New roadmap for Nigeria's mining industry

Mining is big business in Africa and a cornerstone of many national economies. It accounts for a quarter of GDP in the Democratic Republic of the Congo, and in Botswana the figure has been as high as 40%. Yet despite the huge potential for deposits of precious metals, base metals, coal and iron ore, the Nigerian mining sector contributed only 0.3% to GDP in 2015. Over the last 10 years, attempts to boost private investment in exploration and mining through regulatory changes have fallen flat, but the recent slowdown in the Nigerian economy has brought into sharp focus the need for greater economic diversification. “We are a mineral nation but we are not a mining nation,” Kayode Fayemi, the minister of mines and steel development, said in Abeokuta in March 2017. “In the 1970s mining contributed 50% to the country’s GDP, so what went wrong?”

Oil Focus

The short answer to Fayemi’s question is that the country discovered oil. Since their discovery in the 1950s, the hydrocarbons reserves of the Niger Delta Basin have become a central driver of the Nigerian economy, attracting investment and talent to form an essential part of government revenues. “The country has focused on the oil sector for over 50 years to the detriment of the mining industry,” Ayedun Fasina, CEO of local firm Multiverse Mining and Exploration, told OBG. “Today in Nigeria, technical ability in the mining sphere is scarce, both in private companies and government institutions. There has been very little exploration for gold, base metals and other minerals. However, the potential of the country is well known and once the focus shifts to mining, development will begin.”

Slow Decade

Attempts to modernise the Nigerian mining industry and attract private investment began in 2007 with the introduction of the Nigerian Minerals and Mining Act, which aimed to set the rules for the exploration and exploitation of solid minerals. The law stated that the government owns all the country’s mineral resources, established a mining cadastre office, set the rules for the bidding for exploration and exploitation licences, and named mining a national interest with priority over other land uses.

In 2011 the government released new mining regulations to establish greater accountability in the sector, reducing the discretionary awarding of titles. Today, exploration firms can obtain a non-exclusive reconnaissance permit for a period of one year for non-drilling prospecting activities. An exploration licence for areas no greater than 200 sq km allows firms to conduct drilling and other activities for a period of three years, with two opportunities to extend the permit for two more years. To develop mines, firms can apply for a mining lease for a period of up to 25 years, with the option to renew for another 25 years. For both exploration and mining titles, the Mines Inspectorate Department of the Ministry of Mines and Steel Development (MMSD) sets minimum work requirements for licence holders.

Despite these reforms, Nigeria failed to attract large-scale foreign investment, while neighbouring Côte d’Ivoire became an attractive site for exploration firms – such as those listed on Canadian, Australian and UK stock markets – to search for precious and base metals. Nigeria has consistently been among the lowest-scoring African countries in Canadian think tank the Fraser Institute’s “Annual Survey of Mining Companies”, which reviews global mining jurisdictions and their attractiveness. In recent years it has failed to collect sufficient data to provide an accurate score for Nigeria.

“The 2007 act and the 2011 regulations put in place a competitive framework to attract private investment,” Fayemi told OBG. “However, what we discovered is that the framework alone is not enough; we need greater government investment and focus on the mining industry. That new focus is set out in the 2016 roadmap.”

Roadmap

A product of the MMSD, the Roadmap for the Growth and Development of the Nigerian Mining Industry was adopted in September 2016. By 2025 the document envisages a Nigerian mining industry worth $27bn in direct and indirect contributions – a figure that would represent around 3% of GDP by that date – and over $5bn in new investments in the intervening years.

To achieve this, the strategy reinforces many of the principles established under previous legislation, such as the possibility of 100% foreign ownership of projects. Still, there are a number of policy amendments involving administration tasks and financing commitments. One major change is the establishment of an independent “super-regulatory agency” that would merge the Mining Cadastre Office, the Mines Inspectorate Department and the Mines Environmental Compliance Department. The new agency would be separate from ministries, in a role not unlike the Nigerian Communications Commission, which oversees the telecoms industry.

The expectation is that a unified agency will improve responsiveness, accelerate the permitting process and provide greater accountability. “What distinguishes this roadmap, which builds on the old roadmap that was approved by the council in 2012, is its determination to set up an independent regulatory agency that investors have been insisting on, and the ministry – which has been serving as facilitator – should not be the one that regulates them,” Fayemi told local media at the launch of the roadmap in August 2016. In addition, the development of the plan will be boosted by the October 2016 decision to create a N90bn ($318.1m) solid minerals intervention fund, with the aim of financing geological data collection, mine security and monitoring activities.

Clear Priorities

Another key feature of the document is the formation of short-, medium- and long-term targets, and the prioritisation of certain segments and minerals. The first phase of the overall strategy is to replace imported construction materials such as cement, asphalt and bitumen with those from local quarries. The second phase aims to develop metal ore exploration, production and processing capacity, while the final phase is to reintroduce Nigeria to global mining export markets at a competitive price point.

Among the key steps to be taken before the end of 2018 are establishing the new super agency, expanding access to Nigeria’s geoscience data and increasing financial participation in the industry. Over the next five years policy goals include filling gaps between federal and state mining legislation, introducing an incentive programme to attract foreign junior and major mining companies, and developing the human capital required to staff and regulate the industry. Longer-term goals – to be tackled in five to 10 years – include driving the export of value-added minerals through refining processes, establishing a local metals exchange and expanding the infrastructure for mining projects.

Deposits

The level of detail contained in the roadmap and its precise ambitions are encouraging, but sustained government support will be essential to its implementation. Gbenga Okunlola, chairman of the Mining Implementation and Strategy Team, told local media, “The government has to play not just regulator and mediator, but kick-start the sector, make it attractive and create the right environment. It must have a governance structure, ensure a level playing field, make the sector conducive in terms of availability, reduce tensions in relation to ownership of licences and create an atmosphere where foreign investment can come in.”

The government has identified 44 types of commercially viable minerals in the country and earmarked seven as strategic minerals for priority development: limestone, barite, iron ore, bitumen, lead, zinc and gold. One key strategy for boosting investor confidence in the mining industry is to focus on construction materials quarrying, an area where the government and local players already have significant experience.

According to the roadmap, Nigeria has 568m tonnes of proven reserves of limestone – an important ingredient in cement – and potential total reserves of 2.3trn tonnes, yet only 11m tonnes are quarried annually. In addition, there are 1.1bn barrels of proven bitumen reserves with up to 27bn barrels of total reserves, highly concentrated in Ondo State, yet the country imports most of its bitumen for road construction from Venezuela and Canada. Meanwhile, barite, an important ingredient in drilling fluids used by the country’s oil and gas companies, is domestically produced at a rate of 20,000 tonnes per year. Proven reserves stand at approximately 100,000 tonnes and total reserves could be as high as 15m tonnes.

“A major short-term goal of the MMSD is to boost industrial mineral production to allow them to be processed and sold as feedstock to domestic industries, reducing the current dependence on imports,” Fayemi told OBG. “The cement industry could benefit and we have the resources to become self-sustaining in this key material.” The national government awarded a licence for bitumen exploration to Ondo’s state government in July 2017, with Fayemi stating that the reserves in the area could serve all of Africa.

Coal

Prior to the discovery of major crude oil reserves, Nigeria’s substantial coal deposits were the main source of fuel for the country. According to data from the US Energy Information Administration, Nigeria was producing just short of 200,000 tonnes of coal per year in the early 1980s. By the turn of the millennium production was negligible, before growing back to approximately 50,000 tonnes by 2013. During the years of high oil prices, rapid economic growth absorbed the increased costs of diesel generation relatively easily.

However, the recent global economic downturn has increased pressure on the country to diversify its energy matrix, with coal the most immediately scalable alternative to diesel generation. With deposits estimated at up to 2.8bn tonnes scattered across the country, work has already begun to attract foreign investment to brownfield projects. “Nigeria’s coal is of a high quality and with companies moving into generation projects, I think we will see the country produce 3000 MW from coal in the next 10 years. The privatisation of the coal industry and the development of mines in the Kogi area have been very successful,” Olugbenga Okunlola, professor of Economic Geology at the University of Ibadan, told OBG. For example, local firm ETA-ZUMA operates a coal mine in Kogi, and in September 2016 Dangote Cement announced it would also begin coal mining in the state. Furthermore, Zuma Energy Nigeria, the power generation arm of ETA-ZUMA, is constructing a $1.5bn 1200-MW coal-fired plant in nearby Itobe with the support of Chinese investors.

Gold

West Africa also has a long history of gold production and some of Nigeria’s neighbours maintain strong output. In 2015 Ghana produced 95 tonnes of gold, Mali produced 50 tonnes and Burkina Faso produced 34 tonnes, attracting billions of dollars in exploration capital from foreign junior mining firms and creating thousands of new jobs. In comparison, Nigeria produces under 4 tonnes of gold per year, primarily from artisanal mining. The roadmap reports that the country could hold up to 200m oz of gold, but as of 2012 there were just 1m oz in proven reserves – equivalent to a single medium-sized gold mine. While there is no definitive figure for the volume of gold reserves, the Nigerian Geological Survey Agency is documenting proven gold deposits across the country.

Some companies are looking to establish a first-mover advantage in what could prove to be the next promising jurisdiction for mining venture capital. In September 2016 Toronto Venture Exchange-listed miner Thor Explorations announced it had purchased Nigeria’s most advanced gold project.

The Segilola project in Osun State has an estimated resource of over 500,000 oz, but Thor is hoping that this figure will grow following further exploration. “The Segilola gold project is now Thor’s flagship project and has the potential to be a landmark project in the Nigerian mining sector,” Segun Lawson, president and CEO of Thor Exploration, told local media.

Other parts of the country are also starting to see increased exploration and development activity for precious metals. “Between 1950 and 1970 Nigeria produced 30 tonnes of gold and – in addition to the historical deposits in the north of the country – there are 15 areas in western Nigeria with good gold potential,” the University of Ibadan’s Okunlola told OBG. “We have seen interest from Australian, British and Chilean companies, and the western region contains 450-mile geological belts with gold grades of up to 5g per tonne, bigger even than those found in Ghana.”

Base Metals

Given its high price of around $1200 per oz, gold projects require relatively little investment to develop compared to other minerals. Mines can be built in remote locations with the product transported via helicopter if necessary, negating the need to develop major transport or refining infrastructure that is needed for iron ore or copper projects. For this reason, small-cap, high-risk, publicly traded junior mining companies often focus on gold projects.

In Nigeria, exploration for base metals is mainly the arena of larger consortiums. In August 2016 one such group, Comet Minerals, led by Australian mining veteran Hugh Morgan, announced a major nickel discovery in the north-western state of Kaduna. The deposit contains a geological oddity: the nickel is found in high-purity balls of up to 3mm in diameter, offering the potential of a relatively simple, low-cost mining operation. By mid-2017 Comet Minerals was seeking further financing to increase knowledge about the depth and size of the deposit, and was looking to engage a Nigerian partner to help develop the project.

Iron Ore

The nickel discovery, if it proves economically viable, could be used as an additive for the creation of stainless steel in a fully integrated Nigerian steel industry. The country has the other primary ingredient, iron ore, in abundance. According to the mining roadmap, total reserves are estimated at over 10bn tonnes, although only 3bn tonnes have been proved, and Nigeria produces less than 100,000 tonnes per year.

If it is to reach its potential, the segment needs to reorganise and define its priorities. Formed in 1971 and based in Kogi State, the area of richest deposits, the private National Iron Ore Mining Company (NIOMCO) has fallen into a dilapidated state following many years of disagreements and failed talks with nearby local Ajaokuta Steel Company, which prevented both firms from functioning up to standard. However, in August 2016 Isle of Man-based Global Steel Holdings signed a concession agreement with the Nigerian federal government that officials said would lift the deadlock and see operations recommence at NIOMCO.

Although no start-up date has been confirmed, the company’s CEO Bernard Nnagha told local press that the plant would produce an initial 2.5m tonnes of iron ore annually with the ability to double capacity through further investments to modernise the facility. As part of the same deal, the Ajaokuta Steel Complex reverted to the control of the federal government. The MMSD hopes the move will be the first step towards developing a self-sufficient steel industry.

Majors & The State

While the geological prospects are established, the relationship between the federal and state governments and the private sector and local communities has yet to be ironed out. In an effort to avoid a repeat of the conflicts over oil exploitation in the Niger Delta region, the MMSD roadmap gives greater power to state governments with regards to the awarding of exploration and production licences, and the governments themselves can stake land and develop projects independently or in partnership with private firms. Fayemi also told local media in autumn 2016 that licences will not be awarded without the consent of local communities, although the process for giving consent has yet to be defined. Developing capacities at the state and local level will be crucial if both new actors are to oversee such processes effectively.

This also complicates the attractiveness of greenfield ventures. Mining companies operating in Nigeria have said that the bureaucratic and taxation systems are already challenging, with firms facing double taxation from the state and federal governments, as well as tackling corporate social responsibility investment requirements in local communities.

Outlook

Starting from a modest benchmark, the Nigerian mining industry could be on the brink of a major turnaround. “Activity in the mining sector is picking up and the potential is huge,” Andy Hunter, managing director of SGS Nigeria, told OBG. “However, we need more government regulation to ensure healthy and stable growth.“ Further government commitment to the sector, new mineral discoveries and the resolution of disputes in the iron ore and steel industry bode well for future growth. However, renewed efforts will need to be sustained for many years if the country’s potential as a major mineral producer is to be met.