Gabon's mining sector absorbing the drop in commodity prices

While oil has been the driving engine behind Gabon’s economy since independence, the country’s other underground resources have in many ways been equally prominent. The mining sector has traditionally been a major currency earner for Gabon. The country is the world’s fourth-largest producer of manganese, with reserves of 150m tonnes and production of 1.8m tonnes in 2015. Gabon is thought to have more than 2bn tonnes of iron ore, over 40 tonnes of proven gold reserves, and a range of other base and rare-earth minerals, including lead, zinc, copper, diamonds, niobium and titanium, according to the state-owned Société Equatoriale des Mines (SEM).

The mining sector’s contribution to GDP is estimated by SEM to have remained flat at 4% in 2015. However, the potential of the sector is illustrated by government plans to boost GDP contribution to 25% over the next 15 years.

Price Effect

Affected by a global downturn in commodity prices, Gabon’s mining sector had a lacklustre year in 2015 – not unlike many other mineral-rich countries. In 2015 the price of iron ore dropped around 40%, aluminium lost about 30% and gold fared slightly better, but also dropped 15%, according to figures from the Gabon Chamber of Mines (Union Minière du Gabon, UMIGA). For their part, copper prices have halved since their 2010 peak of $10,000 per tonne, while the price of manganese, which commands the highest production rate of all metals and minerals in Gabon, lost more than 40% of it’s value. Thierry Makando, spokesperson of Eramet – the French parent company of Gabonese firm Compagnie des Mines de l’Ogooué (COMILOG) – told OBG, “In late 2015 through the beginning of 2016, prices had come down to such a level that it is safe to say that all producers made losses.”Low prices are also having a knock-on effect on the ability of investors to raise capital. “The drop in mineral prices has dampened the willingness of private equity funds and other financial institutions to extend financing to the sector,” Thomas Pucheu, vice-president of UMIGA, told OBG.

Early 2016 saw commodity price volatility that has unsettled markets and delayed business decision making in the country. An increase in prices, based on a bullish outlook for the Chinese economic rebound following a major policy speech, was later reversed. The price of iron ore, for example, leapt by a record-setting 19% on March 7, 2016. “Although prices picked up in early 2016, weak demand and low steel prices are making recovery prospects precarious,” Makando told OBG.

Regulation

In an effort to boost mining sector investment, a new mining code was approved in 2015 that replaced older legislation from 2000. The new code provides a comprehensive legal, institutional, technical and economic framework for the sector. The legislative objectives include incentivising investment, increasing state participation, promoting local content and skills, and ensuring environmental, and occupational health and safety compliance. Enacted by Law 17/2014 in January 2015 and published in the Official Journal on May 29, 2015, the new code is not yet in effect, and the government is now reviewing the legislation following feedback from operators.

The code strengthens oversight in areas such as sustainability and employment, and under its regulations investor’s will be able to enjoy a five-year tax holiday, which can be as long as eight years for projects that have a lifespan of 20-plus years. The previous code offered no tax breaks. Another new feature of the legislation is the requirement to undertake an environmental impact assessment prior to starting operations. Other expected criteria related to health, safety and the environment have not yet been specified, but companies will have three years to comply with the new rules once passed. The addition of local content requirements represents an important step in the new legislation. Mining title holders will now be obliged to contribute to a mining support and training fund. Hiring preference must be given to Gabonese workers, and annual training is mandatory, with the end goal of skills transfer. In addition, at least 15% of mining activity will be awarded to small and medium-sized enterprises.

Wider State Role

Aside from investment incentives and local content rules, the Ministry of Mines (MoM) has used the new code to focus on environmental impact, greater transparency and more clearly defined roles for the authorities. The new mining code provides the state with free carry rights for a 10% interest in exploitation activities, which can be waived. In addition, the state will have the right to acquire up to 25% of share capital from exploitation permit holders.

The government will also have the right to preempt stake transfers, which are subject to a new 5% transfer tax. The new code formally recognises SEM, which was established in 2011, as the national operator, and grants it the ability to hold the government’s stake in mining operations.

Similar to the existing code, the new one provides for exploration and exploitation permits, and mining concessions. However, unlike in the 2000 code, mining operators will now be limited to a maximum of three exploration permits in areas not exceeding 1500 sq metres each. For diamond exploration, the cap is two permits for areas less than 5000 sq metres. The government of Gabon has also recognised the importance of regaining membership in the Extractive Industries Transparency Initiative (EITI), which it lost in 2013 due to delayed reporting and discrepancies in mineral revenue reporting. In mid-2015 the government put in place a roadmap to meet the criteria to regain membership. The EITI label is key to signalling to investors that Gabon is a transparent environment to work in.

Code Concerns

The new mining code is still awaiting final implementation, in part due to feedback over a handful of specific measures of which the potential legal and fiscal impacts are unclear. UMIGA has raised concerns about the attractiveness of the new mining code, drawing from an analysis conducted by UK-based mining regulation database MineHutte that states Gabon’s new mining code scores poorly in absolute terms and relative to eight comparative African jurisdictions. Established in 2010, UMIGA is the mining sector’s business association, representing 19 members, with a combined 2014 turnover of CFA360bn (€540m). “The general business perception is that the current version of the mining code is not that attractive for private investment in the mining sector,” Pucheu told OBG.

One of the concerns of UMIGA is that the code requires additional contributions to the state based on a percentage of the turnover of mining companies, which impacts the fiscal calculus for projects, while new steps requiring state approvals increase the bureaucratic burden.

In addition, the new mining code is to be completed by the implementation of decrees that have yet to be adopted. For example, a new regulator is to be set up, but the legal basis for this authority has not been established. The body’s principle objectives will be to supervise bidding rounds, undertake cost analysis and assess operator claims. Nonetheless, the big producers are optimistic that the state will factor in industry concerns. “We have had a solid relationship with the government since the beginning of our operations,” Makando told OBG.

Manganese

Gabon is the world’s fourth-largest producer of manganese, behind South Africa, China and Australia, and 95% of this production is used for the steel industry. Manganese production was up 19% in the first half of 2015, according to World Bank figures. The drop in prices towards the end of 2015 impacted bottom lines, but not output. For its part, COMILOG had a record year and increased production from 3.5m tonnes in 2014 to 3.9m tonnes in 2015, representing an increase of 12%, after production slowed 6% from 2013 to 2014. Despite the surplus manganese production on the global market, COMILOG does not plan to scale back. The firm expects production in the coming years to stabilise at around 4m tonnes per annum (tpa), which is the company’s current capacity. SEM holds a 28.5% stake in manganese producer COMILOG, which it took over from the government in 2014.

Competitors

While COMILOG controls 90% of the manganese market, China’s Compagnie Industrielle et Commerciale des Mines de Huazhou (CICMHZ) has a mine that has been operational since 2012. The company is a wholly owned subsidiary of China’s Citic Dameng Holdings. The mine is located in M’Bembélé in the centre of the country, and has reserves of approximately 30m tonnes. As with most Chinese mineral operators in Africa, CICMHZ produces exclusively for its home market. Its mine exports around 350,000 tpa to China from the Port of Owendo, where it has an 80,000-sq-metre site adjacent to COMILOG’s port facility. According to the company’s 2015 annual report, CICMHZ production’s fell by around 53% from 698,449 tonnes in 2014 to 325,262 tonnes in 2015, largely due to lower demand from China.

India-owned Nouvelle Gabon Mining (NOGA) won a new manganese production licence in 2013 and started producing in 2015 on its 800-sq-km concession near Franceville. The company’s peak production level is 28,000 tonnes of manganese ore per week, and the company expects to start exporting 7000 tonnes per week by the end of 2016. The rest of the ore will be processed into electrolytic manganese dioxide, which is used in battery production. In 2014 SEM acquired the government’s 15% stake in the Gabon Manganèse and Ferro-Alloys (GMFA) joint venture with India-based Navodaya Trading, which explores manganese in Okondja, in south-east Gabon. Navodaya owns the remaining 85% of the GMFA and the project is still in the exploration phase. When production begins, SEM will have the right to increase the state’s stake to 25%, as per the new mining code.

Gold Mining & Production

Morocco-based Managem is the largest commercial gold producer in Gabon and runs its operations through a local subsidiary called Ressources Golden Gram Gabon (REG). Managem has a 75% stake in REG, with the Gabonese government controlling the remainder. REG operates a short-life gold mine in south-east Gabon, with a five-year production cycle that the company is hoping to increase to eight years by expanding exploration in the mine. With the price of gold averaging $1160 per ounce, REG produced 1.3 tonnes of gold in 2015 and had a profitable year, despite the price ticking lower throughout the course of the year. Forecasts for 2016 expect an even lower average price of $970 per ounce, following the trend of US interest rate hikes. REG is expected to produce at around the 1m-tpa mark through the life of its mine.

SEM also has four major gold projects: Mavenza near Lambaréné, Camp 6 in the Bélinga area, Kolissen in Moyen-Ogooué province and Lombo Bouenguidi in province of Ogooué-Lolo. The firm’s activities are based largely on artisanal mining, a reflection of the wide range of near-surface-level deposits in the country. This small-scale mining occurs on river banks and mountain slopes, and SEM operates a network of trading bureaus to purchase gold from artisan miners. These small operations can gather around 10 grams of gold per day.

The company collects gold from four collection centres known as Comptoir Gabonais de Collecte de l’Or (CGCO), in Makokou, Mouila, Lastourville and Ndjolé. SEM collected 55,314 grams of gold in 2015 and sales for the year amounted to just over CFA1bn (€1.5m), according to figures from the company. The state-owned firm has been active in recent months, beginning prospecting in early 2015 in the Miamizez region, and more recently receiving quarry permits for Makora and Lambaréné. In late 2015 SEM also signed a partnership agreement with China’s Myanning to explore for gold at Bélinga, which is also the site of a large iron deposit.

Smaller Deposits

In 2015 SEM also was given authorisation to export through CGCOs, although it has now been tasked with developing a strategic gold reserve based on artisanal collection, an endeavour that will largely depend on how effectively Gabon manages gold exploration and collection. The company’s approach may yield some impressive results, although it is unclear to what extent the country will attract larger operators. For example, Anglogold’s 2012 departure from Gabon was mainly because its business model requires tier-1 reserves – those greater than 1m ounces – and Gabon had no track record of proven reserves of this scale. Anglogold had spent $5.7m exploring two sites from 2009 to 2012 in a joint venture with Canada-based Silver Bull.

However, interest in smaller-scale exploration remains robust. SEM is exploring its Camp 6 concession, GoldStone Resources is exploring a 515-sq-km area in Ngoutou and REG is doing further studies around the historical gold region of Etéké, where the company found sizeable reserves in 2015. While estimates of the new reserves are not yet publicly available, Francis Mayaga-Mikolo, general director of the MoM’s Geology and Mineral Exploration Department, believes it is larger than the company’s existing operation, which has reserves of some 400,000 oz. A feasibility study is expected to be completed by the end of 2016, and pending successful results, production will begin in 2017.

Iron Ore

Originally discovered in 1895, the Bélinga iron reserve was most recently assessed in the 1970s, when the MoM estimated reserves of some 1bn tonnes of 64%-pure iron ore. Although no additional assessments have been made, it is widely believed that reserves are sizeable and further studies and drilling will have to be done to understand their value more accurately. The site borders the large reserves known to exist in the Republic of Congo and Cameroon.

Although Bélinga’s iron ore potential was discovered more than a century ago, exploration work has not advanced because its north-east location is in dense forest, isolated from current transport links and power infrastructure. Given the drop in iron ore prices in 2015, activity is not expected to pick up in 2016. The government is, however, looking to get the iron ore reserves certified under international norms such as Australia’s Joint Ore Reserves Committee and Canada’s National Instrument 43-101, both widely respected industry standards. Mayaga-Mikolo told OBG that the government will only be able to get a definitive answer on the iron’s resource grade by drilling in the area.

There was some positive news from iron ore exploration elsewhere in the country in 2015, from Iron-Ridge Resources, which discovered high-grade iron ore at its Tchibanga mine. Sampling results showed an iron mineralisation rate of 45.2%, according to a November 2015 report from mining-technology.com. The high quality of the deposit will translate into cost savings when processing, and savings will also be realised due to cheaper transport costs, since the deposit has an existing road link to the proposed Mayumba port, which is currently in planning.

Infrastructure Development

Improving Gabon’s transport infrastructure will be key to effectively exploiting the country’s various mineral reserves. Having started construction in 2015, a CFA133.6bn (€200.4m) multi-modal rail and marine port is set to open in Owendo by the end of 2016 (see Transport chapter). The 45-ha port is supported by the Gabon Special Economic Zone (SEZ) and will host a 10-tonne capacity mineral terminal. This additional capacity will complement COMILOG’s manganese facility, which has been handling roughly 10% more than its annual capacity of 120,000 twenty-foot-equivalent units.

Société d’Exploitation du Transgabonais, which is majority-owned by COMILOG, secured financing in 2015 for its €330m project to rehabilitate the 648-km Transgabonais Railway. The current annual railroad capacity of 4m tonnes will be upgraded to upward of 7m tonnes to meet expected mineral production increases. The French Development Agency and the World Bank’s International Finance Corporation are also involved in the financing of the project. Both the MoM and mining firms have welcomed the project given that the existing railroad has become overburdened and was designed for the transportation of mainly manganese and wood.

Two additional railway lines are also in the planning stage. One will connect Owendo to the Nkok SEZ, while the other will see Owendo linked to the Bélinga iron ore mine. When iron ore production does eventually start, a 250-km railroad will be needed to connect Bélinga, which is expected to have an output capacity of 50m tpa.

The MoM is also exploring the option of connecting a line to deposits in Congo and Cameroon. Development of an export port at the southern coastal city of Mayumba will also help reduce costs for operators in the south of the country, such as the iron ore discovery by IronRidge Resources, which is located just 150 km from Mayumba. Exploitation in the south has historically been economically unviable because the closest operational port is Port-Gentil, 560 km away.

Underexplored & Undermined

The downturn in mineral prices in 2015 has meant that companies have put exploration activities on hold, particularly at greenfield sites, while some firms even went as far as exiting Gabon in 2015. In the same year UMIGA registered a net loss among its companies for the first time, as two of its members left Gabon. However, Pucheu told OBG that “Gabon is still highly underexplored”, and that the long-term prospects are very encouraging.

According to Mayaga-Mikolo, around 70 locations across the country underwent greenfield exploration activities in 2015, and the MoM has been awarding new licences every month. Maboumine, a subsidiary of COMILOG, has an exploration licence for Mabounié, which contains deposits of tantalum, niobium and uranium. A few new licences were also issued for potash exploration in 2015. The government is eager to see potash production begin in 2016 to support planned fertiliser facilities at Mandji Island, near Port-Gentil. Five new licence blocks were expected in March 2016, but have been delayed.

School Of Rocks

Construction of Gabon’s Moanda Mining and Metallurgical School was completed in June 2016, with classes starting in September 2016. Traditionally, Gabon has trained geologists who specialise in exploration, but very few who specialise in production. The ambition of the mining school – which is jointly funded by the government and COMILOG – is to equip firms that move from exploration into production and limit the need to import costly expatriate skills. Metallurgic engineers will also be trained, as the government is pushing for local operators to add value locally through mineral processing.

Outlook

Gabon’s mining sector is ripe with potential. Unfortunately, volatility in the market has resulted in mining companies taking a cautious approach in 2016. Many companies are waiting for things to stabilise and UMIGA believes that production will not increase until 2017. While there might be a short-term pause for some companies, players in the sector are confident that Gabon’s mineral production will only increase in the coming years.

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The Report: Gabon 2016

Industry & Mining chapter from The Report: Gabon 2016