Image: Courtesy of Mako Gold

Long recognized for its geological potential, West Africa continues to edge into center focus from the peripheral vision of many investors. Within the region, investment dynamics continue to shift, with many rising stars gaining momentum alongside the more established mining countries. Perceived attractiveness largely comes down to geological potential, economics and perceived risk. Due to the shifting perception of attractiveness, investor attention is shifting away from the historic producers to less-explored countries with greater potential for big discoveries. Larger companies are continuing to increase their land positions and acquire properties across the region, and a number of projects have found success.

While each country is characterized by its own policies and operating environment, the common vein among many attractive mining investment destinations in West Africa is their shared position along the Birimian Greenstone Belt. This geological formation underpins Ghana, Côte d’Ivoire, Guinea, Mali and Burkina Faso; a major source of gold, with approximately 52 million ounces of gold resources discovered to date. Geologically, Côte d’Ivoire is considered the most prospective country by many because, covering about 35% of the belt, it is home to the most significant portion. Equally, while gold output for many countries worldwide is uncertain, the outlook for gold production in West Africa is considered very positive. “While world gold production is expected to decline in the coming years, West Africa continues to be one of the fastest growing regions for gold production in the world,” underlined Richard Young, CEO at Teranga Gold. “There are few regions with this much activity. West Africa produces half of the continent’s gold and is closing in on North America production levels. This remarkable progress over the past 25 years is due to the mining-friendly governments and prospective, underexplored geology in the region. There have been about a dozen projects built over the last five years and, with one exception, they are coming in on time and on budget. They are bitesize but profitable.”

In West Africa, Ghana has led the way in gold mining and still holds first place in the region for gold production – second on the continent only to South Africa. Ghana produced 101.7 tons of gold in 2017 versus South Africa’s 139.9 tons. Among the country’s producers are Newmont, Gold Fields, Kinross and AngloGold Ashanti. However, the country’s high tax burden has stalled many exploration projects and deterred new investors, leading to a lack of greenfield exploration. The country’s skew towards large companies with underground mines and brownfield exploration focus goes hand-in-hand with a mining code that favors companies with larger investment power.

Also a center for gold production, Mali’s 2017 figures came to 49.6 tons. Major investors supporting Mali’s position amongst the continent’s top gold performers include AngloGold Ashanti, Resolute Mining and IAMGOLD. Output last year was also boosted by the initiation of production at B2Gold’s Fekola project. Meanwhile, Burkina Faso has stolen fourth place on the continent, overtaking Tanzania, with 45.5 tons of production in 2017 and 2018 set to be a record year with a projection of 55 tons.

After geological potential, investment incentives and stability play a significant role in attracting investment, as demonstrated in Côte d’Ivoire. However, just as international investors seek solid ground, governments continue to find their footing when it comes to balancing investment incentives with ensuring economic benefit to their respective countries, several tipping the scales towards the latter. Countries with increasingly stable economic and political environments are garnering most investor attention, whilst security risks and uncertainty in others are causing companies to delicately tread the line as they enter “wait-and-see” mode.

Attracting Exploration

After a slump in activity, exploration is on the rise again worldwide, with an increase in spending of about 15% in 2017 versus the previous year, according to S&P Global Market Intelligence. Accounting for more than 70% of this year-on-year increase, gold led the way, followed by base metals. In West Africa, gold’s share of exploration spending sat at 61% in 2017, up from 51% in 2016. However, investor appetite is still a long way off the highs of six or seven years ago. “Most of the lower investment appetite for gold and gold stocks is simply that the value of gold has fallen from US$1,800 in 2011/2012 to just US$1,200 today,” commented Douglas MacQuarrie, CEO at Ghana-focused junior Asante Gold Corporation. “The junior gold market is highly leveraged to the gold price and, while investment leverage is great when the underlying asset is increasing, the converse is painful. The stock charts say it is a great time to pick up your favorite gold shares cheap, but be prepared to hold them for an extended time.”

The impacts of reduced activity have been felt across the value chain, with service companies tied to the sector also suffering a great deal. “The last four years have been tough for all companies involved in exploration, particularly service companies, but we are optimistic about the future,” commented Simon Meadows Smith, managing director at SEMS Exploration Services, a Ghana-based full-service provider to the mining industry. “For the first time since 2013, we can plan with confidence due to the return of the junior explorers to West Africa. We have witnessed a couple of IPOs this year where companies have raised US$4 million to US$6 million on the ASX for early-stage mineral exploration projects in West Africa, which would have been extremely difficult just 12 or 18 months ago. We are confident that this trend will continue for a while. On the back of this upward trend, we are now back in a position where we can expand our field of operation and we are looking to grow the company again.”

Optimistic that this strong growth trajectory will continue, SEMS is keen to focus more attention on Guinea and Côte d'Ivoire and is hoping to replicate its West Africa service offering in the Central African region.

Since investment dollars are in tighter supply than they once were, governments are recognizing the importance of competitiveness beyond the naturally-occurring resources held within their lands. "Global investors have choices,” asserted Jeff Quartermine, CEO at Perseus Mining, an ASX/TSX-listed gold production, development and exploration company focused on West Africa, which poured its first gold at its Sissingué gold mine in in Côte d’Ivoire in January 2018 and has been producing gold at its Edikan mine in Ghana since 2012. “The gold game in West Africa has become quite competitive now, especially in Côte d'Ivoire as a new address for people to explore. Burkina Faso and Mali are big competitors, and even Guinea is starting to get involved."

Whilst investors may turn to countries with a proven track record of successful discoveries, focusing on the same geological trends, after some time the general perception is that the potential for big discoveries is much lower. In more mature mining countries, as seen in Ghana, juniors begin to pursue smaller ounce numbers, playing to their strengths in exploration and taking advantage of leaner cost structures, and on discovery are often quickly taken over by large companies with greater capability and experience in development and production. Nevertheless, while the juniors may pursue smaller ounce numbers, there is a limit. “In this part of the world, we believe that we need close to 1.5 million ounces of inferred resource before it is worthwhile to look at more advanced studies,” outlined Don Dudek, CEO at Savary Gold Corporation, which is focused on two properties in Burkina Faso in a joint-venture agreement with Sarama Resources. “The theory is that a 1.5 million ounce-inferred pit-constrained resource could translate to around a million-ounce reserve which could support mining production of approximately 100,000 ounces over 10 years.”

It is the relatively underexplored countries that are attracting more greenfield exploration activity as investors set their sights on larger returns. Côte d’Ivoire in particular is experiencing a boom in its mining industry, seemingly out of the woods regarding the political instability that had deterred investors in previous years.

Burkina Faso, similarly, is widely regarded as a country with great geological potential. Within West Africa, the landlocked Francophone country was the biggest focus for exploration activity in 2017. For Burkina Faso, however, security risks are a big hurdle for investment and several recent incidents are likely to have shaken investor confidence.

A more recent entry into the investor spotlight is Senegal. Although the country is not new to mining, operating its first phosphate mine since the late 1940s, it has so far not experienced much of the limelight on West Africa’s mining stage.

Other golden opportunities

Although gold has historically been West Africa’s most sought-after and most heavily-exploited resource, market volatility has driven a diversification of interest, both from investors and governments alike.

From the government perspective, having an economy so tied to one commodity is a huge risk. Investors, seeking high returns and stability, will follow opportunities with minimal perceived risk and gold is currently somewhat out of favor with the junior investor community. Battery metals, on the other hand, are receiving a great deal of attention due to projected demand in end-use segments. There has been notable attention on resources such as cobalt and lithium, for example, although share prices are not necessarily reflective of current interest. “Although many lithium companies have dropped significantly in market capitalization, there is a clear disconnect between share prices and the deals that are actually being hunted down in the marketplace,” noted Vincent Mascolo, CEO at IronRidge Resources, an AIM-listed exploration company with advanced lithium projects in Ghana, amongst a portfolio of gold, bauxite, titanium and iron ore projects in West Africa and Australia. “There is a lot of activity and everyone is talking about electric vehicles. However, IronRidge is a bit different as we focus on the stored energy space. Many countries in Africa lack electrification, which is due to transmission costs rather than the source of the generation. The technological development in solar panels and stored energy, combined with LED lighting, has made it much more efficient and it will have a great impact on Africa. We have started a Lights of Africa initiative in Chad for this purpose.”

Underscoring the likely trajectory of the market, Darryl Butcher, project manager at Mali-focused Birimian Limited, commented: “My outlook for the lithium market is very positive, but it is important to understand the market consensus. I believe lithium will go through a period of oversupply between 2019 to 2021, followed by a period of sustained under-supply, based on the assumption that the electric vehicle market expands as expected. While the outlook for other metals involved in the battery design is less certain, lithium will be involved in most batteries regardless. The consensus is that the next step will likely be a solid-state lithium battery that will not involve other metals such as cobalt.”

Other alternative energy resources also have high demand projections. Uranium, for example, while yet to recover from the impact of the Fukushima disaster, is broadly considered to have a positive outlook. “Uranium has always been a challenging commodity, but there are currently approximately 450 reactors in the world with many more being built,” highlighted Stephen Roman, president and CEO at Global Atomic Corporation, which is developing a high-grade uranium project in Niger. “The Americans have the largest reactor fleet, but soon the Chinese will match them, followed closely by India. Nuclear provides a very clean and efficient base-load power… People must understand that new reactors are much safer than they were in the past. Some designs cannot melt down given the new technology and cooling systems… There is a powerful effort by many to shut down nuclear, but common sense has to prevail. Countries need to fulfill their power requirements. China will have 150 to 180 reactors in the next 20 years; every few months they turn on a new one.”

While uranium producers are certainly going through a difficult period, the market outlook is considered positive and, with significant capacity having come offline due to oversupply, juniors should be well positioned to capture demand increases by the time they move through to production.

Enabling Framework

After geological potential, the tax regime is one of the most highly-considered factors when assessing the economic viability of a project. Governments are often at odds with companies over the balance between incentives for the company to operate and economic return for the country of operation. Because the viability of a mining project relies on its economics, a stringent tax regime can quickly render the development of a mine unfeasible. Equally, juniors are less likely to enter a country where they are expected to pay high taxes before making a return themselves.

On the other hand, negative public perception, a source of pressure on the government to secure greater economic return from companies, is often a result of a lack of apparent increase in local and national development and wealth. While in some instances this is due to an inefficiency in reinvestment of funds received through royalties and other taxes, the perception generally leads to efforts on the government’s part to tax more heavily for greater economic benefit. “There appears to be a large gap in the understanding of mineral economics between mining companies and governments,” commented Jeff Quartermaine, CEO and managing director at Perseus Mining, which operates the Sissingué mine in Côte d’Ivoire and the Edikan mine in Ghana and will soon move into construction of its third mine, Yaouré, also in Côte d’Ivoire. “Everybody is under pressure to find funds and when governments approach traditional lenders, like the World Bank or OECD, the advice they seem to receive is to extract more value from the country’s existing resources. There seems to be a belief amongst some politicians, not shared I should say by the companies, that the mining industry is not sufficiently contributing to their host countries’ economic welfare.”

Meanwhile, the industry perspective emphasizes indirect economic benefit, including local employment, and urges consideration for “hidden” taxes such as import duties on equipment and VAT. In countries where exploration activity is not accompanied by tax breaks, juniors are at a disadvantage and investors may be deterred altogether. On the flip side, governments that try to revise tax systems once companies have entered are also at risk of dispute. On the topic of the recent uptick in arbitration cases, Mouhamed Kébé, managing partner at the Senegalese law firm Geni & Kébé, commented: “One of the reasons is that more African countries have new mining regulations and taxes. In many cases, these reforms have impacted existing mining contracts. We are developing more programs in arbitration, and there is a provision under the OHADA system. The OHADA Arbitration Act applies to 17 countries and the Common Court of Justice and Arbitration in Abidjan is seen more and more as the major arbitration center in Africa.”

Investors will tend to stay away from countries with track records of unstable tax regimes or attempts to renegotiate contracts. “Governments must stop thinking of mining companies as having massive war chests, particularly in African countries that are heavily reliant on the junior segment,” asserted Daniel Major, CEO at GoviEx. “Juniors have generally only had enough money to do what they need to do. Many governments have the misperception that these companies have cash to spare, when in fact they work very hard to get what they have and it goes straight into the ground. One aspect that appeals to us in Niger in particular is that the tax code is bound to the mining code. It is in the law. The law also binds both parties, so it is equally beneficial to companies. West Africa’s integrated OHADA law system is also extremely useful.”

As enabling frameworks stabilize in developing mining jurisdictions, investors will gain more confidence that what they see now is what they will be getting over the long-term.

Security

Security can be a major challenge in Africa and, as has been seen in many countries, security profiles can change rapidly with unexpected incidents or, at a broader level, with a change in political regime. Countries that have become more attractive in this regard include Côte d’Ivoire and Guinea, while investors are proceeding with greater trepidation in countries like Burkina Faso, Niger and Mali. “It is worth noting that there are many established smuggling routes in West Africa, of which one branch goes through Burkina Faso and up through Agadez, Niger,” highlighted Philip Whitehead, regional security manager for West Africa at MS Risk, a British company with a strong presence in security and risk assessment and management in West Africa. “A lot of the violence we are seeing is a mixture of straightforward Islamic fundamentalism and violence surrounding the trafficking of drugs, people and consumer goods in one direction and weapons in the other direction.”

Due to the often-vast expanses of uninhabited land and lack of surveillance capability, it is impossible for governments and companies alike to keep abreast of unrest in certain areas and activity at the borders in real-time. Since mining operations tend to be in remote locations, keeping track of potential security threats can therefore be extremely difficult. At the mine sites themselves, companies often have to take major precautions to mitigate security risks, but the underlying problem goes unsolved. MS Risk is trying to address this challenge through its intelligence-gathering efforts, a great deal of which have been translated into the company’s mobile phone application, D-Risk. The app allows companies to view the region, with the option to filter by country, with pinpoints any incident overlaid onto google maps. Companies are able to search their area and also interrogate it and view trends.

In Mali, it was the recent election that caused discomfort in the investor community amid accusations of electoral fraud and anticipation of potential public unrest. The environment does, however, seem to remain settled for now.

Local Expertise, International Standards

When available, international mining and exploration companies look to local service providers, as long as they can compete at the same standards as the international alternatives. Whilst cost is certainly a factor, companies will generally not compromise on quality. “High quality products are the preferred choice in the region and, although the importance of quality may have decreased slightly during the downturn in favor of lower cost products, it has generally been the predominant aspect over pricing,” commented Martin van Gemert, managing director at Mincon West Africa, which primarily supplies DTH products to West Africa and has its local base in Senegal. “Whilst price can be a consideration, our customers generally recognize that higher quality means increased longevity and efficiency, leading to overall cost savings. Therefore, while the initial CAPEX investment may be higher, cost per meter will be lower.”

Mincon is currently looking for distributors that can comply with the company’s standards.

Training has become a major preoccupation for many companies, particularly as new technologies come into play. The major drivers for innovation are safety and efficiency, and many new technologies seek to simplify processes and reduce potential for human error. “We are also seeing a lot of technical development with machinery; automation for example, that is making our drill rigs safer and helps reduce human error,” commented Vincent Gonthier, director of development at Forage FTE Drilling. “Interestingly, these new technologies are entering West Africa at the same time they are arriving in North America and Europe since many companies and distributors are doing business globally now.”

Local content guidelines are outlined by most governments, but when it comes to service providers, many companies are finding benefit in contracting locally.

The overarching trends in the service segment pivot on complete turn-key solutions and reactivity. Many service providers are expanding their capabilities, if they have not already done so, to become a “one-stop-shop” for their clients, responding to the longstanding preference of companies at the end of the supply chain to work with fewer suppliers. In terms of reactivity, fast response times are key in maintaining competitiveness. For many international companies, this means building out warehouse capacity and holding greater inventory in country. Many other companies are responding to demand for fast responses through greater proximity to the client, whether by setting up bases in the main mining regions or at the mine sites themselves.

Equally important are the new technologies coming into play to increase safety and drive efficiency. Automation is being increasingly implemented across different settings primarily driven by these two factors. Predictive maintenance is also gaining momentum to maximize operational output. “Downtime is key in mining operations,” stated Andrew Sarsons, mining director at Burkina Equipements, part of the JA Delmas network of Caterpillar dealers. “A lot of methods used by mines today were not in place 20 years ago. Today the focus is more around driving productivity and efficiency while being cost effective… If a machine goes down and we do not have the part in our inventory, that machine could stand for three weeks. The mining philosophy is “repair before failure”. We work with our customers more and more on planning engine or component change-outs before they fail. With scheduled downtime, we can work with our customers and plan effectively to ensure production targets are achieved.”

Echoing the drive for greater efficiency with new equipment, Boart Longyear’s West Africa division manager, John Madigan, elaborated: “Safety is number one for Boart Longyear. In the near future, we are looking at hands-free handling to take away the risk of injuries and we are using new mechanisms such as our Roller Latch Overshot. We are also using our In Vehicle Monitoring System (IVMS) in every vehicle in West Africa, with a centralized user interface to track any vehicle from our headquarters. They all carry panic alarms, and also send out alarm signals if a driver is speeding, which has reduced safety incidents. We are also implementing lasers in locking systems, so the rotation stops if the laser is crossed.”

Power Generation

Also tying in heavily to the economics of projects is power, which accounts for a significant portion of the cost structure of gold extraction in particular. However, while investment seems to be flowing, projects are still hitting road bumps when it comes to transmission. Andrew Herscowitz, coordinator at Power Africa, an arm of the United States Agency for International Development (USAID), stated: “Some of the biggest challenges for projects when they reach the point of bankability is the purchaser or off-taker. A recent study indicated that only two of 37 utilities in sub-Saharan Africa were actually financially solvent… The question is not whether there is enough deal flow across the continent – they are pretty much on par with anticipated demand for power in most countries. The power will simply not reach industry or the local population if we cannot improve the financial viability of utilities, build out the distribution network and set up transmission lines.”

Power Africa is therefore working on strengthening the enabling environment across Africa to increase the success rate of strong projects with good financial backing.

Renewable energy sources are considered the future for power generation across the continent and have a place in the mining sector too. However, for now, mines will generally require a hybrid solution with the occasional exception of light-load operations. “For most mines, heavy fuel and gas-powered plants are still the priority consideration,” outlined Erik Pretorius, LBU manager – process industries at ABB. “Renewables are a consideration for light-load operations but are unlikely to become an isolated power supply source for the foreseeable future. Rather, they can be used as a complementary energy source. Where ABB is particularly strong is in the establishment and management of micro-grids and building in a renewable power source.”

Nevertheless, as confidence grows and commodities continue along a positive trajectory, mining companies will take a longer-term view to return on investment, shedding a more favorable light on the significant upfront capital required to develop on-site renewable energy capacity. "There has been real progress in power generation, particularly renewables,” highlighted Andrew van Zyl, partner and principal consultant at SRK Consulting. “New sources of power are becoming available and are better understood. SRK is increasingly focused on understanding how to trade off the advantages and disadvantages of various approaches. Public Private Partnership is certainly an option but each situation is unique and the final approach will depend on the location of the mine, not only the country, but proximity to communities, rivers for hydropower, coal and the general infrastructure and regulatory environment."

IAMGOLD’s recently-inaugurated solar facility at its Essakane mine in Burkina Faso is a prime example of the increased interest and viability of incorporating renewables into the energy mix. Synchronized with Wärtsilä’s 55 MW oil-driven power plant, the 15 MW hybrid PV plant will reduce CO2 output by about 18,500 tons and save around six million liters of fuel per year. These kinds of results tie in well with the increasing emphasis on sustainability driven by most mining companies.

Local Engagement; Economic Benefit

Community engagement has become an increasingly integral part of mining operations and, with the right type of practices, explorers and miners could potentially constitute a reckonable force in driving economic development outside of the main cities. Through local employment, training and development of locally-driven industries such as agriculture, the potential indirect economic impact is huge, and companies across the mining value chain are increasingly incorporating local content and finding mutual benefit.

Since mining operations are finite, developing sustainable local activity is crucial in supporting long-term economic development across the continent. In Ghana, locally-owned Atlantic Catering and Logistics is incorporating local agricultural activity into its supply to mine sites. “We are very keen on developing the local communities and have policies in place to support that,” pronounced Maud Lindsay-Garmat, the company’s CEO. “When we move to remote locations, we try to identify local farmers and bring them up to speed and train them to ensure they are employing good practices. If not, we guide them and let them know which products we need so that they can concentrate their farming efforts where there is high demand. For the products that are not available in the local communities, we transport them to the regions at regular intervals.”

Mining companies are also increasingly understanding the importance of building on local competencies and contributing to communities in a meaningful way. Providing a school may seem worthwhile, but without a trained teacher the benefit of the investment will be lost. Over time, training and employing a local workforce will also provide opportunities for local companies. There are many instances whereby a previous employee at a major mining company or service provider branched out to open his own business. Similarly, local companies working with international players are able to learn best practice, benefit from knowledge transfer and raise themselves to an internationally competitive level. It is important for governments to support the development of local companies to international standards, rather than simply impose and enforce local content laws when it comes to service providers. If the local companies can operate to the same level as the international ones, they are naturally competitive and often have other advantages such as a simplified in-country supply chain and greater in-country focus.

The potential for the mining industry to drive development across West Africa is huge if managed sustainably and, as such, it will remain a priority for most governments in the region. Previous deterrents, such as economic and political instability, which are anathema to growth and investment, are becoming less of a concern in many countries across the continent.

Local transformation is one of the greatest opportunities going forward, and currently where the greatest potential value is lost for many West African countries. Most of what is produced locally is exported before much value addition occurs. In more mature mining countries such as Ghana, there are some plans afoot to develop downstream activity in country, including a planned refinery at the site of the Precious Minerals Marketing Corporation in the next few years.

Long filled with promise and recognized geological potential, investors are recognizing West Africa’s potential as a destination for mining investment. The growing focus is on less-explored countries such as Côte d‘Ivoire and Burkina Faso, particularly as success stories continue to unfold. Planned infrastructure development, a newfound political stability and government receptiveness to the sector suggest that the favorable business environment for mining will be sustained well into the future.