Because of its geological formations, Ethiopia is endowed with extensive mineral resources such as gold, platinum, niobium, tantalum, nickel, copper, chrome, and manganese, among others. However, the sector is ploughed with a number of challenges that calls for policy interventions. As a result the contribution of the sector to the overall development of the country is low compared with its potential. Especially in recent years, the role of the industry has been declining in export revenue generation. EBR’s Ashenafi Endale has consulted research, authorities and insiders to understand the reasons.
Generations of Ethiopians grew up being told that the country has an abundance of gold reserves. Though far from being Africa’s top producer of gold, or hugely lagging in at least fully exploiting its riches in precious stones and minerals, Ethiopia sits on the greenstone belt, a geological formation of the planet harboring great potential for mining and involves mineral rich countries like Canada, Australia and the southern Africa region.
Gold mining in Ethiopia is quite ancient, which reached its peak in the Aksumite civilization’s era of prosperity where gold was widely mined for many purposes. Coupled with few large scale mining companies operating in the country, such practices still continue in Ethiopia, with millions of artisanal miners splattered across many river banks hoping to make it big and cash in on Ethiopia’s barren-esque gold rush.
Gold created millions of jobs in Ethiopia. Though some employment may be seasonal, official estimates put the number of people engaged in mining gold at approximately 4.5 million while 1.5 million people are expected to involve directly.
Despite official figures show Ethiopia has a significant reserve of minerals. According to the information obtained from Ethiopian Geological Survey (EGS), the country has a reserve of 19,435 tons of tantalum, 68.4 million tons of iron, 12.5 tons of platinum and 1.3 billion tons of potash, among others. In terms of gold, the reserve at different parts of the country such as Adola, Moyale, Metekel, Tulu Kapi, Dul, Oda and Godere is estimated at more than 200 tons. However, the amount is not final, as some 250 assessment results are not included into the figure, and the potential of the country not fully explored, according to Befekadu Oluma, director of Geosciences Data at EGS.
Despite the potential of the extractive sector of Ethiopia and its comparative advantage, mining is generally one of the country’s poorly performing economic activities. Although gold is relatively more productive among extractive industries, statistics show that there is a big disparity between the potential of the country and actual exploration and productions.
In fact, Ethiopia’s export earnings from the mining industry have slumped over the past six years. After registering a record USD654.025 million in 2011/12, earnings from precious metal dropped by more than three folds to USD231 million in 2016/17 fiscal year. This indicates that mining revenue is back to the levels of nine years ago, and the sector still remains undeveloped.
Exports from gold registered a dismal performance for the recently concluded fiscal year widely missing the USD718.6 million target by three folds, according to data from the Ministry of Trade.
Among extractive industries’ gold is the most explored and exploited mineral in Ethiopia. It commands almost 90Pct of the revenue from mineral export last fiscal year. Yet, the volume of gold mined and delivered to the National Bank of Ethiopia (NBE) has been on a falling streak since 2012/13 when a total of 12,580 kilogram gold was sold to the central bank – a record for the country. That figure declined to less than 6,000 kg last year.
Artesianal minerscontribute the majority of gold exported. The total gold supplied by artisanal miners reached the highest in 2010/11 with 8,328kgin volume and USD455 million in export earnings. However, the tied shifted in the consecutive years and the supply dwarfed to 1,942 kilogram in the just ended fiscal year.
Though the price of gold has been falling in the international commodity market, the significant factor for the country’s souring fortunes is attributed to the rise in the volume of smuggled gold out of the country and the slow pace of production among large scale mining companies in exploring and exploiting the precious metal. Insiders attribute the failure of the big corporations to produce more quantities of the precious metal to the debilitating bureaucratic hurdles in the country.
The amount of gold supplied by artisanal miners nose-dived over the past few years largely due to the new terms introduced by the central bank. “Currently, the central bank buys a troy ounce of gold at ETB28,980 including 5Pct on top of the international price, as a method to incentivize direct supply to the bank. However, the same amount of gold sells for ETB31,200 at the black market, which shows a difference of ETB 3,669 from the international market,” said Kiros Alemayehu, senor public relations expert at Ministry of Mining.
Artisanal miners simply opted to sell their gold at the black market since about a year ago following the central bank’s decision to scrap its procedure where it paid suppliers the highest price of gold at the international market for the month it was supplied plus an additional incentive of 5Pct.The central bank used to pay 90Pct of the total price of the gold to the suppliers and keep the remaining 10Pct which was accumulated at the bank and paid out later. The central bank now pays suppliers with the daily price of gold at the international commodity market.
“The central bank had to change its ways, because it highly impacted its profits,” noted Kiros. “The government’s patience is running out on smugglers of gold.” He alarms illicit traders.
Worried with the significant dip in the supply of gold, authorities at the bank have taken measures. The minimum amount of gold supplied has been reduced from 300 grams to 150 grams.
The unusually longer supply chain in gold is also blamed for the fall in the supply from artisanal miners to the central bank. Experts underscore that the absence of formal primary markets at mines and the proliferation of middlemen have alienated the central bank from the miners.
The problem emanates from brokers that have a license to collect gold from artisanal miners that mine below 150 gram and supply it to the central bank. “Since artisanal miners cannot supply to the central bank when the volume of the gold is below 150 gram, brokers will have the advantage of collecting and selling it in the informal sector.”
According to Kiros it is by installing a system that attracts and benefits artisanal miners that the country can collect more gold and improve revenue generations. “In the state of Tigray, Amhara, Oromia and SNNP, centers will be opened to buy gold from artesian miners [soon],” he told EBR. “In addition to this, miners should be allowed to export the gold by themselves.”
Officials argue that with the increase in large scale mining by companies, the problem of contraband will be dully addressed. “Unlike artisanal miners, company production is more traceable; their supply is also predictable,” said Kiros.
The mining and quarrying industry is highly underdeveloped and its contribution to the GDP is limited to 5.6Pct in 2014/15. This is despite the fact that the industry is one of the priority sector in the first and second phases of the Growth and Transformation Plan (GTP I &II).
In fact, mining in Ethiopia is expected to be an important economic catalyst for the government’s export-orientated development strategy with main strategic directions of attracting sizable foreign direct investment for exploration and extraction of minerals. It aims to increase foreign exchange earnings tenfold and focus on production of mineral inputs for the manufacturing sector that promote import substitution.
The Ministry plans to increase the sector’s contribution to national economic growth and envisioned to generate close to USD2.4 billion annually from export of mineral in 2027. However, Ethiopia’s geology that has the potential for long-term mineral development still remains untapped.
The country is not benefitting from the sector on par with its potential. “So far, the nation is not [significantly] benefiting from the extractive industry.” Befekadu Oloma, an official at the Ethiopian Geological Survey argues. In fact, only one company dominates the production and export in mining.
On top of artisanal miners, only few companies involve in the extractive industry. However, over the past two decade, 500 companies had received licenses to explore natural resources including precious metals and stones, natural gas and petroleum. Up to 2012/13, 280 licenses were given in the industry, which rose to 500 currently, out of which 100 is for gold exploration 51Pct of the licenses were issued to foreign firms while 21Pct are joint ventures. The remaining licenses were issued for local companies. The investment capital has also increased from ETB1.099 billion in 2012/13 to ETB1.27 billion in 2013/14. This figure stands at ETB58 billion, currently.
Only five companies have licenses for exploitation out of a hundred that received exploration rights in Ethiopia. MIDROC Legenembi Gold Mine, the only large scale gold mining company in the country, is one of them while MIDROC’s two exploration projects: Adola and Metekel as well as KEFI Minerals and Ezana Mining Development are slated to start production in the near future.
MIDROC first acquired its Lege Dembi site when the government privatized it in 1997 for USD172 million. Located in the Southern Nations, Nationalities and Peoples State, the site extracts 50,000 tons of rock every month. MIDROC Gold exported 3,500 kilogram of gold in 2011/12, which increased to 4,100 kilogram last fiscal year.
“The mining process in Ethiopia is distinctively cumbersome and takes more than a decade to commence production,” noted a mining engineer who works at MIDROC Gold’s Metekel project and requested to be anonymous. “From acquiring licenses, to settling compensation issues and accessing adequate infrastructure, the process is wrought with a suffocating bureaucracy,” the engineer underscored. “Its surface stock is also rapidly depleting with the precious metal, but the two underground reserves are still rich with minerals.”
The speed with which companies set up mining operations is depressingly challenging in Ethiopia,” argues Harry A. Adams, executive chairman of KEFI Minerals in Ethiopia. “Mining gold can take as long as 15 years before production.”
The company initially invested USD60 million at its Tulu Kapi site in the state of Oromia more than a decade ago, and expects its cost to rise to USD250 million by production stage roughly in 2019. With the production of more than 280,000 kilogram over the next decade, the company has set its eyes on a USD1.3 billion dollar earning.
The problem for large companies to fully mobilize their resources in mining is not limited to the aforementioned hurdles. The time it takes to import custom-tailored machineries and access approval for explosives is very long in Ethiopia. “We’ve done everything on our part (MIDROC Gold Metekel), but production is a good two years out before the government finalizes the supply of water and power to the mine,” complained the engineer.
In addition to government bureaucracy, mining companies in Ethiopia face a chronic shortage of qualified work force both at the government institutions and mining companies. “The reasons for the underperformance of the industry are partly due to failure of the government in monitoring and supervising licensed companies,” argues Befekadu.
EBR wrote an article in its 42 edition (August 16, 2016-September 15, 2016) entitled ‘Decent Pay’ in which it explored the problem of the [Ministry of Mining] regarding hiring competent workforce. Even though the Ministry posts regular vacancy, its becoming even more difficult to hire administrative and supportive staff let alone professionals with mining expertise. A year after the article was published; Kiros says the situation has not improved.
“One of the biggest challenges in Ethiopia is the poor supply of qualified staff,” Wayne Nicoletto, head of operations at KEFI Minerals told EBR. “We’re simply forced to hire civil engineers, since there are no mining students sufficiently trained in the country.” Settling compensations for relocated residence is also a challenge for officials at KEFI.
MIDROC Gold, through its sister company, has taken matters into its own hands to directly address this problem. Unity University, the first private higher education institution in the country and currently under the management of the MIDROC Ethiopia Technology Group, offers the only mining engineering program in the country. MIDROC Gold trains and recruits its staff from the University.
However, despite the company’s best efforts, the program is faced with its own challenge of finding qualified instructors. The mining engineer at its Metekel project is a graduate of the program and recalls the shortage of professors, which was partially addressed by bringing lecturers from abroad. “Practice was not a big problem, since we used to spend our summers at MIDROC’s mining sites,” the engineer said.
“In addition, companies prefer to trade on their license than starting production. Allana Potash has profited USD300 million, by transferring the Afar Potash project to ICL. KEFI Minerals is the fourth company to work on Tulu Kapi gold mine, right after Nyota left. The companies do their business but the country is not benefitting. If the mining potential, especially in gold, is properly exploited, it could have effect,” said Befekadu.
Faced with these administrative, labour and infrastructural challenges, only two companies, KEFI and Ezana, are expected to start production in the near future. Ezana has been in the mining industry since 1993.
“The stock imbalance is probably the main factor for the great disparity between companies who take exploration licenses but fail to engage in production in Ethiopia,” argues Kiros. Questions remain with the large number of estimated reserves announced by “foreign exploration companies, whose aim is to lower their costs by wrapping up their work rather quickly.”
In contrast to the gloomy reality in Ethiopia, neighbouring Sudan enjoys a rather vibrant mining industry where gold earns the nation an average of USD4 billion dollars annually. The country is now more reliant on gold following the secession of South Sudan in 2011 which has most of the oil reserves.
With an increased drive to push investment in gold mine industries, 14Pct of Sudan’s GDP was covered by gold in 2014. This was made possible with the government having installed the country’s gold refinery, banned export of gold ore, and having placed a stricter regulation to curb contraband.
Cognizant of the sober reality in gold mining, Ethiopia’s government has set a less ambitious target of USD400 million for the 2017/18 fiscal year for the entire mining industry. In the mean time, it is making preparations to unveil a strategy to shorten the gold supply chain. Gold market centers would be established near the exploitation sites to effectively cut the middlemen out of the equation.
The mining industry in Ethiopia is showing an increase in the total investment capital which jumped by ETB7 billion in the just ended fiscal year from the previous year. The rise is due to recent investment in potash, which is set to start production after 2020.
While the current state of mining gold is not as shiny as the precious metal, those involved in the thick of the industry are optimistic and envision a bright future. If human resource development issues are adequately addressed, facilities and licensing procedures simplified, right of way issues promptly settled, and infrastructure developed, Ethiopia’s gold rush would soon live up to its expectation. EBR
5th Year • September 2017 • No. 54