Is aluminium the new gold?

It seems that Cameroon might at last be able to break the vicious cycle of shortage of power preventing industrial growth and lack of industrial growth discouraging investment in new power plants. Rio Tinto aims to expand its aluminium smelter and this can have far-reaching effects on the economic growth of the country, as Neil Ford explains.

**********

Cameroon has long been recognised as having one of the most diverse economies in Central or West Africa. Agriculture, services and even the relatively modest oil sector all make a large contribution to GDP, while Douala boasts a significant industrial and manufacturing base.

[GRAPHIC OMITTED]

Yet industrial production has long been held back by a lack of electricity supplies, while investment in new power plants has been deterred by the lack of a guaranteed market for its output. Now, however, mining giant Rio Tinto has put together a proposal that could solve both problems at the same time.

The biggest industrial concern in Cameroon at present is the Alucam aluminium smelter at Edea, close to Douala. It was developed by French firm Pechiney, which held a 46.7% stake in the venture until it was taken over by its Canadian competitor Alcan in 2003.

The Canadian firm was bought by Anglo-Australian mining giant Rio Tinto in November last year and the new Rio Tinto Alcan now operates the plant, with the government of Cameroon retaining its own 46.7% share in Alucam.

[ILLUSTRATION OMITTED]

Alucam is currently supplied by bauxite imported from Guinea but the company's successive operators have all hoped to boost production capacity of 87,000 tonnes a year by developing proven bauxite reserves within Cameroon itself.

The bauxite is processed into alumina, which in turn is used to make aluminium and Cameroon would be able to retain more of the economic benefits of the industry if it was able to host all stages of the production process.

Some reserves have been identified in the west of Cameroon but interest centres on the 900m tonne Minim Martap and 200m tonne Ta Ngaoudal reserves, both in Adamaoua Province.

The Edea smelter consumes about 45% of total power output in Cameroon, so boosting production capacity to 300,000 tonnes a year, as planned by Alcan, would certainly require new generating capacity. The government has tried to attract foreign investment to exploit its scattered gas reserves for use in a gas-to-power project but interest has been limited. The most likely source of new electricity has been the hydro sector, with the Lom Pangar, Nachtigal and Memve'ele schemes all likely options.

Cameroon's power sector has been in the hands of AES SONEL since US firm AES Corporation bought a majority 56% stake in power utility Societe Nationale d'Electricite de Cameroon (SONEL) in 2001.

The company has developed the 85MW Limbe thermal power plant but most electricity is supplied by the 384MW Song Loulou and 263MW Edea hydro projects.

British emerging markets investor CDC has agreed to develop the 200MW Memve'ele scheme on the Ntem River but output from this plant is likely to be mainly absorbed by AES SONEL's ambitious rural electrification programme of connecting 50,000 new homes to the national grid every year for the next decade.

Power tariff negotiations

Rio Tinto Alcan has been quick to follow up Alcan's original proposals and appears ready to invest in expanding the Edea smelter. The environmental impact assessment (EIA) and technical study are in place and the company is now in talks with AES SONEL regarding a power purchase agreement (PPA), although this appears to be far from a formality.

Aluminium smelting uses so much electricity that exporting aluminium is often equated with exporting power. As the recent problems over another Rio Tinto aluminium plant, in South Africa's Coega industrial zone, have demonstrated, the PPA is often agreed at close to--or even below--the price of production.

Any PPA with AES SONEL will undoubtedly offer electricity tariffs at below residential or even usual industrial rates but the position in Cameroon is very different to that in South Africa.

AES SONEL is partly privately owned, unlike South Africa's Eskom, which is a parastatal, and so may be under less pressure to agree terms. However, both countries will gain significant employment and additional industrial capacity through the construction of a new smelter, so the government of Cameroon could use its stake in AES SONEL to ensure a deal is reached. If as expected pen is put to paper, a 330MW hydro scheme will be developed at Nachtigal. In addition, another hydroelectric venture could be developed at Lom Pangar that could provide electricity for both general and smelting use.

Lom Pangar is particularly attractive as the government predicts that the water held in its reservoir could be used to maintain flows downstream, boosting dry season generating capacity at the existing Song Loulou and Edea schemes by up to 216MW.

Moreover, Rio Tinto Alcan has signed a preliminary development agreement with the government of Cameroon for the development of a new aluminium smelter with production capacity of 400,000 tonnes a year, plus a 1,000MW hydro scheme at Songmbengue on the Sanaga River that can be used to supply electricity and water to the new plant.

Jacynthe Cote, the chief executive and president of Rio Tinto Alcan Primary Metal, said: "What we are seeing today are the results of the long and prosperous collaboration between Rio Tinto Alcan and the government of Cameroon. This is a promising project that will have a positive impact for all stakeholders."

Pre-feasibility and technical studies for the smelter and hydro scheme are planned for this year, with the final investment decision due some time next year. If Rio Tinto Alcan and AES SONEL can reach a PPA then Cameroon's aluminium sector is set for massive expansion. Current production capacity of 87,000 tonnes a year contributes about 5% of GDP, so a combined 700,000 tonnes a year would represent a huge share of national economic activity. However, it is vital that the new and expanded smelters are not developed at the cost of providing electricity to other homes and businesses across the country. Smelting may be worth a lot in terms of GDP but it creates relatively few jobs and so may not benefit the economic fortunes of many Cameroonians. As long as the various dam projects are developed to provide electricity to both Rio Tinto Alcan and the national grid in general then this investment will be deemed an economic success.

RELATED ARTICLE: Nigeria

Nitel woes continue

Nigerian telecoms reform has been thrown into turmoil by the apparent failure of the divestiture of state companies Nitel and Mtel. A 51% stake in both companies had been sold in August 2006 to a Nigerian consortium, Transnational Corporation (Transcorp), which was supported by former president Olusegun Obasanjo and secured several other state assets during the final years of his second term of office. Nitel was the state owned landline monopoly, while Mtel was its mobile offshoot.

A spokesperson for the federal government, which retains a 49% share in both companies, said that too little progress had been made on improving the performance of the two companies and so the sale of the majority stake to Transcorp had been cancelled.

A spokesperson for Transcorp gave the company's initial response to the move: "Ironically, the purported reversal comes at a very crucial period of Transcorp's efforts at revitalising both organisations. We are certain of an amicable settlement of this challenge in our favour."

However, after several days of negotiation, it appears that Abuja and Transcorp have agreed a new investor in Nitel and Mtel is required. In a joint statement, they announced they would sell part of the respective equity shares to allow a new company to take the lead on overhauling telecoms services. They will therefore seek "a new core investor that is an industry player with the requisite focus, technical expertise, managerial experience and financial capacity". It remains to be seen whether the current Nigerian investors will be reimbursed for the $500m they paid for their 51% stake and for any investment made in the interim.

[ILLUSTRATION OMITTED]

The Nigerian government originally began the process of selling off Nitel shortly after Obasanjo came to power and the privatisation was repeatedly delayed and reformulated.

Orascom Telecom of Egypt, which bid $265.5m for a stake in Nitel in 2005, seemed to have a realistic assessment of the problems and solutions of the Nigerian telecoms sector but its offer was rejected.

Last November, the Senate Committee on Communications warned Transcorp that it was struggling to turn the fortunes of the two firms around. In a statement, the committee argued: "Nitel is the nation's gateway in the communication sector of the economy and must not die."

The company's initial public offering (IPO) last year was deemed a failure as it attracted too little interest. Many had expected President Umaru Yar'Adua to be heavily influenced from behind the scenes by Obasanjo but this does not appear to have been the case, at least with regard to the privatisation of some key state companies.