Cairo opens for mineral exploration

25 April 2008
Egypt is seeking to capitalise on its mineral wealth as the government reforms the mining code.

Within weeks, a new regulatory framework for Egypt’s mining sector will be put before parliament. This will be followed by the submission of a new mining code in the summer. If passed, Cairo could implement the updated legislation by the end of the year, paving the way for a new bidding round for mining acreage. Such a move would be welcomed not only by junior exploration companies keen to launch activities in Egypt, but also by many of the world’s leading mining organisations.

The government’s extensive participation in mining operations until now, from the exploration phase to production, has been a cause for concern for potential investors. “Any reduction in the government’s heavy involvement in running the operations of a mining company will be welcomed by foreign investors,” says Karim Matar, managing director of Egypt-based SMW Gold, which is pursuing exploration activities in the Eastern Desert.

Josef el-Raghy, chief executive officer (CEO) of Australian mining company Centamin, also believes reform is essential. “There are definitely lots of mining opportunities here,” he says. “The key to unlocking them is in applying the new framework. Reform is long overdue.”

The move to introduce a regulatory framework is a significant step towards encouraging foreign involvement in developing Egypt’s mineral resources. It is part of a wider reform of mining policy by the Petroleum & Mining Ministry.

The Egyptian Mineral Resource Authority (Emra), part of the Petroleum & Mining Ministry, is working with the International Finance Corporation (IFC), the private sector arm of the World Bank, on its reform plans. Although closely related, the regulatory framework and mining code are being developed separately.

Until the latter has been passed, the fresh legi-slation will sit within the current mining code. Mining & Petroleum Code Law 66 of 1953 and Mining Code Laws 86 and 151 of 1956 form the basis of the rules that underpin mineral exploration and exploitation in the country. “We are designing a new model agreement for high-value minerals that lays out the legal and fiscal framework,” explains Frank Sader, senior operations manager of the IFC in Cairo. “This will function within the existing mining code. At the same time, we are in the process of developing a new code that will be submitted to parliament by the summer.”

Uncertain rewards

The current legislation governing the mining industry in Egypt is poorly suited to the sector’s needs. In particular, it fails to meet the requirements of companies working in a country where extensive exploration is necessary. This is expensive and the rewards are often uncertain.

The main problem is that regulation of the sector is based on the legal and fiscal structure used in the oil and gas industry. This is strongly focused on making foreign investors form joint venture partnerships with government entities and enter into production sharing agreements (PSAs). While this is suitable for the hydrocarbons sector, exploratory mining companies find it frustrating and unfamiliar.

In 2006, SMW Gold won the exploration and exploitation licences for the Um Balad and El-Fawakheir blocks in Egypt’s Eastern Desert. It is developing the mines under a 50:50 PSA with Emra and owns 20-year exploitation leases on each of the areas, with a 10-year extension option. But development has not been as fast as Matar would like. “Bureaucratic procedures and the constant monitoring of activities makes progress slow,” he explains. “We are determined to speed it up.”

Matar is confident the new laws will ease the situation.

Exploiting mineral resources is more complicated than oil in terms of determining the size of the deposit, says Sader. Erratic veins of ore make identifying the extent and direction of the deposit difficult. Exploration is therefore capital intensive, but the size and profitability of the potential rewards can be hard to establish.

“There is an assumption across the region that mining is another extractive industry that can be developed in the same way as the oil and gas industry,” says Sader. “But practice shows this is not the case.”

Under the new regulations, Cairo will be moving towards a framework based on taxes and royalties paid to the government by mining companies. This is similar to the procedure followed in countries around the world where there are high levels of mining activity.

The new regulations are designed to maintain the revenue from the sector received by the government through PSAs and royalties, but at the same time reduce the bureaucratic burden on mine operators and, critically, increase transparency over mineral rights and the security of tenancy agreements on mining acreages.

International companies are already showing an interest in Egypt’s mineral deposits. “There is a lot of interest in Egypt among major internationals and smaller mining companies,” says El-Raghy. “Of the world’s 10 largest gold producers, five have visited Egypt in the past two years.”

Estimates indicate there are about 6.7 million ounces of gold deposited in the Eastern Desert alone. All of Egypt’s high-value minerals and phosphates are to a large extent untapped. These include 48 million tonnes of tantalite, the ore from which tantalum is extracted for use in the manufacture of electronic components.

Without an improved regulatory framework in place, mining companies find it hard to access the funds they need to explore these resources. Stock market investors have also shown less appetite for stakes in junior exploration companies. But to secure foreign investment in the mining sector, the involvement of the international project financing community is needed.

“Raising money for mining projects is not easy, and the stock market has moved away from explorers” says one source at a mining company operating in Algeria, where there is a similar regulatory system to that in Egypt.

The reluctance of project financiers to get involved in projects where the financial outcome is not initially clear is an obvious deterrent to exploration companies. “These companies are shying away in recognition of the risk of exploration and the associated risk of getting financing at a later stage should initial exploration prove positive,” says Sader. “Investment banks have been hesitant to engage in potential financing operations in Egypt at the exploration phase. It has been difficult to attract third-party investors because it has been difficult to value mining projects.”

A lack of clarity over the transferability of assets should exploration prove successful has also been a concern. “The legal framework does not provide complete transparency over shifting from a joint venture exploration partnership to an independent operator,” explains Sader.

This is another reason why private operators would prefer less government involvement in their activities.

Driving the reform of Egypt’s mining sector is Petroleum Minister Sameh Fahmy. He has made his support for the new regulations clear. But those working in the industry know that getting the updated framework through parliament will not be easy.

Some resistance to change within government is also likely to be encountered. “It is a huge challenge for the IFC to implement what it is working on,” says El-Raghy. “But we are confident that the groundswell of support is there in the government.”

Maintaining momentum

El-Raghy’s cautious optimism is echoed by others. “There is some reluctance from the government to agree to moving away from the product-sharing idea,” says one operator. “I am aware of elements within Emra who do not welcome this change.

“But I think the new law will be passed because the minister likes it and it has the support of the World Bank.”

It is not just technical issues that will need to be overcome. “It is also psychological,” says Matar, referring to any decision made by Cairo to release control over Egypt’s mineral resources. “Although in the end there is little difference in what money they will receive.”

“Changing the government’s philosophy and mindset is the most important thing,” says El-Raghy. “The key issue is whether the government sees a 50 per cent interest in a project as equal to gaining tax benefits.”

Cairo is not alone in its need to update the laws governing its mining sector. Further west, in Algeria, international mining companies are showing a growing interest in the country’s mineral wealth. But they are also finding an onerous bidding process and government involvement in the sector difficult to negotiate.

If Cairo goes ahead with extensive reform of the laws governing its mining code, it will be a significant move forward for North Africa’s mining sector. “Egypt is leading the way in North Africa in terms of developing new regulations,” says Sader. “There is more reform momentum here.”

Capturing this momentum and implementing a new mining code, in addition to passing the new regulatory framework, will be an impressive development. It is one that inter-national mining companies will be watching with interest.

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