Algeria bringing in foreign expertise to develop the Tala Hamza mine

17 March 2010

International firms are sparking a revival in the Algerian mining sector with their investment and new technologies

In the coming weeks, the local/Australian joint venture Western Mediterranean Zinc will apply for a mining licence to develop the Tala Hamza lead and zinc mine in northern Algeria. Assuming the application is approved by Algiers, it should get the green light to start developing the mine within five months of the application being submitted.

The Tala Hamza project is located some 13 kilometres from the port of Bejaia, within easy reach of major European metals markets and is aimed at giving the company, and Algeria, a strong foothold in the global lead and zinc market.

The successful development of the mine would also be a powerful vindication of Algeria’s new regulatory environment, despite the country’s often cautious attitude towards foreign investment in key economic assets.

Key Fact: Extracting the lead and zinc deposits at Tala Hamza will require a $285m capital investment, according to a pre-feasibility study

Source: MEED

High-grade ore

Legislation permitting private investment in the mining sector was introduced in 2001, following 35 years of state control of the industry. In the past nine years, foreign companies have engaged in exploration or production activities in Algeria, but if approved Tala Hamza will be the first internationally led mining operation to be undertaken on a major industrial scale.

Finance availability is not considered to be an impediment to timely development

Kevin Moriarty, executive chairman, Terramin

Adelaide-based Terramin Australia owns a 65 per cent stake in Western Mediterranean Zinc, and its local partners are the state-backed Entreprise Nationale des Produits Miniers Non-Ferreux & des Substances Utiles, with 32.5 per cent of shares, and the government’s Office Nationale de Recherche Geologique et Miniere holding the remaining 2.5 per cent.

Kevin Moriarty, executive chairman of Terramin, tells MEED that the Tala Hamza mine lies within the “highly prospective” Oued Amizour region and his company views the venture as “potentially world-class” due to the combination of the volumes of zinc and lead held by the site, the high grade of the ore, as well as the proximity of the site to major European markets. He adds that there is also the potential for the discovery of additional areas of mineral desposits to those already identified at the site.

Terramin predicts an initial probable reserve of 24.1 million tonnes, containing 5.89 per cent zinc and 1.67 per cent lead.

Low cost

“It is expected that the mining extraction rate will ramp up to 4 million tonnes a year (t/y), and at this rate Tala Hamza will potentially be in the top five mine producers of zinc metal [based on 2009 annual production data],” says Moriaty. “A commonly used measure of costs in the industry is the ‘C1 zinc cash cost’ – measured in cents per pound of payable zinc metal produced. It is anticipated that the Tala Hamza operation will rank in the lower half of the industry cost curve, reflecting its close proximity to infrastructure and the selection of a bulk mining method.”

Moriarty also cites Tala Hamza’s relatively low capital investment cost as a further competitive advantage. A pre-feasibility study estimated the cost of developing the mine as a sub-level cave – extracting thin blocks of ore – at $266m, but went on to suggest that it would make more sense to develop the pit on a block cave basis – which allows bulk mining of larger blocks of ore. The study stated the latter would increase the capital cost of development to $285m but would cut ongoing operating costs by 40 per cent, compared with the sub-level cave technique.

The capital investment costs would be partly covered by the three Western Mediterranean Zinc shareholders and partly with external debt. As an export project, the mine is well placed to offer the sort of secure hard currency revenue stream that would reassure potential lenders.

“Financing options are still being considered but it is anticipated that the financing will encompass a combination of equity contributions from the shareholders, proportionate to their interests, combined with some form of project debt finance,” says Moriarty. “Both local and international banks have offered indicative terms of up to 70 per cent of the capital over a term of 15 years. Consequently, finance availability is not considered to be an impediment to timely development.”

Operational expertise

Moriarty appears confident about his own company’s capacity to mobilise its share of the funding. “[Terramin’s] share of equity contribution is unlikely to be onerous and will most likely be sourced from existing cash reserves, future cash generated from its low cost Angas Zinc Mine in Australia and future equity issues as required,” he says.

Hunter Hillcoat, resources analyst at Austrialia’s Austock Securities, points out that to date Terramin has only one mine in operation – the Angas zinc and lead mine in Australia. The mine, which is estimated to have reserves of 2.15 million tonnes, began production in July 2008 and is producing “moderate” early cashflow, says the analyst, but is important in allowing Terramin to accumulate and demonstrate operational expertise. This will be vital in convincing bankers or stockmarket investors that the company has the capacity to lead Tala Hamza, a project that Hillcoat describes as “the jewel in Terramin’s crown”.

If the Tala Hamza mine is successfully developed it would help to convince other investors of Algeria’s viability as a mining location, particularly with regard to regulation and security – issues that apply to any project and are quite separate from the geological and business specifics of each individual mine. Moriarty’s experience on both points has been favourable.

“The Tala Hamza project will be governed by the Algerian Mining Act, which was established in 2001. The legislation is very thorough, transparent and well-tried although not necessarily by projects of this scale with foreign investment,” he says.

“Algeria generally is in a strong fiscal position and the mining sector benefits from a relatively attractive tax and royalty regime. In summary, the system is well established and the environment is stable.”

He says Western Mediterranean Zinc has experienced few security issues because such problems in Algeria tend to be localised to particular regions, with the Bejaia area largely unaffected. Although he adds company maintains “well structured security measures”, his broadly positive assessment is encouraging for other investors looking at Algeria.

There are a number of other potential projects that could also strike international interest. Both Chinese and Brazilian firms have shown interest in the Gara Djebilet and Mechri Abdelaziz iron ore deposits, which hold a combined 3 billion tonnes of ore. Situated between Tindouf and Bechar, the most direct route to the sea from these sites would be through southern Morocco; but relations between Algiers and Rabat remain fraught with tension due to a long running border dispute.

This may be one reason why the Algerian authorities have been restoring the historic rail link from the coast at Oran to Bechar – which is situated 700km to the south on the fringes of the Sahara. Bechar’s rail connection to the north was established in 1906 during the colonial era, but was subsequently neglected. By mid-2010, however, the link will be back in operational order, potentially facilitating the export of iron ore from Gara Djebilet and Mechri Abdelaziz.

Foreign investment

Elsewhere, in the northeast of the country, there is a 12 million tonne undeveloped iron ore deposit at Djebel Hanini, near Setif, while two operational mines also in the north, at Bou Khrada and Quenza, hold 70 million tonnes of reserves and could be expanded.

The mining sector benefits from a relatively attractive tax and royalty regime

Kevin Moriarty, executive chairman, Terramin

Another established bulk mining site with scope for expansion is the Djebel Onk open-cast phosphate pit 100km south of Tebessa, near the Tunisian border. Ferphos, the Algerian operator of the mine, has reached a supply deal with the Spanish fertiliser company Fertiberia that will allow it to boost output from this 2 billion tonne deposit to 4.5 million t/y – up from the current output of 2.5 million t/y.

Meanwhile, the Algerian government has been seeking a foreign partner for the Ghazaouet zinc mine and refinery, in the far northwest. The pit is more than 25 years old and output has slipped from 40,000 t/y at its peak to just 30,000 t/y today.

Algeria is seeking to attract foreign capital and new technology to its mining and metals industry to boost capacity and to modernise the sector. Local civil society groups complain that fumes from the zinc refinery in Ghazaouet town, are damaging the health of residents. The development of the sector in the north of the country also has the potential to create hundreds of new jobs.

By contrast, the long-established international gold-mining projects far south in the remote Sahara are small operations so their socio-economic impact is much more limited.

Additional reserves

At Tirek, the UK-owned GMA Resources – in partnership with local state-owned energy giant Sonatrach – has been producing gold since 2001 and silver since 2004. Output has declined from its peak of 20,476 ounces of gold and 3,551 ounces of silver in 2005.

Algeria is seeking foreign capital and new technology to boost capacity and to modernise the sector

The company is developing a second mine at Amessmessa, some 60km to the south. Government data points to the presence of substantial further deposits in the Zita area, lying between these two mine sites. According to GMA Resources, the total gold deposits in Algeria could well amount to 5 million ounces, almost double the volume that is indicated by the prospecting data currently on file, much of which is more than 20 years old.

Meanwhile Cancor, a Montreal-based exploration company, holds a permit to prospect the Ouzzal North concession, which lies adjacent to Tirek and Amessmessa.

A first competitive bidding round for exploration licences was held in 2007, leading to the award of 29 licences; a further round, in April 2009, saw the award of 29 licences for exploration for non-metal minerals, albeit mostly to local companies.

The mining industry liberalisation of 2001 has proven successful in attracting investors who have developed or are planning to develop major production ventures for zinc, lead, gold and silver. But the Algerian mining sector still has the potential to grow much further.

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