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Same-Day Analysis

Guinea Passes Long-Awaited Mining Code, Launches Contract Review

Published: 14 September 2011

One of the world’s most resource-rich but poor nations has passed a new mining code that could grant the state up to 35% of projects, and has embarked on a comprehensive review of existing contracts.



IHS Global Insight Perspective

 

Significance

The National Transitional Council standing in for Guinea's parliament has approved the long-awaited mining code, which gives the government a much greater degree of involvement in and control of the country's vast mineral reserves.

Implications

Mines Minister Mohamed Lamine Fofana is also closely inspecting previous contracts for overly generous provisions to investors and has already cancelled a controversial USD7-billion deal with a secretive Chinese investment group.

Outlook

Early indications are promising that a full exploitation of the country's immense iron ore and bauxite deposits can go ahead despite investor concerns about increased obligations, and that surging government revenues can start to fund much-needed large-scale socioeconomic development.

The National Transitional Council has adopted a mining code that could give the state up to 35% of mining projects and raises the customs duty on mineral exports from 5.6% to 8%. The code was formally adopted by the interim parliament on 9 September 2011, but Mines Minister Mohamed Lamine Fofana said he intends to follow up with a comprehensive review of existing contracts to root out “unconscionable provisions” granted by previous administrations.

A revised code to update a flawed 1995 version has been on the agenda since a military junta took over the running of the country upon the death of dictator Lansana Conté. It was put on the backburner as junta leader Moussa Dadis Camara struggled unsuccessfully to keep his rocky regime together, and then Sekouba Konaté concentrated on overseeing the transition to multi-party democracy. That was achieved late last year with the election of Alpha Condé, who stressed throughout his campaign and after the importance of a new code for Guinea to properly benefit from its vast mineral wealth as the best route to haul the country out of poverty (see Guinea: 21 February 2011: Guinean President Vows to Recover State Assets). Fofana has driven a relatively fast process, producing a draft version in February and a revised effort in June 2011, which was then put before the NTC and passed unanimously. During the process, mining companies lobbied hard against the changes, arguing that it would undercut their profitability and lead to reduced investment. Their response to the code, and particularly the forthcoming review of existing contracts, will be crucial to the success of the regulatory overhaul and the country’s future prosperity.

The main provision of the new code gives the state a free 15% stake in mining projects, with the option to purchase an additional 20%, bringing the total share to 35%. The 1995 code only gave the state a 15% share in some projects. Mining companies have argued that this will cut into their revenues without reducing capital outlay, while their tax bill for mineral exports will also increase significantly, with the 8% rate one of the highest in Africa. Fofana said that to help ensure the code balances state and investor needs, the government sought advice from private research firms, the International Monetary Fund (IMF) and billionaire George Soros, among others (see Guinea: 2 March 2011: President Enlists Billionaire’s Help to Review Guinea’s Mining Code).

Procedures for companies seeking a permit will be toughened up, requiring them to complete a feasibility study, and environmental and social impact study beforehand. Companies will be limited to five exploration permits each for “better control” of mineral exploitation and some reserves will be set aside for future generations. Preference will be given to Guinean companies in mining zones and there will be a minimum quota of Guinean employees to be hired on projects. Members of government and officials in the Mines Ministry will be forbidden from “having direct or indirect financial interests in mining companies”. However, the Guinean state will play a more active role in the marketing and transport of mineral resources, as well as the financing of industry-related infrastructure. Fofana admitted to Reuters, “There is no doubt that when we say we want to participate in the development and financing of our mining infrastructure, it will not please people. When we say we want to be involved in the shipment of our resources by chartering boats ourselves so we can be aware of the real costs ... it intrudes on a closed world reserved for major companies.” A state minerals management company, Soguipami, has been formed to oversee the sector and help to manage a mining fund open to investors.

Agreement Overturned

Mining concerns will be unhappy enough with elements of the new code, but noses could really be put out of joint with the forthcoming review of existing contracts. One major casualty has already been announced, which illustrates the government’s determination to act, but is also clearly the most egregious example of a deal that did little to benefit the state. Fofana said he has scrapped an agreement signed by the junta to give secretive investment group China International Fund (CIF) the rights to all of Guinea’s unexploited resources. This deal, reportedly worth USD7 billion, had been widely denounced as exploitative. The former junta leaders had also formed a joint venture with CIF, called GDC Mining Oil and Gas, in which CIF had a controlling stake and the right of first refusal for all unexploited mineral resources. Fofana said the company still exists, but its rights have been toned down and it “will be subject to the same mining laws as any other mining company working in the country.”

As for existing projects, whether in production or preparation stages, it remains to be seen how they will be affected by the review, but an important precedent appears to have been set earlier this year when Anglo-Australian mining giant Rio Tinto came to an agreement with the government (see Guinea: 27 April 2011: Mining Giant Settles Dispute over Iron-Ore Mine with Guinean Government). Since the late 1990s Rio Tinto has held the rights to what has been called the world’s last high-grade iron ore deposits at Simandou, containing an estimated 2 billion tonnes of the 4 billion Guinea is believed to hold. Rio Tinto was threatened by previous governments with cancellation of the concession for non-development and did lose the rights to two of the four blocks. The eventual agreement with the Condé regime saw the company pay out USD700 million and agree to a 35% upper threshold for a government holding, including 15% at no cost, which exactly prefigures the provisions of the new code. The blocks taken away from Rio Tinto by the Lansana Conté regime in 2008 were granted to BSG Resources, controlled by Israeli diamond dealer Beny Steinmetz. Although the deal was criticised for BSG’s lack of experience and resources, it was confirmed by the junta and has been given some heavyweight backing in the form of a 51% stake taken by Brazilian company Vale. Particularly since having lost the two blocks in dubious circumstances, Rio Tinto may well have questions to ask if BSG and Vale are not subject to the same requirements as itself. As far as Simandou is concerned, however, almost no concession is too great to make as the high quality of the ore and vast deposits mean that enormous profits and a long working life are all but assured when production begins in 2015.

Investor Response

Simandou is not only hugely lucrative, but development is well advanced. For projects at a much earlier stage, right down to basic prospecting, the picture is far less clear and many concerns have adopted a wait-and-see approach. Bellzone own the rights to the Kalia iron ore deposit among others, but has reacted to the code and review by stating that it is “committed and ready to work with Guinea”. BHP Billiton has so far been cool on advancing its interest in the high-quality Nimba iron ore deposit and has all but halted expenditure on a USD5.2-billion alumina joint venture with Canadian and Middle Eastern partners despite having spent USD700 million. The most negative outlook expressed so far came from the world’s leading aluminium producer, Rusal. In an email statement, the company noted, “The mining code adopted in Guinea increases considerably tax pressure on mining companies, making it senseless to invest in development and new projects ... Any investor of good sense will look for investment opportunities outside Guinea.” The company added, “All our concessions were concluded a long time ago and contain obligations of the Republic of Guinea.” That could prove to be wishful thinking by a company with a very rocky relationship with the government as Fofana has already signalled that he expects to have extensive negotiations with Rusal over a range of issues, including back taxes and compensation for alleged pollution at the port of Conakry. Rusal already operates the Kindia mine and a complex at Friguia, including the country’s only alumina refinery. It also holds the concession to develop a bauxite deposit at Dian Dian, but Fofana added that this project is “on the table”. Despite Rusal’s negative assessment, the potential is enormous for exploiting reserves of bauxite, the main ore source of aluminium. Guinea is estimated to hold half of the world’s readily exploitable reserves, and even though bauxite and alumina already provide around three-quarters of total foreign-exchange earnings, most deposits remain unexploited. Only last month, the state-owned China Power Investment Corporation announced on Guinean television that it will invest more than USD6 billion in bauxite production in the Boffa region (see Guinea: 22 August 2011: Chinese Energy Giant Plans USD6-bil Investment in Guinean Bauxite). One of the biggest investors of all is clearly prepared to play by the new rules.

Outlook and Implications

This is one of the most important pieces of legislation in Guinean history because the desperately poor country can now start reaping the full benefits from its most important resources. For far too long, the state’s share of this wealth was minimal as previous contracts were signed in murky circumstances under an opaque and disadvantageous mining code, with generous concessions to mining companies and well-connected Guinean individuals alike. Although the state’s share of the cake and involvement in the industry are greatly increased, the vast high-grade iron ore deposits and huge bauxite reserves, as well as diamonds, gold and other minerals, mean there is plenty of wealth to go round. The state was also losing out in another way as the lack of transparency was coupled with investor unease over the security situation to prevent the development of many projects and full exploitation of resources. The new code and greater stability should therefore act as a counterweight to those companies that have been adopting a wait-and-see approach. Fofana expressed this hope by saying, “The freezing of Guinea’s resources is over.” Some may still be deterred by the level of state intervention, but this should be outweighed by those who want to push ahead. The next step, of course, is to ensure that the money flowing into government coffers is properly utilised for the socioeconomic development of a country stranded at 159th out of 172 in the UN Index of Human Development. The care and commitment of the Condé regime to push through the mining code and review at least offers hope that ordinary people will eventually see significant benefits.

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