A Review of the Nigerian Energy Industry

Nigeria’s mining sector holds promise for the future

musa-mohammed-sadaOscarline Onwuemenyi 08 July 2013, Sweetcrude, Abuja – Nigeria today is in a wave of market reforms in many segments of its economy including the privatisation of government-owned companies and mining assets.

After years of dithering and being weighed down under squandered oil revenues and rising debt levels, the government finally demonstrated the political will to implement market friendly policies. To that end, Nigeria, over the past couple of years has began privatising the country’s mineral and steel resources, and has initiated a program of reform and mining regulations.

For long, West Africa has been a destination of choice for mining executives the world over, with countries like Burkina Faso, Ghana, Ivory Coast and Niger being actively explored and mined. Now, Africa’s most populous nation, Nigeria, fortuitously located in this remarkably prospective region, is opening up its mining sector and taking aggressive step to woo foreign mining companies as it seeks to become an alternate mining destination.

Gold has been the predominant mineral of choice in the region. But Nigeria, thus far known for its oil and gas deposits (tenth – largest reserves in the world and third – largest after OPEC at 36 billion barrels), is now offering a whole range of 34 solid minerals including precious metals,base metal, rate earths and minerals such as uranium to prospective miners for development.

More recently, the country has attempted to modernise the mining and minerals sector, improve international best practices through the institution of well thought-out regulations as well as establishment of the Mining Cadastre Office to ensure efficient management of mining licenses for exploration activities.

Nigeria is also undergoing a political transformation of enormous proportion. For the past 10 years, the country has seen uninterrupted civilian rule, which is the longest since independence. One of the major failures of the previous military regimes was the inability to diversify the economy away from its dependence on oil revenues. Developing the country’s solid mineral wealth promises to have a considerable impact on the economy since mineral deposits are geographically spread across more than 450 communities in the country. The oil industry on the other hand has concentrated in the swamps of the Niger delta.

According to Steve Vaughn, a partner at Heenan Blaikie Business Law Group and a leading expert on international mining law, Nigeria’s mineral sector has not historically received “enough attention as other countries in the region did from investors, but that is changing now.” Some potentially serious investors, however, have sounded a note of caution on the type of companies that may be attracted to Nigeria’s new liberal mining environment. However, according to J. Howard Bills, senior exploration manager, Axmin Inc, a Toronto-based gold mining company, “Nigeria will have to derive rules to keep out the suitcase companies, i.e. those that simply enter to acquire lucrative licenses only to sell them later at a huge profit.”

World Class Minerals
The mineral spread in Nigeria is significant with evidence of 34 different minerals distributed in Nigeria’s richly endowed geology. Though not all the mineral occurrences will ultimately have enough reserves to be of viable interest to mining companies, the Federal government is leaving no stone unturned in its increasingly sustained efforts to delineate and objectively demonstrate the potential and encourage investments in all.

“Nigeria has excellent and very significant deposits of tantalite, which are world class. It also has good quality lead and zinc properties with good commercial potential”, says Barey Guarnera of Behre Dolbear & Co Ltd, a consulting company dedicated to the minerals industry. However, the West African geology is replete with gold deposits. Gold is a miner’s dream right now considering the huge spread between gold prices and production costs and that is precisely the mineral that is attracting the most attention as far as Nigeria is concerned.

The government is also keen on following a strategy that would bring in the miners quickly. “We have to be realistic about focusing on the most promising minerals”, says Nigeria’s Minister of Mines and Steel Development, Arc. Musa Mohammed Sada.

New Greenfield mines are not the only option. Nigeria has several previously explored mines that could be re-opened. The gold mining opportunity in Nigeria could be very much like that of Ghana, where abandoned mines could be re-developed, says Sada. “Nigeria has several high grade gold mines but with modern technology we could also work the low grade mines, thus significantly increasing the country’s mining potential,” he added.

The biggest investment that Nigeria needs to make is in it’s infrastructure. Without adequate power, roads and ports, the development of the mining industry is going to remain a pie in the sky. Power shortages are endemic in Nigeria and the gap between peak demand and production is 7,000MW. The government’s energy plan for the next few years has been worked out and the contribution from coal-fired plants has been puts at 25 percent of the total energy requirement. The government is pipelining efforts to ensure that the energy sector needs are being addressed parallel to developing its mining opportunities.

Coal Mining: A Key Focus
Given the implications that continued power shortages have for the Nigeria economy, coal mining seems to be an area of immediate development concern, especially considering that Nigeria has proven deposits of over 1.5 billion tons, after only partial exploration. The advantages of coal mining is that though it is open to mining companies, the government is not dependent on them. Thermal power-generating companies would happily takeover the responsibility of developing coalmines since it would automatically, build fuel linkages with their power generating plants. The focus on developing coal mines will also speed up development of the power infrastructure, since plants will come up at the pithead to avoid haulage costs and the national grid will also get built up to transmit power across the country.

Rapidly developing the coal industry is in Nigeria’s best interest but the interest of foreign investors is in exploiting the most attractively priced mineral, gold. The price of gold in the international market today is nearly three times its production cost. “Coal should be a key target given the energy aspect and the opportunity for large coal mining projects for power generation exists, especially since there are handsome coal properties in Nigeria,” says Barey Guarnera. He adds that, “Coal mining will remain critical because of the peak load deficit factor. But the focus on industrial commodities is critical for the development of the metals and mining sector. The focus on industrial commodities will broaden the universe of mining companies interested in investment in Nigeria.”

Clearly the message is that the government has to look over the long term and focus on what is important for its overall development and not be swayed by short-term market factors. That said, the opportunity is clearly waiting for those mining companies willing to take the plunge into Nigeria. And to do that, many companies willing to overlook most shortcomings. “There is no need to convince mining companies about negative issues, they are experts at assessing this risk for themselves,” says Rizwan Haider, regional manager, sub-saharan Africa, Export Development Canada, a Canadian government agency which works with Canadian companies doing business with other countries especially in the emerging markets. Putting up the infrastructure will be a prerequisite for large scale investment.

An unshakable fact is captured by the Minister’s apt reminder that “if you build it they will come”. So if the opportunity is there and the bottom line looks favorable, miners are notoriously hardy and they will not necessarily be deterred by infrastructural constraints and other confluence of factors. The high risk appetite of miners is evident in their persistence in active conflict zones where they have records of catering to relevant infrastructural needs.

While Nigeria opens its mining industry it also seeks to battle negative perceptions that have bedeviled it through years of military rule and socio-economic crisis. The present government’s reform commitment is progressively boosting the confidence of investors.

A mining industry always existed in Nigeria and prior to independence in 1960, it was the dominant industry controlled by British firms. But investors were left with a bad taste after the mining sector was completely nationalised in the 1970’s as the country sought to recover from a devastating civil war. All foreign investors left the country and many of them of them have had strong reservation about reengaging with the country until the recent past, when they have seen a steady path of growth and unflinching political support to attract foreign direct investment.

Understandably, the years of dormancy meant that the mines deteriorated and production fell sharply, especially since the state owned companies were neglected with neither technological equipment nor conditions for efficient performance. After the discovery of oil in the 1960s, the government’s focus swung to developing its oil resources and that focus has remained to date to the continued detriment of the mining sector. But with the recent unprecedented boom in commodity prices, especially for solid minerals, the Federal government’s decision to revisit the mining sector and emphasize the opportunity there to global investors is a very welcome one.

To this extent, the Federal Government has declared 2012 as the minerals and mines year to augment the visibility of the mining sector in the country, lay the ground work for constructive community engagement and participation in minerals development, reaffirm the strategic implications of the sector and redouble efforts to develop the sector.

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