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Political turbulence overshadowing Egypt’s efforts to increase mining’s share of GDP

29th July 2016

By: Ilan Solomons

Creamer Media Staff Writer

  

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JOHANNESBURG (miningweekly.com) – Egypt, which seeks to grow its mining sector’s contribution to the country’s gross domestic product (GDP), has become Africa’s second-largest economy after Nigeria, pushing South Africa into third place on the continent.

This is according to data released by multilateral organisation the International Monetary Fund in April.

Professional services firm KPMG states that, since South Africa was demoted from first place, after Nigeria rebased its GDP data in early 2014, South Africa has had to settle for the title of ‘most advanced economy’ in Africa, holding onto its infrastructural and regulatory advantages.

Egypt’s nominal US dollar GDP expanded by an average of 7.5% a year from 2012 to 2015. The Egyptian pound’s depreciation during this period was at a notably slower pace, compared with that of the rand.

KPMG notes that the Central Bank of Egypt has been tightly managing the pound since 2011. This not only resulted in a milder depreciation, compared with the free-floating South African currency, but also contributed to Egypt’s GDP eclipsing South Africa’s in 2015.

Further, Egypt aims to grow its GDP, with the mining sector having been targeted by government as a catalyst for increased revenue generation.

Speaking at the Egypt Economic Development (EED) conference, in Sharm El-Sheikh, in March 2015, Prime Minister Sherif Ismail, then Petroleum and Resources Minister, said the country’s government intended to increase the contribution of the country’s mining sector to the GDP from its current 3.4% to 5% by 2025.

However, research firm BMI, a unit of Fitch Group, forecasts that, with the current indicators, the value of the mining sector’s contribution to GDP will drop to 2.5%, which will make the 5% target unattainable.

BMI commodities analyst Sabrin Chowdhury tells Mining Weekly that, despite increasing efforts by the Egyptian government to attract overseas investment to the country’s mining sector, the country’s appeal continues to be overshadowed by the “pervasiveness of political turbulence” in Egypt and the wider Middle East region.

She notes that expected improvements in Egypt's political stability over the coming months are doing little to alleviate ongoing concerns about the stability of the business climate of the international investment community.

Therefore, Chowdhury says, despite a weak currency, which will help with input costs, BMI expects new entrants and investors to remain “thin on the ground” for Egypt’s mining industry going forward.

Nonetheless, Ismail said at the EED conference that government intended to enhance the sector by introducing new mining laws, restructuring it broadly, building capacity, reducing the exports of raw materials to ensure maximum value-add, regularly issuing new mining project bidding rounds and developing a master plan to include integrated complexes to assist in ensuring maximum mineral resources value-add.

“The Golden Triangle project, in upper Egypt, aims to establish a world-class economic zone [that will include] mineral extraction, industrial facilities, commercial hubs and tourist zones,” he pointed out.

Further, Ismail remarked that the introduction of new mining laws would include measures to ensure “decent” revenue generation for the State and increased value-add of minerals. He added that there was also a need for a special law to govern exploration and concession agreements through international tenders for areas exceeding 16 km2.

Moreover, Ismail stated that at least 1% of the output from mines in Egypt should be allocated to social development within the relevant governorate for the area being developed. He noted that different models for all exploration agreements should be considered in any new mining legislation.

Chowdhury adds, however, that there has been no official indication whether the country will update its mining laws.

“We expect gold prices to increase . . . from $1 275/oz in 2016 to $1 500/oz by 2020 . . . government will show more reluctance to change the production-sharing method as investors have a greater incentive to mine in Egypt,” she says.

Chowdhury says this is because Egypt offers investors a production-sharing agreement similar to its oil and gas deals, and has been reticent to adopt the more widely used model where mining companies pay royalties on mineral production and collect tax from these operations.

Additionally, there has been no progress to date on the Golden Triangle project, Chowdhury notes. She believes that its success would “definitely add immense value” to Egypt’s minerals sector, as the project area contains significant gold and iron-ore reserves.

However, Chowdhury highlights that this very success depends on investors’ willingness to mine in the area, which, in turn, depends on mining laws and costs that are not yet favourable. Moreover, she points out that there is a conflict between the technical committee for the Golden Triangle development project and the Egyptian Mineral Resources Authority over who is responsible for the project’s execution. This dis- agreement has yet to be resolved and has, therefore, further delayed the development of the project.

Sector Insight
Chowdhury notes, however, that, despite having vast reserves that are relatively easy to mine, owing to the availability of good infrastructure, the country’s mining industry is largely underdeveloped, with Egyptian gold miner Centamin the only large-scale commercial miner currently operating in the country.

The company’s 160 km2 Sukari tenement area is in the south-east region of the Eastern Desert, about 700 km from Cairo and 25 km from the Red Sea.

The Sukari deposit is hosted by a large porphyry body on a regional shear zone, providing favourable drilling conditions. Several types of gold mineralisation are found here, including disseminated gold and shear-zone-related quartz vein. The mine currently employs about 1 300 Egyptians and 70 expatriate workers. It also has more than 270 Egyptian companies supplying the mine with equipment and services.

Subsequent to first production in 2010, the processing capacity of Sukari’s plant was increased in stages by reinvesting initial cash flows. An expansion to the project was completed and commissioned in 2014, with the target production rate of 11-million tons achieved in the fourth quarter of 2015.

Ore is supplied by two mining operations – a large-scale openpit, which provides about 90% of the ore feed, and a higher-grade underground mine. The ore is processed on site through a plant with a forecast production of 11-million tons a year, with potential to exceed this rate through further productivity improvements.

Centamin reported a 6% year-on-year increase in production at Sukari during the first quarter of the year to reach 125 268 oz, up from 107 781 oz in 2015. The miner has also raised its 2016 global production forecast by 7% to 470 000 oz as it increases production in expanded areas of the mine.

Chowdhury notes that Canadian precious and base-metals explorer and developer Alexander Nubia International (ANI) is also seeking to develop privately owned gold mines in Egypt.

She points out that ANI is conducting exploration work on a gold prospect at Hamam, north-east of Luxor, where it has discovered significant reserves of gold, silver and zinc that can be mined economically.

The company has a National Instrument 43-101inferred gold resource of 397 000 oz of gold and gold-equivalent at the Abu Marawat vein system, at Hamam. The mineralisation extends along strike for 3 000 m and ANI has completed about 6 273 m of core drilling and 6.8 km of trenching at the site to date.

The company’s aim for the remainder of the year is to complete diamond core drilling at Hamama West for 3 500 m towards resource calculation to 150 m vertical depth, targeting gold-oxide mineralisation and primary sulphide mineralisation along 900 m of strike length. The Hamama prospect is expected to be developed into an active mine by 2018.

Meanwhile, Chowdhury notes that the Egyptian government plays a very significant role in terms of setting mining rules and regulations – efforts to boost the sector will not amount to much if the production sharing, or profit sharing (up to 50%), method of paying, instead of paying regular mining taxes, is retained, and is likely to be a major deterrent to new investors. However, it will remain intact for some time to come.

“Red tape and outdated, harsh laws will remain hindrances to growth in the sector,” she concludes.

Edited by Creamer Media Reporter

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