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From: Biniam Tekle (biniamt@dehai.org)
Date: Thu Sep 09 2010 - 07:51:38 EDT
http://online.wsj.com/article/SB10001424052748703946504575469313620261180.html
BUSINESS
SEPTEMBER 9, 2010.
Northeast Africa's Unexplored Grounds Lure Gold Miners
By MATTHEW WALLS
London
Gold miners are expanding their focus in Africa to the northeast of
the continent, a region they largely bypassed during the decade-long
rally in gold prices.
Big-name gold miners such as AngloGold Ashanti Ltd. and Newmont Mining
Corp. are exploring for gold in Eritrea and Egypt on a promising
geological belt known as the Arabian-Nubian Shield. African Barrick
Gold, Barrick Gold Corp.'s recent spinoff, is also looking at Eritrea
for potential acquisitions, Chief Executive Greg Hawkins said
recently.
The miners' entry marks a departure from their recent drive into
western and southern Africa and could create a major new gold-mining
region. Already, northeast Africa is home to a few gold deposits of a
million troy ounces—a threshold size for bigger miners—that hint at
its potential. "The region is pretty much under-explored compared to
West Africa and Tanzania," said geologist Michael Robertson, a
consultant at Johannesburg-based MSA Geoservices. "From a
prospectivity point of view, it's a good place to be."
For governments, a thriving gold industry would bring revenue and a
better investment profile, as it has in West Africa, where the gold
boom has transformed countries such as Mali and Burkina Faso into
popular investment destinations for miners. The region's gold output
doubled in the ten years to 2008 and discoveries of deposits of one
million troy ounces have become an annual occurrence, says U.K.
investment bank Ambrian Capital.
But mining in West Africa is moving out of an early-stage exploration
phase into a period of consolidation as companies merge or buy out
miners that have already made discoveries. Miners such as Randgold
Resources Ltd., Severstal JSC and Endeavour Financial Corp. are taking
a bigger share of the region's output. In comparison, northeast Africa
remains under-explored and competition limited to small miners. Border
wars between Ethiopia and Eritrea, autocratic governments and onerous
mining regulations kept miners from venturing into the region in
recent decades.
Those fears have not vanished, but calmer relations between Eritrea
and Ethiopia, a new mining code in Eritrea and a handful of gold
discoveries by smaller miners such as Centamin Egypt Ltd. have enticed
those looking to find big deposits at little cost.
Centamin Egypt's seven million troy-ounce Sukari gold deposit is in
Egypt, on the Arabian-Nubian shield that ancient Egyptians mined for
gold. The shield encircles the Red Sea and runs along the coastal
sides of countries bordering it: Egypt, Sudan, Eritrea, Ethiopia,
Saudi Arabia, Yemen, Jordan and Israel. "I think the success of
Centamin Egypt peaked a lot of interest in the region," said Leon
Esterhuizen, a mining analyst at RBC Capital Markets.
AngloGold's exploration efforts, guided by the company's airborne
electromagnetic imaging system Spectrum, are targeting Egypt, Eritrea
and Saudi Arabia. The miner established a joint venture last year with
the privately-held Saudi Arabian company Thani Investments. AngloGold
Chief Executive Mark Cutifani told an audience at the miner's
second-quarter earnings results last month that the joint venture has
found an exciting early-stage discovery in North Africa, and will
deliver news on its exploration in Eritrea and Saudi Arabia next
quarter.
Newmont stepped into Eritrea in July in a joint venture with
Australian gold miner Chalice Gold Mines Ltd, though Chalice said
Monday it wouldn't proceed in the project.
Both AngloGold and Newmont declined to comment for this story, with
Newmont citing the confidentiality of its exploration efforts.
The majors would be joining over a dozen small miners that are
developing or exploring for gold. Next year, Canada's Nevsun Resources
Ltd. will open Eritrea's first gold mine in decades at its one million
ounce gold-copper-zinc deposit at Bisha, 150 kilometers (93 miles)
west of the national capital of Asmara.
Despite the attractive geology, miners still face some prohibitive
requirements and the possibility that governments will revise mining
laws. Egypt and Sudan require that the state holds at least a 50%
stake in any mine, which miners may try to renegotiate if they make a
discovery. Ethiopia is considering raising royalties on gold mining to
between 5% and 8%, from 2% to 4%.
"It's been voiced by mining companies that this is very negative for
mining," said Bob Foster, CEO of Stratex International PLC, a
London-listed miner that is buying up property in Ethiopia near hot
springs rich with gold mineralization.
Some observers worry that a mining boom won't benefit local populaces
and revenues will be diverted by the region's governments to military
budgets or to elites. For nearly two decades, Eritrea has been run by
an unelected former independence fighter and ranks among the most
repressive states in the world, according to the U.S.-based group
Freedom House. In Ethiopia, the ruling government has grown
increasingly dictatorial and combative with opposition parties and the
media. The U.S.-government funded organization United States
Commission on International Religious Freedom this year urged the
government to prohibit any foreign companies mining in Eritrea from
raising capital or listing its equities in the U.S.
To miners, these are substantive issues. After the U.N. sanctioned
Eritrea last December for instigating insurgents in Somalia, banks
declined to lend to Nevsun, forcing it to issue shares to finance the
Bisha mine. A Nevsun employee was killed by rebels in 2003, and
tensions between rebels and autocratic governments continue to simmer
across the region. Border clashes with militants in Sudan and Somalia
remain common in both Eritrea and Ethiopia.
"The market is still skeptical because of the jurisdiction it's in,"
said Nevsun's Chief Executive Cliff Davis. "But we've mitigated that
by making sure they [the Eritrean government] have a big stake in
this."
Eritrea's mining law allows the government a minimum 10% free-carry
stake in any mine, which means the government doesn't have to pay for
the stake up front or fund exploration costs. It also holds an option
to add another 20% at market prices for a maximum 30% stake, but it
must fund exploration costs, a rare arrangement in any mining
jurisdiction. In Nevsun's case, the miner and the government
negotiated a 40% stake for the government, above what the law
stipulates, at the request of the government, said Mr. Davis. Soft
loans from China's Export-Import Bank of China have allowed the
government to pay for its share of the exploration costs.
Tim Williams—whose company Andiamo Exploration Ltd. is exploring in
Eritrea—praised the government for honoring its obligations, and said
miners can't worry about what a government will do with its revenues.
"We've got to accept the laws of the country," Mr. Williams said. "As
long as the government keeps its word and you can trust it to continue
to do so, then the mining industry will invest."
But the region also presents problems of a more technical kind to gold
miners. While sand cover is not an issue as it would be in Saudi
Arabia, where mineral outcrops are often buried, the grounds hosting
gold are typically arid. Gold mines use copious amounts of water to
wash gold from the ore, and without a nearby source, pipelines would
need to built to carry water, adding to costs. More worrisome,
analysts said, would be conflicts with communities over water in
regions with scarce water supplies.
Write to Matthew Walls at matthew.walls@dowjones.com
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