Patrick Werr: Egypt must ease rules to benefit from plentiful mineral resources

Investors complain that the government’s terms do not ensure enough profit to justify the risk of setting up expensive operations, writes Patrick Werr.

Egypt is almost certainly sitting on huge mineral resources, including gold, silver, zinc and copper, but it has been having a devil of a time attracting companies to explore for them, let alone start production. Investors complain that the government’s terms do not ensure enough profit to justify setting up expensive operations with a long payback period.

The government needs to listen to them.

Egypt has largely neglected its mineral potential since the great nationalisations of the early 1960s, despite dramatic advances in extracting technology in other parts of the world.

The country organised mining concession bid rounds in 2006 and 2009, but miners say the response was tepid at best.

Companies that won concessions were required to form joint ventures with the government in a production-sharing agreement, with the government getting 50 per cent of all revenue straight away. On top of this, companies typically had to give the government a royalty of 3 per cent of production and pay a small rent on the land.

This is akin to the formula Egypt uses for oil and gas concessions, a model mining companies say is not appropriate for their line of business. Oil and gas typically require a large initial investment, but then costs drop off dramatically once a discovery is made and brought into production.

Mining, on the other hand, not only requires a large initial investment, but also high continuing costs even after a mine is developed. Normally, mining companies exploit the richest and most easily accessible ore near the surface, but as time goes on they are required to dig ever deeper. If they eventually go underground, costs can soar.

Because oil company costs tend to be front-loaded and mining company costs backloaded, miners argue that Egypt should abandon the profit-sharing model altogether for a simpler and more flexible system of tax, royalties and rent, similar to that used in successful mining countries such as Australia, Tanzania, Mexico and Peru.

They would also like Egypt to provide longer periods for exploration and other incentives.

During the 2006 bidding round, investors took eight of the nine concessions on offer, and in 2009 round five of the seven on offer. But companies later abandoned several of these concessions as infeasible. Among listed stock companies, only two, Centamin and Alexander Nubia, are now either producing gold or exploring for it in Egypt. Egypt’s first and only large-scale gold mine, Centamin’s Sukari mine near Marsa Alam, began producing in 2009 and last year earned US$508.4 million in revenue.

The Eastern Desert and Sinai are scattered with more than a thousand ancient mining sites, and with better terms companies would race to explore the land around them for deposits that were out of reach for extraction techniques used in antiquity.

If more mining companies were to enter Egypt, the government would not only collect more profit and royalty revenue, but would also be able to tax the wide range of service companies and other businesses that would inevitably spring up around them.

These businesses would also reduce the costs of operating mines, since they would be able to take advantage of scale. In Peru, more than 100 mining companies are now operating.

Had Egypt adopted a more investor-friendly model 20 years ago, it would have been able to ride the wave of China’s great expansion in mineral consumption. It is now coming late to the game.

Egypt’s mineral resources authority, under the oil ministry, has been compiling geographic data and putting together commercial terms for a long-delayed bid round for concessions for mining gold and associated minerals, although it has not announced a date. It is believed around eight areas will be on auction.

The government seems aware it needs to change its terms. In late 2014 it passed a new mining law designed to simplify procedures. The cabinet’s economic committee on Monday reviewed possible amendments to the mining law’s executive regulations to encourage “people dealing in mining and quarries”, Al Mal newspaper reported, without giving more details.

Many Egyptians are deeply suspicious of foreign companies getting wealthy by exploiting Egyptian gold deposits.

But if the government were to limit its role to that of regulator, promoter and overseer, with proper royalty and tax systems that are competitive with concessions in other countries, it should be able to greatly increase its own revenue while making the business worthwhile for investors. The country must compete with the rest of the world for scarce investment dollars.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

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