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Peace at Last: Eritrea and Ethiopia have ended one of Africa's longest and bitterest conflicts, opening the Horn of Africa to new mining possibilities.

Events moved quickly. In May, Ethiopia gained a youthful new prime minister, Abiy Ahmed. Within three months, the 42-year-old Ahmed had made peace with Eritrea and settled border disputes that straddled vast potash deposits.

For 20 years, the countries fought a border war that claimed as many as 100,000 lives. Ethiopia was cut off from the Red Sea, and Eritrea sealed itself off from the rest of the world. Right next door, Somalia lived on as a failed state, another no-go for all but the most intrepid explorers.

Ahmed has also since brokered deals with Somalia's various enclaves to secure at least four port projects along the Indian Ocean coast.

"What is happening in Ethiopia right now could be one of the most significant shifts in government policy that this region has seen for decades," said Christopher Hockey, head of information at WS Insight, a Mauritius-based and Africa-focused security company. "The significance of an improved relationship with Eritrea are self-evident, recent talks with Somalia are also extremely important," Hockey said.

But it is the peace agreement with Eritrea that is especially significant, Hockey said. The relationship between the two nations that share ethnic bonds had become as ferocious as that between North and South Korea. "These are two countries that have historically held significant animosity toward one another, animosity that is most vehemently expressed by civilians of the two nations," Hockey said.

For the mining sector, Eritrea is a tantalizing target, and already firms are moving. In July, Canadian Lundin Resources ended nine months of buyout talks with fellow Canadian Nevsun Resources, and launched a hostile C$1.4 billion take over bid instead. Nevsun's main asset is Eritrea's only commercial mining operation, the Bisha gold and copper producer in the country's hinterland. The mine is currently majority owned by Nevsun, in partnership with the Eritrean government. It cost an initial $250 million to build and opened in 2011. Bisha now consists of 10% of Eritrea's GDP, according to the World Bank.

Eritrea has a lot more untapped resource potential, including vast potash resources--a crucial element in modern fertilizers. Whoever owns Bisha will have a head start in future mineral licenses, but potential suitors will have to move fast.

The need for speed is mainly why the Lundin board opted to go hostile, after failing to convince Nevsun executives to accept their initial offer of C$1.4 billion.

"After having made a series of proposals and observing significant recent changes in the political landscape related to Eritrea, we have determined that the best course now is to make an all-cash offer directly to Nevsun shareholders," Paul Conibear, CEO of Lundin, said.

Bisha is a large, high-grade volcanogenic massive sulphide deposit located 150 kilometers (km) west of the Eritrean capital, Asmara. The government holds a 40% stake in the mine--10% acquired as free carry, but the other 30% paid for.

"They took a loan to buy the stake, so they have skin in the game," Frazer Bourchier, former Nevsun COO, told E&MJ several years ago at the African Mining Indaba in Cape Town, South Africa. "The key is risk management and cost control. With Bisha, it's not about how much money is in the ground with such an exceptional deposit, rather it's about how much money can be produced efficiently for the benefit of all stakeholders."

As for Nevsun, its board has urged shareholders to turn down the offer. "The board unanimously recommends that Nevsun shareholders reject the hostile bid and not tender their shares," the company said in a statement.

Potash Potential

Apart from Bisha, Eritrea is almost entirely dependent on agriculture for economic growth. Other mining companies are also now looking at setting up operations.

Australian firm Danakali has toiled for years to drum up investor support for its proposed 1-billion-ton-per-year potential potash mine that straddles the border between Eritrea and Ethiopia.

There is enough potash available to keep the operation, named Colluli, going for two centuries according to Danakali's investor prospectus. The mine will cost around $900 million to develop.

In July, a couple weeks after the peace agreement, Danakali tested the waters with investors by listing it on the London Stock Exchange. Projects like these are usually regarded as high-risk investments, but Danakali has the advantage of the region's conflicts coming to an end.

Danakali also signed an offtake agreement with EuroChem Trading for a minimum of 87%, and up to 100% of the sulphate of potash production from Module 1 of Colluli. The key terms of the offtake agreement include that EuroChem will take, pay, market and distribute up to 100% of Colluli Module 1, said Bell Potter analyst David Coats in a note to clients.

"The binding offtake agreement is a major milestone and bolsters Danakali's case to potential project financiers," Potter said. "We see it as a major de-risking event for the funding and comercialization of the Colluli project, supported further by the London listing."

Logistics Evolution

The ending of the war has also drastically shaped logistics. Previously, the port enclave of Djibouti was the only access to the sea for landlocked Ethiopia. More than 95% of goods going in and out of the country do so via Djibouti.

A brand-new Chinese-funded rail line has now opened between Addis Ababa and Djibouti, cutting a three-day road journey to just eight hours. It is unclear as of yet, if the rail line will be useful for transporting bulk ores, as it is dedicated to container freight. This is unusual since most-recent rail linkages around Africa are designed to move bulk.

However, containerized ore has been done before. Bisha itself uses sealed containers to move copper concentrate to Eritrea's Massawa port. These are stacked warfside until a bulk vessel arrives, then using a rotator system, the containers are lifted and tipped into the vessel, after which returned to the mine.

Ethiopia, meanwhile, is eager to develop its own mining industry. Until now, it's depended on small-scale gold and opal production. The country does have proven reserves of platinum, niobium, tantalum, nickel, cooper, chrome and manganese, among others.

"We are the fastest growing economy in Africa, but we cannot hope to keep this up if we only depend on agriculture," said Motuma Mekassa, formerly mines minister but now moved to key portfolio of defense. Speaking on the sidelines of a mining symposium in Cape Town earlier this year, Mekassa said the country had begun setting itself up to become a modern, diverse economy.

"We see mining as a way to diversify our economy, and will play a great part in our future development," Mekassa said.

Ethiopia has a single large-scale gold mine, Lega Dembi, in the southern area of the country. This is owned by Mohammed International Development Research and Organization Companies (Midroc), a company that belongs to Saudi-Ethiopian billionaire Mohammed Hussein Al Amoudi.

Al Amoudi is enormously influential in Ethiopia, but recently had his wings clipped when Lega Dembi had its license suspended following violent protests by locals living around the operation. Al Amoudi was close to the ruling faction that ran Ethiopia for the past three decades. However, the new prime minister appears to be building his own relationships, especially with on-the-ground communities. It is possible that Lega Dembi's license will be reviewed and calls for applicants issued.

Al Amoudi, incidentally, was one of the hundreds of wealthy Saudi citizens arrested in a government roundup last year in the country, ostensibly for corruption and tax evasion.

Among the more promising projects are East African Metals' two gold projects located in the far north Tigray of the country. Both are near the Eritrean border, not far from the Bisha mine across the frontier.

According to East African Metals' prospectus, it expects to achieve an average metal production of approximately 17,800 ounces per year (oz/y) of gold and 57,250 oz/y of silver. Open-pit mining will be the method of extraction, using drill blast, shovels and trucks. Around 715 metric tons per day (mt/d) will be extracted, using two-stage crushing, heap leaching, and Merrill Crowe technology.

Although the company has yet to say so, it is likely that its export route will be north across the newly opened Eritrean border, rather than the longer route south toward Djibouti.

License Revoked

Less certain is the fate of the Danakil Potash project (not to be confused with the Danakali project across the border in Eritrea), concessions that cover approximately 312 [km.sup.2]. The project was initially developed by Canadian junior Allana Potash, in the northeastern Danakil Depression. As the name suggests, it is contiguous with the Danakali project in Eritrea.

Allana sold its concessions to Tel Aviv-based Israel Chemicals in 2015. ICL was intending to complete the development at a cost of around $650 million, but by 2016, ICL had run into a dispute with the government over what ICL calls an "illegal tax assessment, and a failure to provide infrastructure."

ICL has since filed a $200 million lawsuit in The Hague International Arbitration Court, the Netherlands. The Ethiopian government, meanwhile, has taken over development, although it is unclear how or if the deposit is close to full production.

It is possible the new leadership in Addis Ababa will want to bring the dispute to a quick resolution. A key to understanding Ethiopia is its military, which is the largest force in Africa at more than 100,000. The military has itself buried deep in the country's financial infrastructure, including the managing of multiple businesses, through the blandly named Metals & Engineering (Metec) company.

Metec was doubtless behind the engineered dispute with ICL, since it also owns potash and chemical production plants that would benefit from the Danakil project. But Ahmed has also moved to shake up Metec's board of retired generals and appoint civilian overseers. At the same time, he has begun yanking other projects such as a sugar farm from Metec.

"Ahmed has been able to announce these reforms because of the changing dynamics within the ruling coalition," said Barnaby Fletcher, senior analyst, Southern Africa, at specialist global risk consultancy Control Risks. "Many of the seemingly dramatic reforms announced by Ahmed are little more than obvious solutions to the challenges Ethiopia is facing."

Somalia Saga

Somalia remains the outlier in the region. The country remains governed by a fragile federal government, with limited influence outside the capital Mogadishu. Currently resource activities focus on offshore oil and gas, mostly.

An exception is Somaliland, a breakaway region in the north that declared independence from the greater Somalia. Somaliland is relatively stable and for the region, prosperous. It has failed to achieve international recognition, but this could change as it continues to set itself apart from the instability of Mogadishu.

Somaliland has aggressively courted investment, especially in oil, gas and mining. It has a Ministry of Mines and Minister Hussein Abdi Dualeh, who is a regular visitor to international events such as the Mining in Africa Indaba. Recently, he hosted a mining event in Dubai to drum up support for an independent onshore resource industry for Somaliland.

Somaliland's growing ties with the United Arab Emirates are a strong endorsement of eventual independence. Recently, Dubai-based DP World, the largest port operator on the globe, signed a deal to develop a full industrial harbor on the Somaliland coast.

Should it become independent, Somaliland would be a solid exploration destination with deposits of gold, iron, tantalum and others.

By Gavin du Venage, South African Editor

Caption: The Bisha mine, a gold and copper operation in Eritrea, is now the target of a hostile takeover bid by Canada's Lundin Resources (Photo: Nevsun Resources)

Caption: Source: NYSTROM Herff Jones Education Division.

Caption: Ethiopia's changing politics have made much-needed reforms possible, says Control Risks analyst Barnaby Fletcher. (Photo: Control Risks)

Caption: A new rail link between Ethiopia and Eritrea cuts travel time from three days to eight hours. (Photo: Turtlewong)

Caption: Eritrea and Ethiopia have ended generations of conflict, says WS Insight analyst Christopher Hockey. (Photo: WS Insight)
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Title Annotation:HORN OF AFRICA
Author:du Venage, Gavin
Publication:E&MJ - Engineering & Mining Journal
Geographic Code:6SOMA
Date:Sep 1, 2018
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