The arrival in town last week of a delegation of investors who met with Guinean president Alpha Conde is an indication that there is still appetite to invest in the West African nation, despite the prevailing sense of political risk which abounds, particularly for the mining community. The London-based Doyen Group, which describes itself as a “holding company of multi-strategy investment funds concentrated on emerging markets,” expressed its confidence in the investment potential in Guinea, with the company’s representative, Sultan A. Esmail, stating his company’s desire to explore the investment opportunities in the West African nation.
Indeed, it could be argued that a democratic dawn is breaking over Guinea, having emerged from a period of political volatility in the wake of the 2008 death of long-time leader Lansana Conte and the ensuing military coup. Civilian rule was restored in November 2010 bringing Conde to power and relations with external bodies began to normalize. His administration has received both domestic and external praise for the introduction of structural reforms, including the adoption of a new mining code and steps towards a reform of both the justice security sectors. These changes have led to the opening up of dialogue with the multilateral financial institutions and a resumption of budgetary assistance; the Poverty Reduction Strategy Paper has been extended from 2010 until 2011/2012. An increase in agricultural production and mineral wealth has seen an improvement in growth figures, standing at 3.6 percent in 2011, following meager movement in 2010 of 1.9 percent. The economy is forecast to grow further still, by 4.7 percent in 2012, and mineral wealth has led to a consolidation of Guinea’s external position with international reserves increasing to 4.5 months of import cover at the end of 2011.
However, criticism by Conde’s detractors has been charged, with civic organisations calling for evidence of a greater trickle-down effect from the fruits of the nation’s vast mineral wealth in a country where 50 percent of the population lives on less than US$1 a day. The delay in holding legislative elections – they ought to have taken place six months after Conde’s inauguration but have been put off until July this year – is another source of discontent. Opposition parties claim that the date of the elections was decided unilaterally and have warned against poorly organized polls, while clamouring for the auditing of the electoral register before they occur. This weekend’s opposition rally in which some 15 people were injured when unrest broke out when opposition activists stoned the ruling party headquarters in Conakry was a poignant reminder that Guinea’s newfound stability could be easily ruptured.
Wait Patiently or Get out While You Can?
Meanwhile, mining companies follow the unfolding events nervously, observing both the political situation and the general operating environment at close quarters, and weighing up whether the prevailing risks are eclipsed by the opportunities, or vice-versa. In September last year Guinea adopted a new mining code. Drafted with the input of the economist George Soros and with civil society organizations such as the Revenue Watch Institute and the International Senior Lawyers Project also on board, the new code is visibly designed to recalibrate the relationship between the state and mining firms, affording improved terms for the country, while, as the mining majors would argue, compromising their profit margins. The major sticking point for the mining companies is the provision in the new code which automatically accords the state a 15 percent free-carried interest plus the option to purchase a 20 percent state at market prices. This change has sent shockwaves through the mining industry. BHP has halted work on its Boffa-Santou-Houda site. The company’s president, Jean-Francois David, told reporters: “Explorations are stopped and all the activities will stop before June 30.” The company is set to return its mining permits for the site to the government. . The official reason given by the company for the retreat from Guinea is the global slump in aluminium prices and not the changes brought about by the code. With aluminium prices fetching 18 percent less than last year, coupled with the prospect of a 15 percent free carry interest for the government, the returns on investment are far lower than hoped.
But it is not just those companies who are caught by the provisions of the new code who are concerned. The Guinean authorities have said on a number of occasions that they would conduct mining contract reviews on the premise of ensuring that Guineans benefit commensurately for the mineral wealth and to do away with “unconscionable provisions”.
All eyes are currently on Brazilian firm, Vale, and the Israeli BSG Resources over the 2010 deal in which BSGR sold Vale a 51 percent share of blocks 1 and 2 in Simandou north for US$2.5 billion, US$500 million of which was reportedly paid upfront, while the remainder is to be paid in increments. However, the Guinean authorities are now contesting the validity of this agreement, seemingly taking BSGR to task for failing to follow the correct procedures. Unperturbed, BSGR has said that it will challenge the government on this, with the company stating by email that:
“BSGR’s deal with Vale was approved, ratified and publicly welcomed by the Guinean authorities at the time; and it was signed in the presence of the current Minister of Mines, Lamine Fofana…We have met all the terms and conditions of our Base Convention. Any attempt to illegally undermine our position will be firmly resisted.”
Vale, for its part, is considering its position. After threatening to pull-out in January, the company is still hanging on but with the company’s CEO Murilo Ferreira saying that it will make its firm decision on whether to stay or leave by the end of this year.
Guinea is reliant on minerals for than 70% of exports and is one of the largest exporters of iron ore and bauxite in the world. Criticised by the mining community for engaging in resource nationalism, Guinea’s authorities claim to want to correct the injustices of wealth inequality by using the proceeds of the mining industry to benefit the masses. Yet the perception of a hostile operating environment, high government take, political instability and the prospect of lower ore prices on the international market, is making investors reassess their prospects and decide if the risks really are worth the potential rewards.
Kissy Agyeman-Togobo is a Partner at Songhai Advisory LLP