Monday, 16 January 2017

Egypt’s golden opportunity: Mining for the 21st Century

Egypt could be one of the top mining jurisdictions in the world, but it badly needs to reform its mining policies to attract more companies to invest in developing its mineral resources. One need only gaze at the mask of Tutankhamun to realize that gold and other minerals have been found and mined in Egypt’s deserts since the time of the Pharaohs. Abundant deposits of gold, copper, silver, zinc, platinum and a number of other precious and base metals almost certainly lie in the rocks beneath Egypt’s Eastern desert and the Sinai Peninsula, both part of a geological setting known as the Arabian-Nubian shield. But for the past 70 years, Egypt’s mining industry has been almost entirely dormant, with only one modern gold mine, near Marsa Alam, in operation.

The government recently announced its intention to hold a bid-round for new gold exploration concessions. This is a good time for policy makers to rethink what it’s going to take to create a successful mining industry for the 21st century that could be a cornerstone of the economy.

Among the benefits would be an increase in exports, more tax revenue, an economic stimulus and significant job creation and training, especially in Upper Egypt, which suffers from high unemployment. Also, foreign direct investment in the mining sector and an increase in foreign currency earnings could help to improve Egypt’s credit ratings, making international loans less expensive.

Reviving this ancient sector does not require a major overhaul, especially as there are no legacy issues to overcome.

First, we need to understand that the investment model for mining works in a way very different from that of oil and gas, even though both industries are extractive in nature. The commercial terms and framework that govern mining in Egypt are currently the same as those governing oil and gas — nowhere else in the world is this the case. This model, known as a profit-sharing agreement, is well known to international oil companies and has been used to successfully produce Egypt’s hydrocarbons for decades. Under this model, oil investors are able to recover their costs in a relatively short timeframe and proceed to share profits with the government economically, given the relatively low operational costs of producing oil. But due to its high operational costs, this simply does not work with mining.

The mining investment model entails a different combination of risks and costs. Early stage mineral exploration is incredibly high-risk, similar to venture-capital startups. Most exploration projects fail. For example, only about 2% of global copper prospects make it through the development cycle to become producing mines. Large, cash rich international companies are not at the vanguard of the mining industry, but rather those that are known as junior explorers. These are operators whose shareholders have a high threshold for risk and a high appetite for reward. Junior explorers raise speculative capital in international financial markets to fund exploration activities. They frequently return to the markets for additional capital, much like tech startups. Juniors usually develop projects to a feasibility stage before transferring their discovery to larger mining corporations that are better suited to manage corporate risk. Furthermore, the exploration process itself can be very slow, as finding economic quantities of minerals is technically more complex and challenging than finding a needle in a haystack. Commercial frameworks and regulations must therefore accommodate this propensity for failure and encourage speculative exploration.

The commercial framework that best does this is called a ‘tax and royalty regime’, and it’s the international standard. This transparent model is far better suited to the characteristics of mining than the profit-sharing regime used in the oil sector.  Under this model, a firm’s profits are realized as the gross value of the mineral less costs, taxes and royalties. It is less cumbersome, offers a familiar legal status, and provides the level of security and comfort required for investors to commit to long-term, risky exploration. Importantly, this model quickly generates predictable cash-flow to the government, as there are no lengthy cost recovery periods as with the profit-sharing model. In mining, unlike in oil and gas, cost recovery can take between 10 to 20 years.

Policy makers will also greatly benefit by thinking in terms of producing more than just ‘gold’. They should think instead in terms of granting exploration concessions that cover all of Egypt’s economically recoverable minerals including silver, copper, zinc, lead and iron, as well as precious gemstones such as peridot and emeralds. Egypt may even have minerals like borax and lithium that no one has yet explored for. The key is for Egypt to attract many diverse exploration companies to invest to look for them.

Thus, exploration concession areas should not be designated for a single mineral. Until the land is methodically explored, it’s anyone’s guess as to what might be found. Very often associated minerals are discovered in larger commercial quantities than the mineral initially sought after. For example, it’s common for companies exploring for gold to find copper and silver. Should a company find a commercial copper deposit, it needs the flexibility to become a copper mining firm and not solely be a gold mining firm.

By reforming mining policies and adopting an internationally recognized commercial framework, Egypt will send a powerful signal to the mining investment community that it’s open for business and ready to compete for it. As the central bank governor recently said in an interview with Enterprise, “competition for global investment is high — everyone wants to harness investment flows to increase the rate of growth, to create jobs.”  At Aton Resources we couldn’t agree more. We believe in Egypt and its enormous potential to develop a world-class, 21st century mining industry that will benefit Egyptians for many generations to come.

Mark Campbell is president and CEO of Aton Resources, a TSX Venture Exchange-listed gold play. You can read their latest investor presentation here.

 

 

 

 

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