Protectionist Mining Code in Guinea Highlights African Sovereign Risk

Wednesday, 21 September 2011

Background

In mid-September 2011, lawmakers in the West African republic of Guinea passed a radical new mining code, to increase government ownership of mining operations. Prime Minister Mohamed Said Fofana argued the legislation will curb corruption and stimulate development in the impoverished country. Analysts and mine operators, however, argue that the new laws are restrictive and may halt planned investment.

Comment

Guinea is the world’s leading exporter of the aluminium ore, bauxite. It also holds more than four billion tons of iron ore, drawing in significant capital investment, and has large unexploited gold and diamond deposits. The country’s human development indicators, however, are among the worst in the world; mining and resource investment has scarcely benefited the nation’s ten million people. In December, Prime Minister Fofana’s democratically-elected government ended the authoritarian and military rule which has blighted Guinea since independence in 1958. The government rose to power on a platform proposing mining sector reform.

The new mining code, enacted into law last week, will give the state a 15 per cent ownership of mining projects, with the option to purchase an additional 20 per cent. Customs duties will rise to eight per cent from 5.6 per cent and accountability will be strengthened, as companies will be forced to conduct rigorous impact studies. 

Russian mining giant, United Co. Rusal, the world’s largest manufacturer of aluminium, criticised the changes and said investors would find it “senseless” to agree on new projects in the country. Australian mining companies, and those with significant interests in Australia, shared these sentiments. BHP Billiton raised doubts over the future development of its Nimba iron ore deposit and the BBC reported that Rio Tinto, another major investor in Guinea, expressed concern over the onerous mining code, saying it could cost the company an extra $10 billion.

Regionally, analysts suggest Guinea’s neighbours may seek to replicate the law. Africa has a number of resource-rich, yet cash-poor, states that may find inspiration in Guinea’s assertive approach. Stakeholders in the resources sector should be concerned by the potentially arbitrary nature of African markets in the years ahead. 

Analysts have suggested that, ultimately, mining companies may be forced to accept the protectionist mining code. Were existing players to exit the market, Guinea’s large reserves of bauxite, gold, iron ore and diamonds would present an attractive opportunity that other mining companies may exploit. The Australian mining sector, however, is well placed to fill the niche created by pressures in Guinea. Australia has the second largest bauxite reserves in the world and significant market capitalisations of iron ore, gold and diamonds.

In this context, with the Guinea issue highlighting the sovereign risks of African resource investment and mining, it is imperative that Australia markets its comparative advantages of low sovereign risk and an amiable business environment, to the states and companies driving demand.

Conversely, Australia’s position as a responsible stakeholder in the international development environment could be bolstered by providing Guinea, and other African states, with policy advice and expertise. This would help to ensure that the opportunities presented by their mining sectors are more fully realised and translate to greater opportunities for the population. An Australian presence in Africa would serve to promote Australia’s reputation in the region and provide future economic opportunities, such as joint venture projects. 

Liam McHugh

Strategic Analyst

Northern Australia and Energy Security Research Programmes

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