating plants. The focus on developing coal mines will also speed up development of the power infrastructure, since plants will come up at the pithead to avoid haulage costs and the national grid will also get built up to transmit power across the country. Rapidly developing its coal industry is in Nigeria’s best interest but the interest of foreign investors is in exploiting the most attractively priced mineral, gold.
The price of gold in the international market today is nearly three times its production cost. “coal should be a key target given the energy aspect and the opportunity for large coal mining projects for power generation exists, especially since there are handsome coal properties in Nigeria,” says Barey Guarnera. “coal mining will remain critical because of the peak load deficit factor. But the focus on industrial commodities is critical for the development of the metals and mining sector,” says Leslie Maasdorp, vice Chairman, Barclays Capital and Absa Capital. “The focus on industrial commodities will broaden the universe of mining companies interested in investment in Nigeria”, he says. Clearly the message is that the government has to look over the long term and focus on what is important for its overall development and not be swayed by short-term market factors. That said, the opportunity is clearly waiting for those mining companies willing to take the plunge into Nigeria. And to do that, many companies willing to overlook most shortcomings.
“There is no need to convince mining companies about negative issues, they are experts at assessing this risk for themselves,” says Rizwan Haider, regional manager, sub-saharan Africa, Export Development Canada, a Canadian government agency which works with Canadian companies doing business with other countries especially in the emerging markets. Putting up the infrastructure will be a prerequisite for large scale investment. An unshakable fact is captured by professor Obiora’s apt reminder that “ if you build it they will come”. So if the opportunity is there and the bottom line looks favorable, miners are notoriously hardy and they will not necessarily be deterred by infrastructural constraints and other confluence of factors. The high risk appetite of miners is evident in their persistence in active conflict zones where they have records of catering to relevant infrastructural needs.