Sierra Leone Hopes to Draw Mining Investment (Dow Jones) Updated: 2010-01-06 13:42 Counter:283
Sierra Leone has embarked on a major reform of its minerals laws, hoping to attract foreign investment to spur economic growth after an 11-year-long civil war that ended in 2002.
The mineral-rich country had a thriving mining industry before the war, which, after several years of peace and two democratic elections, it now seeks to restore.
But while a peaceful Sierra Leone looks like a better investment bet than some of its more turbulent neighbors-Guinea suffered a coup d'etat a year ago and has been racked with violence ever since-the country's tenuous peace remains vulnerable to turmoil spreading across its borders.
A resurgence of mining is already taking place and new mine production from gold to iron ore is forecast to come onstream in the next two years.
Netherlands-based aluminum producer Vimetco NV bought a bauxite mine in Sierra Leone in July 2008 for $40 million from rutile-focused miner Titanium Resources Group Ltd. It currently produces about 1.2 million tons a year for export.
Titanium Resources is in the process of expanding its processing capacity of rutile, an ore high in titanium that is used to make paints, paper, plastics and drugs.
Cluff Gold PLC said it aims to be producing the precious metal at its Baomahun deposit in Sierra Leone by the end of 2012. London Mining PLC is developing a first-phase project to produce 1.5 million tons of iron ore a year, and hopes it will be completed by the end of 2011.
Tractor and equipment seller Caterpillar Inc. said in November that Sierra Leone has the potential to become a major mining hub in west Africa, the equivalent of Ghana, and expects the country to be one of the company's major growth areas on the continent.
But there are risks.
Sierra Leone was hit hard economically as the global economic downturn hurt consumption of raw materials. Its government revised its gross-domestic-product growth estimate down to 4% for 2009, while inflation is around 9%. The country's gross domestic product per capita, measured on a purchasing-power-parity basis, was about $900 in 2008, according to US government estimates, making it one of the world's poorest nations. U.S. GDP per capita is $47,500 when measured the same way.
"While Sierra Leone's growth performance in 2009 is likely to be stronger than that of many African countries, slowing growth will make it more difficult for the government to address the already-dire social situation," said Standard Chartered economist Victor Lopes.
Many young people in Sierra Leone played roles in the fighting that hit the country. Finding jobs and improving their lives is key to keeping them from returning to violence.
"I don't think there is a civil war danger, but risk of a breakdown in society could be a trend if the fruits of growth don't spread," said Tom Cargill, assistant head of the Africa program at London-based think tank Chatham House.
Drug trafficking and the instability in neighbor Guinea also threaten the fragile stability Sierra Leone has achieved. Drug cartels are being established in the region and militias are being formed across the border in Guinea, Mr. Cargill said.
Mohamed Ibn Chambas, president of the commission of the 15-member Economic Community of West African States, said, "Some countries appear to be gradually sliding back to military rule-Liberia, Sierra Leone and Guinea Bissau remain the most vulnerable."
But the country is determined to avoid that and is aggressively advertising its mineral wealth and general investment potential. For example, in November it held an investment day in London attended by former U.K. Prime Minister Tony Blair and at which well-known investment manager George Soros gave a video message promoting the country.
"The mood amongst policy makers and potential investors is that, yes, Sierra Leone has come a long way and a new government since 2007 has made good reform efforts, but it's still early days," Mr. Cargill said.
"If it can get the mining reform carried out, companies will start investing. But the question is whether it will be faster than the temptation of drugs and crime," Mr. Cargill said.
Diamond smuggling, which financed much of the civil war through the notorious "blood diamonds," is also still a problem, with some estimates finding that the state loses around $100 million of diamond revenue a year.
Despite the risks, the mining ministry forecasts that by 2012 the country will be exporting $371 million worth of minerals. It expects that in 2009 it will have exported minerals with a value of $132 million, mostly from diamonds.
Finance Minister Samura Kamara recently said he hopes GDP growth will reach 6% this year, driven by investment in the minerals sector.
The Parliament recently passed a new minerals law, which still needs to be signed by the president. The law would raise the royalties paid to government coffers from mineral production.
While bigger royalties might seem a disincentive for investors, a boost to government coffers and to economic growth should help the country's stability.
"With good government spending, nearly a million people could be lifted out of poverty," said a report by the National Advocacy Coalition on Extractives, a Sierra Leone-based watchdog group. The group said, though, that corruption, enforcement of any new mining act, and companies employing locals will be key to that happening.
Royalties for diamonds will rise to 6.5% from the current 5% and gold to 5% from 4%, if the law is finalized.
The minerals law will also unify the system currently in place whereby individual companies strike their own deals with the government. It will lay down basic ground rules for granting mining licenses, and the more transparent process will provide more ownership security for the foreign companies, government ministers say.
"In Sierra Leone, companies tend to have individual parliamentary agreements, and the government wants to move away from that and have a more general agreement," said John Sisay, chief executive of Titanium Resources.
David Carew, the minister of trade and industry, said, "A lot of mining companies negotiated agreements outside of the mining act, and the government and companies didn't trust it. What we want is to use the new mining legislation as the condition for business."
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