Patrick Werr: Egypt digs itself a hole with new mining bid rules
Imagine, if you will, the sight of hundreds of prospecting companies fanning out across the Red Sea mountains and the Sinai, tracking down the vast reserves of gold, silver and copper that the Pharaohs could hardly have imagined might be below the surface.
Then picture the world’s most sophisticated mining companies rushing into snap up the reserves uncovered by these prospectors, creating a whole new industry employing tens of thousands and pouring streams of revenue into government coffers.
Unfortunately, it’s a scenario unlikely anytime soon, given the terms and conditions the Egyptian Mineral Resources Authority (Emra) laid down in its mining concessions bid round that opened on Sunday.
That Egypt sits on substantial mineral deposits is well established. The only big company that has managed to navigate the country’s intricate mining laws and open a mine, LSE-listed Centamin, produced a good 12 tonnes of gold last year. The ground under more than a thousand other ancient Egyptian gold-mining sites has yet to be explored. The geology is off the charts, with potential for zinc, tungsten, molybdenum and titanium, as well as lithium, now all the rage for batteries.
Emra offered five blocks for exploration and exploitation – four in the Red Sea mountains east of Luxor and one in Sinai near Dahab. The blocks are huge, ranging from 248 to 1,583 square kilometres, compared with the 10 or 15 square kilometres typically offered elsewhere.
Emra is charging US$1,000, payable in US dollars, for the financial terms and conditions and another $5,000 for the technical data on each block. If you are considering bidding on all five blocks, you will have to buy the same $1,000 terms and conditions document five times. Companies have until April 20 to submit bids.
If Emra is trying to entice investors to explore for minerals, you would think it would not only be providing this information for free on its website but also aggressively organising roadshows around the globe.
Next, Emra is requiring each company to put up a $50,000 six-month bond to submit a bid. In these bids, it must specify how much it plans to invest over the course of the eight-year concession. If the company wins, it must put up a bank guarantee equal to 10 per cent of its planned investment as a performance guarantee, a requirement imposed by virtually no other country.
There are a whole host of other upfront costs that not only make Egypt unattractive to investors but will certainly lower the government’s long-term revenue as well.
A winning company will also have to pay three additional “bonuses”. Its bid must specify the amount it is willing to pay as a “signature bonus” before it signs the concession agreement. It must specify how much it is willing to pay as a “development lease bonus” before it begins building an actual mining operation.
And finally, it must pay an upfront assignment bonus of $1 million.
May I point out here that a company might find it difficult to know how much to spend developing a site it has barely set foot on, let alone carry out a surface survey or drilled a single bore on.
After that, the company must pay Emra a “training fee” equal to 2 per cent of its annual exploration budget. Once it begins production, it must pay the Finance Ministry a royalty of 5 per cent of gross production and Emra another royalty of 1 per cent for “social development”. Other countries typically charge a royalty of 3 per cent. Mexico doesn’t demand a royalty at all.
All this for a maximum of eight years of exploration, with no provision for renewal, in a business where it can take up to 15 years or more to establish that a site is commercially viable.
Emra also demands that the exploration company chart out a very specific work programme in three phases over the eight years, including how many explorator y holes, tranches and studies it will make, again before it has had much of a look at the land.
Once production begins, the company must then share half its profit with Emra, which also demands the first right to purchase any gold produced.
The problem with this is that most exploration companies are tiny and their costs tend to continue throughout the life of a project. A typical company might start out with a capital of $3m, then constantly have to go back to the market to raise more capital based on the results of their exploration.
A better approach would be to treat them as venture capital companies, most of which will eventually fail. Try offering them a one-year reconnaissance licence and letting them choose which areas to explore. They don’t need such large concession areas. Eliminate as many of the upfront costs as possible to attract as many exploration companies as possible. Abolish the joint ventures and production-sharing agreements with the government and extend exploration and exploitation periods, up to 30 years perhaps.
The government should aim to maximise revenue over the long term, through rent, royalties and income tax, rather than grab a few dollars in the short term. It is an easy fix.
Patrick Werr has worked as a financial writer in Egypt for 26 years
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Published: January 18, 2017 04:00 AM