As the business climates in Sierra Leone, Liberia and Guinea improve, investors are being called to take a second look, say speakers at a West African mining seminar hosted by law firms JLT and Clifford Chance.
Host governments in the West African countries of Guinea, Liberia and Sierra Leone are welcoming international mining and steel companies to help them release the untapped potential of their natural resources, and to develop their country’s infrastructure.
But while the rewards for investors are great, so too are the challenges, highlighted a London seminar on June 30, which featured speakers from IHS Global Insight, Clifford Chance, and Jardine Lloyd Thompson (JLT).
The seminar explored strategies for mitigating and managing political risk for companies operating in the region’s mining sector.
“In spite of the risks, there are high returns for these countries, particularly as the price of commodities starts to rise,” said Kissy Agyeman-Togobo, senior country analyst: Sub-Saharan Africa, at IHS Global Insight.
Agyeman-Togobo and her colleague, Nana Adu Ampofo, Sub-Saharan Africa research analyst, provided an overview of the country risk profiles for Sierra Leone, Liberia and Guinea, by evaluating their political, legal, tax and operational, and security environments.
According to Ampofo, all three countries are considered relatively risky, and are default countries in that they are not meeting their financial obligations. Nevertheless, conditions are improving.
Although all three of these countries have historically been dominated by autocratic regimes and civil conflict, they are all recognised as having the largest untapped mineral reserves in the world. As such, a number of foreign investors, including British-Australian Rio Tinto and BHP Billiton, Chinalco, Brazil’s Vale and London-listed African Minerals – are jostling to access and release the potential of these resources.
Sierra Leone’s investment climate has improved considerably since the end of its civil war in 2002, and improvements are being made to its ailing national infrastructure – particularly power production. Recently-passed legislation reforming business registration procedures, bankruptcy and investor protection in the country are due to come into effect by the end of the year.
Earlier this year, African Minerals raised £80mn in a cash placing, to be used to fund the construction of key infrastructure at its Tonkolili iron ore project in Sierra Leone. Commercial production is expected to commence in 2011, and according to the company, the reserves are amongst the biggest in the world.
In Liberia, although infrastructure bottlenecks prevail, government spending has focused much on addressing this issue. President Ellen Johnson-Sirleaf has done much to engage with investment firms, and has also established a productive relationship with multilateral institutions.
In June, BHP Billiton concluded an iron-ore agreement with the Liberian government, reportedly worth US$3bn.
In Guinea, the results of a presidential election held on June 27 are still pending, but it is thought that the vote could be the start of a genuine commitment to democracy and an opportunity for political change. Investors are likely to follow events in the country closely, as most of the leading presidential candidates have expressed a commitment to review all mining contracts.
In May this year, Brazilian mining giant Vale bought a majority stake in a division of Guinean mining company BSG Resources, spending US$2.5bn to tap the country’s high-quality iron ore reserves. According to a statement by Vale, output will begin in 2012 with 10 million tonnes of iron ore, and reach 50 million tonnes by 2015.
Also in Guinea, Rio Tinto and Chinalco signed a memorandum of understanding to establish a joint venture covering the development and operation of the Simandou iron ore project earlier this year. The scope of the proposed joint venture covers rail and port infrastructure as well as the mine itself.
Despite these improving circumstances, risks remain, and at the conference in London, Nick Robson, partner, head of credit, political and security risks at JLT, highlighted the importance of political risk insurance (PRI) as a means of mitigating non-commercial country risk in West African mining projects.
The conference also underscored the benefits of setting up bilateral investment treaties (BITs) to promote and protect foreign investment. Audley Sheppard, partner, head of Clifford Chance’s global arbitration group, profiled the protection available to foreign investors under a BIT; and which countries around the globe have listed BITs with each of the West African countries profiled.
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