Did Ethiopia Dig Into Mining Too Soon?
People have known that Ethiopia had huge mining potential ever since mineral prospecting began around the end of the 18th century. It was not until 1968 that mineral exploration began when the Ethiopian Geological Survey (EGS), which worked under the auspices of the Department of Mines and Energy, began to survey geological and mineral reserves.Ten years after the geological survey was established Ethiopia began appearing on the radar of international mining investors. Many commercially exploitable mineral deposits were discovered. Available data from EGS indicates that Ethiopia‘s notable mining resources includes an estimated 61,000 tons of gold; 72 million tons of iron; 200 million tons of potash and three million tons of marble.
The accessibility of these huge untapped mineral resources encouraged the Ethiopian government to tap their gross market value, estimated to reach tens of billions of dollars. Mining’s promising potential began to bear fruit, especially with regards to gold. In 2001 gold’s export values rose nearly 100-fold from just USD five million in 2001 to USD 461.6 million 2010.
After this the government revised their 20 year plan for mining. They came up with a goal mining contributing at least 10 Pct of Ethiopia’s Real Gross Domestic Product (GDP). The sector currently contributes 1.5Pct to the GDP.
Following the build up of positive expectations, large scale investors have explored some areas where gold has been discovered. Under such circumstances, the prospect of reaching 1.36 billion dollars in annual mining exports by the 2014/15 fiscal year, as outlined in the five year Growth & Transformation Plan (GTP), seems possible.
Target vs. Achievement
In 2010/11 fiscal year, Ethiopia earned USD 495.5 million from the sector and 93Pct comes from selling gold in the international market. Although the government had plans to increase the gold purchased from artisan miners to 5,250 Kg at the end of the five year plan, it was surpassed in the first year of the plan. Artisans had already supplied 6,615 Kg of gold to the National Bank of Ethiopia (NBE) in the 2010/11 fiscal year.
Gold has been mined mainly by the artisan miners for thousands of years. Currently, according to data obtained from the Ministry of Mines (MoM), about one million people are directly engaged in artisan mining activities. They are organized under close to 25,000 associations throughout the country. Out of these, 89Pct are engaged in gold mining.
Siraj Abdulkadir, an artisan miner in Benishangul Gumuz recalls the time when he used to earn up to Birr 500 a week. Siraj, a father of three, also built his present home from the income he has earned back then. “There was a lot of gold in the ground that we could extract,” Siraj told EBR.
During 2010/11 fiscal year, Siraj and other artisan miners in Benishangul Gumuz managed to supply close to 2,000 Kg of gold for the NBE. Their achievement was 26Pct higher than expected from artisans in the region. Since GTP goals for artisan miners had been achieved in one year, the government revised its plan.
However, the optimism around artisan mining lasted only one year. In 2011/12, things began to slow down although the country managed to earn USD 627.4 million from mining sector, 96Pct came from the sale of gold. Unlike the previous fiscal year, the achievement exhibited 83.2Pct of the value and 63.1 Pct of the volume against the plan.
To make things worse, Ethiopia’s export mining revenue fell short by USD 255 million from its target during the third year of GTP due to lower performance in gold exports and declining international gold prices. In the year 2012/13 MIDROC and artisan miners were expected to export 18,645.5Kg of gold to earn USD 848.3 million. The country, however, fell short by 6,064Kg. Artisan miners like Siraj in Benishangul Gumuz managed to extract and sold only 1,083kg of gold while they were expected to sell 2,999Kg.
In the last four months of the current fiscal year the government again did not get the income it was expecting from artisan miners. Only 70Pct of the planned 3,600Kg of gold was supplied from artisan miners to the NBE. “Although we were determined to extract gold as we used to, the potential of the land to provide us with quality gold has declined,” Siraj told ERB. “Currently, I am considering going back to farming because my income has decreased in half.”
The officials of the Ministry, tasked with the management of mineral resources of the country, agree that gold extracted by artisan miners has declined in the last two years. “When we compare it with the plan, the performance is getting weaker and weaker,” Chala Bonsa, Public Relation & Communication Directorate assistant head at the Ministry, told EBR. “The real reason is because of the ambitious plans we set for each year.”
The continued decline of the foreign currency generation capacity of the mining sector, especially the gold sub – sector due to over exploitation of resource and low international price then started to worry the government.
Top Challenges Faced by the Mining Sector
The first solution the government took to offset the gap is to raise its export revenue target for the current fiscal year, from USD 777 million to USD one billion.
This action convinced stakeholders, industry observers and experts that the government had huge aspirations for the mining industry. They advise the government instead of planning ambitiously; it should introduce better legislation and conduct a concrete study that indicates the exact location and potential of mineral reserves that can be extracted.
Senior officials of MoM recognize that the lack of using modern technology by artisan miners and over depletion and unsustainable use of resources are creating the problem. To alleviate this, the Ministry established a directorate, which oversees and coordinates the activities of traditional miners, five years ago.However, the problem has not yet been resolved since the artisan miners use traditional methods of locating and extracting minerals.
The lack of geological data is not specific to traditional miners alone; rather the same problem is affecting large scale mining companies. To date, close to half of the landmass of the country has been covered by basic geological mapping at a scale of 1:250,000 and at about 20 Pct by geochemical surveys in the search for minerals and to support development activities in other sectors with basic geo science information.
Currently, there are 263 companies engaged in the sector, according to the annual report of MoM. Of these 207 are only exploring for minerals. The rest have a license to develop mineral products in the country. Yet, more companies have actually returned licences than those that have begun extracting minerals. Last fiscal year alone 97 licences were returned to the MoM.
The operation manager of one of the foreign companies, which recently returned its license to the Ministry told EBR, on the condition of anonymity since he is not authorized to comment, that the low capacity of the MoM to meet the investor’s demands forced the company not to shift their project to other locations after unsuccessful attempts to find gold in Afar Region. “We didn’t apply to get another exploration license because we know that the capacity of the MoM to provide us with an alternative location is limited.”
Another example is the UK based mining company, Nyota Minerals Limited. The Company found a reserve at Tulu Kapi, in western Ethiopia’s, Oromia Region. The Company had an exploration license that they obtained in May 2005. Although the officials of MoM said they would grant Nyota a mining license during the middle of 2012, the company is still waiting for approval from the authorities to mine an estimated 17.97 million tonnes of gold reserves.
In fact, the MoM had suspended receiving new applications in 2011 due to piled up requests for mineral exploration licenses. However, a year later it resumed issuing mineral exploration licenses to local and foreign mining companies. At the time close to 250 license applications were submitted to the Ministry, which forced it to stop receiving additional applications.
According to Chala, “The large amount of applications coupled with high staff turnover made the halt compulsory.” Currently, the Ministry has 90 outstanding applications to review although an additional 50 applications were submitted after the MoM resumed issuing licenses.
Lack of capacity to meet the demand of investors from the government side is not the only problem faced by mining companies in Ethiopia, a consultant who wished to remain anonymous due to the sensitive nature of the issue, told EBR. “Rather the current legal framework, although better than the previous one, is not adequate and flexible enough to attract and maintain investors.”
The legal Framework
The first inclusive mining laws and regulations were endorsed in 1971 which helped the government to open the mining sector to domestic and foreign investors. However, during the Socialist Military Government (Derg), the sector returned to its initial stage when the government blocked foreign investors from engaging in the mining activities.
After 1991 the government tried to make the sector more attractive for investors by creating a favourable legal environment. However, the sector is not living up to its expectations. This is indicated by the relatively huge mining investment stock which stands currently at USD 1.1 billion while the country’s revenue from mineral exports still remains low.
To reverse the situation, the most recent ratification of the Mining Income Tax Proclamation ratified in July 2013, reduced the 35Pct corporate tax that has been in place since the 1997 to 25Pct. Even though the tax was reduced it is the same as many nations with better infrastructure like Australia, China, South Africa and Botswana.
The Way Forward
The government, nevertheless, wants to see the effects of the newly modified laws before changing them. “I think those countries with advanced infrastructure passed the same road we are currently walking on,” said Chala. “So there must be some kind of sacrifice to attain that level”.
“I know a couple of companies, which constructed a road and use a generator in order to carry out their activities,” said the consultant. “Although this is the job of the government, the companies have no choice except to do it by themselves.” In addition, bureaucratic obstacles in the different related institutions, high taxes and royalties make mining here difficult, according to the consultant who advised more than 35 mining companies in the last two decades. The consultant also argued that they are pushing up regulatory compliance costs for mining companies in Ethiopia.
Due to this, capital expenditures, too, are reaching a new peak, “said the consultant. “For companies already invested in Ethiopia the high level of costs in infrastructure, taxation and royalty fees are bound to affect project profitability.” The consultant’s opinion is also supported by a study conducted by Deloitte in 2012 on Africa’s mining sector. The report indicated by mid-2011, the price of haul truck tires alone had tripled, touching USD 100,000. Energy and power prices are also on the rise – Brent crude prices rose 45Pct year-over-year as of June 2011, at the same time electricity prices in Africa climbed by 25Pct.
To make things even worse, according to the report, the average cash cost of gold production rose to over USD 620 per ounce in 2012, marking a year-over-year cost increase of 12.5Pct.
Investing in the mining sector currently mandates significant long-term infrastructure investment, according to the operation manager of the mining company, which recently abandoned its project in Ethiopia. “This includes costs to construct infrastructure, community housing and schools. In fact, according to the operation manager, investments in water, transportation and energy are estimated to account for around 80Pct of project spending.”
With significant cash at their disposal, many mining companies can absorb the effects of these cost increases in the short run, said the consultant. “In the long run, however, most companies will eventually understand this does not represent a sustainable strategy. History shows that, as prices fall, input costs are not likely to decline by an equivalent proportion. As a result, cost management remains a critical priority, impelling forward-thinking companies to relocate their operation.”
Reversing the situation, according to industry observers, requires developing and establishing competitive mining legislation, promoting the mineral wealth and maintaining an efficient licensing and licensing administration system.
Yet, the government still believes that the extractive sector will be one of the major revenue generating sectors in Ethiopia taking into consideration the current trend of investment. Experts argue, however that mining companies look at legal stability in addition to political stability, when making decisions on where to mine. International mining is increasingly mobile so Ethiopia must work hard to encourage mining companies to stay. EBR
2nd Year • January 2014 • No 11