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The first shipments of iron ore have left Sierra Leone, heralding a new era of growth for the West African nation. Paige McClanahan reports from Freetown.

In 2010, the economy of Sierra Leone – a West African nation still recovering from a decade of civil war – grew by a modest but respectable 5%.

For 2011, the IMF has predicted that this figure will swell by a factor of 10, and that Sierra Leone’s economy will grow by more than 51%. If that happens, it would make Sierra Leone, a nation of just six million, the world’s fastest-growing economy. And all of that growth boils down to one thing: iron ore.

Global iron ore production has long been dominated by mega-companies operating in a handful of mining-heavy nations like China, Australia and Brazil. But a raft of junior companies have jumped into the iron ore business in the past few years, digging up millions of tonnes of the raw material in countries like Liberia, Guinea, Cameroon and Sierra Leone.

In November 2011, Sierra Leone shipped its first batch of iron ore in nearly 30 years, and there’s a whole lot more on the way.

London-listed African Minerals was the company behind that first shipment; 40,000 tonnes of iron ore sent to China. But another company wasn’t far behind. London Mining, which is developing the abandoned Marampa iron ore deposit just 80 kilometres from the Atlantic coast, announced its first shipment in December.

The two companies plan to export a combined 16 million tonnes of iron ore this year and 19 million tonnes in 2013.

The bulk of that material will come from African Minerals, whose 12.75 billion tonne resource at its Tonkolili mining site in central Sierra Leone is the largest project being developed by any of the junior companies operating in the region.

“We will shortly become the largest fully integrated exporter of iron ore in West Africa,” African Minerals CEO Frank Timis says, adding that the first shipment marked his company’s emergence as a “world-class iron ore exporter”.

Such an enormous project requires a staggering amount of infrastructure, and in Sierra Leone – where only a handful of paved roads exist outside the capital city – much of it is being built from scratch.

African Minerals has already constructed a 200km railway line and refurbished a port to manage its export flow. In the next five to 10 years, the company plans to build an entirely new port – this one in deeper water, so it can take bigger ships – and link up to a hydroelectric dam that should be in operation by the end of the decade.

“It’s all about the infrastructure,” says Matt Fernley, an equity analyst at the investment firm GMP Europe. “The advantages for African Minerals are first of all that its costs will be lowered by using its own railway and port, and also it should be able to access cheap hydropower for the latter stage of the project.”

All of that infrastructure may save money in the long run, but getting everything in place has required a substantial investment from African Minerals: a total of US$1.4bn. That’s a lot of money in Sierra Leone, where the value of the entire economy was just US$1.9bn in 2010.

Financing needs

Over the past two years, the company has raised most of that money on its own through equity sales (US$730mn) and a secured loan facility (US$418mn), Andy Mills, a spokesman for African Minerals says.

More financing will be needed soon. Under a deal negotiated in 2010, Shandong Iron and Steel Group, the world’s ninth-biggest steelmaker, agreed to pay US$1.5bn
for a 25% stake in the African Minerals project.

The deal, which was approved by Chinese authorities at the end of 2010, also guarantees Shandong a 25% take of the mine’s output.

Presently the actual shipments of iron ore are being financed by the buyers of the raw material, Mills says. In addition to Shandong, African Minerals has signed off-take agreements with China Railway Materials and South Africa’s Standard Bank. Rival London Mining signed a similar deal with Glencore, the multinational commodities giant.

As yet the commercial banking sector is not particularly active in the financing of these growing iron ore trade flows. Yet this could change as production ramps up. By the end of this decade, Sierra Leone could be producing 130-140 million tonnes of iron ore per year, says GMP Europe’s Fernley, even as similar projects in neighbouring Liberia and Guinea start ramping up output.

By 2020, analysts say that West Africa as a whole could be generating 500 million tonnes of iron
ore every year.

Whether the market has an appetite for this surge of iron ore isn’t clear. The price of iron ore slid by more than 30% in October last year, hitting a 15-month low as demand slumped in China, whose steelmakers snap up two-thirds of the world’s iron ore production.

“I don’t think the number of projects coming online at the moment is enough to push the industry into oversupply in the near term,” says Fernley, although he notes that the price of iron ore could drop in the long term if Chinese companies coordinate their efforts to finance new projects.

Political risks

Back in Sierra Leone, the government is doing what it can to encourage mining investment, and get a decent slice of the pie at the same time. A draft government document circulated in late 2011 called for a renegotiation of the London Minerals contract to boost the company’s corporate taxes from 6% to 25%. There have been persistent rumours that the African Minerals contract will also be reviewed, but that seems unlikely, at least for the time being.

Richard Konteh, Sierra Leone’s minister of trade and industry, insists that the country isn’t looking to bleed investors dry; it just wants a fair deal.

“[Mining] investment will create a whole range of job opportunities for our people,” Konteh says. And he hopes that someday mining companies will begin adding value to the raw material in Sierra Leone, instead of just shipping it directly overseas.

“We hope that we will be able to do some processing in-country,” he says. “That is really the direction we want to take as a country.” GTR