Nigeria's untapped mineral reserves could aid the goal of economic diversification

During the 1970s Nigeria had a prosperous, export-orientated mining industry. Before the discovery of oil, the West African nation had developed strong production operations for coal, tin and columbite. The discovery of hydrocarbons eclipsed these activities and relegated mining to an economic footnote. However, with the recent decline in the global price of oil and reductions in production due to violence in the oil-producing Delta states, the government in Abuja is looking to revive the country’s mining sector.

Natural Wealth 

“The Nigerian mining industry is set for significant long-term growth, as it is currently largely untapped,” Innocent Ezuma, executive chairman of Nigerian mining firm Eta Zuma Group, told OBG. “There are significant quantities of minerals that are of very good grade.” The government has identified 44 minerals that are found in Nigeria in commercial quantities, ranging from industrial and energy minerals, such as iron ore and coal, to gemstones, including sapphires, rubies and emeralds. For certain minerals, the country has the potential to be a global player. For example, Nigeria is home to more than 3bn tonnes of iron ore, giving it the 12th-largest iron reserves in the world. It also has an estimated 42bn tonnes of bitumen reserves – potentially the second-largest deposit in the world – and approximately 10m tonnes of lead and zinc reserves across eight states. Furthermore, potential coal reserves are estimated to be as high as 3bn tonnes, much of which is clean and bituminous with a low sulphur and ash content. These reserves could be used to meet as much as 30% of the country’s power needs by 2020, according to the government.

Limited Size

However, for much of its recent history, the Nigerian mining industry has grappled with transparency, the misuse of resources and illegal mining. Given these limitations, it is hardly surprising that the mining sector has not come close to reaching its full potential. In 2015 the sector contributed just 0.3% to GDP. This is partly the result of the fact that the industry is largely informal and not standardised, suffering from a lack of investment and commercial vitality.

PwC estimates that as much as 85% of mining activity in the country is artisanal or small scale. This not only presents regulatory issues in terms of enforcement, working conditions and environmental impacts, but also leads to the loss of potentially significant royalties and taxation revenues for the government.

Opportunity Costs

The consequences of this situation are significant. In November 2015 Roberts Orya, the managing director of the Nigerian Export Import Bank, told the local press, “Nigeria is losing lots of resources from untapped mineral deposits, as well as from the fact that what little is being mined is taken mostly by illegal miners who smuggle the products out of the country.”

Nigeria only needs to look to its African counterparts to see the potential benefits of a strong mining industry. In Ghana, for example, mining accounts for 5% of GDP and 37% of exports. In South Africa, the mining industry is even more important. Here, solid minerals account for 18% of GDP, half of all foreign exchange earnings and approximately 1m jobs.

Government Policy 

As a result, successive governments have sought to boost exploration and production, with an eye to eventually encouraging downstream processing. Under the administration of the previous president, Goodluck Jonathan, the government laid out bold targets for the mining sector as it sought to diversify the country’s economic base. Goals included an increase in the contribution of the mining sector to 5% of GDP by 2015 and 10% by 2020. The plan also called for the creation of 3m direct and indirect jobs from mining by 2015. Yet these targets had not been met by the end of the previous administration in May 2015, prompting the incoming government of President Muhammadu Buhari to focus on accelerating the sector’s development.

Buhari and his cabinet have frequently highlighted the country’s mineral resources as a means of reducing the dependence on oil and spurring an industrial revolution in the country. Speaking in Riyadh in February 2016, Buhari said, “With the downturn in the global prices of oil, we now have to prospect our solid minerals. Mining and agriculture are our hopes now. We will welcome investment in these areas. We appreciate an inflow of more resources and expertise to help us achieve our objective of economic diversification.”

Priority Segments

In April 2016 Kayode Fayemi, minister for solid minerals development, told the local press, “In Nigeria, it is a much more compelling argument to diversify our focus and revenue base because oil has been the king for so long and we have been blinded by it. We need to rediscover our roots, which interestingly was in mining in Jos, Enugu and other places.” The government has highlighted seven minerals that will be at the heart of the mining and industrial transformation in the country. These are baryte, bitumen, coal, gold, iron ore, limestone and zinc.

While mineral exports offer the opportunity to reduce the trade imbalance and improve foreign exchange earnings, the sector also offers significant potential for growth within Nigeria. “The attractiveness is in serving the domestic market,” Kevin Joseph, executive director of Kogi Iron, an Australian iron-ore mining firm, told OBG.

However, doing so will require improving local value addition and downstream processing, and ensuring a steady increase in consumption. For the prospects of iron ore extraction and upstream mining, this will mean building up the local steel industry. Initial targets set by the previous administration called for the production of 3m tonnes of liquid steel per year by 2015 and 12.2m tonnes by 2020. It also called for the production of 100,000 tonnes per year of primary aluminium. Similarly, the government is looking to promote coal mining by creating demand for the mineral. As such, Abuja has targeted a 30% contribution of coal-fired generation to the country’s power supply by 2020.

Reform Efforts 

To achieve those targets, the government has taken strides in the last decade to improve the environment for mining development. “The government has been active in preparing the necessary legislative and regulatory environment needed for the mining industry to take off,” Ezuma told OBG. The first steps in this regard were taken with the 2007 and 2011 Mining Acts, pieces of legislation that restructured the governance of the sector. As a consequence of these laws, the government stepped back into a regulatory role, paving the way for the private sector and greater investment in mining. Furthermore, prior to these laws, the industry was plagued by opaque procedures for licence approval and revocation, as well as a lack of oversight of on-the-ground activities. To tackle these problems, the government established the Mining Cadastre Office (MCO), a single body responsible for all mineral titles in the country. The MCO offers licences on a transparent and non-discretionary basis. Previously, the government “had overseen a cumbersome process fraught with unclear licences, limited control, inefficiency, opacity and long delays”, Fayemi told the UK All-Party Parliamentary Group on Nigeria when discussing bilateral trade in May 2016.

The current administration has sought to build on this move by reviewing all mining licences in the country to ensure they are being correctly used and are in compliance with the law. The move is aimed at encouraging serious investors to enter the market, according to Fayemi. Abuja’s efforts to improve the governance of the industry, create stability and reassure investors appears to be paying off. “The government has cleaned up its ways after the 2011 act. I think it’s worked very well and they’ve worked it very well,” Joseph told OBG.

Fiscal Incentives 

The government has also sought to offer attractive terms for investment in the sector. While it does collect a 30% corporate tax, a 5% value-added tax, a 10% capital gains tax, a 5-10% withholding tax, and royalties ranging from 3-5% for mining operations, it has also offered a number of incentives for companies looking to enter the market. These benefits include a 95% capital allowance on expenditures for exploration, development and processing: a three to five year tax holiday for new investors; and a deferred royalty payment scheme that varies depending upon the specifics of the project.

This tariff regime is competitive with the region as a whole and less burdensome than that imposed in, for example, nearby Ghana. There, corporate income tax is charged at 35%, royalty payments are levied at 5%, and capital gains and withholding tax are both imposed at 15%. The revised Nigerian regime has been positively received by investors, and is appropriately priced for the risks of operating in the country. “The tax regime is not particularly onerous. If we were in Australia, the situation would be a lot more onerous,” Joseph told OBG.

Data Access

One of the biggest issues affecting the sector is the difficulty in persuading companies to invest in greenfield projects. This is largely the result of a lack of appetite for exploration within Nigeria, and these concerns also expressed by firms already in the county. “Foreign investors will not fund exploration. They are looking to acquire production,” Joseph told OBG.

Exploration is hampered by a dearth of clear and precise information about mineral reserves in the country. “Data gathering is the biggest challenge we have here,” Donne Darku, technical director of Multiverse Mining and Exploration, a local Nigerian firm, told OBG. “Most miners won’t come without data.” Between 2003 and 2010 the government produced a number of airborne surveys of the country’s geological landscape. However, while this presents a broad picture of the state of the country’s reserves, it does not provide enough detail upon which to make an investment decision. In May 2016 Fayemi told the UK All-Party Parliamentary Group on Nigeria that, “We still have weak mechanisms for gathering, disseminating and archiving the critical geological data required by investors and policy makers. Insufficient data has created an opaqueness about Nigerian mining which needs to be addressed. We are not generating sufficient data, nor are we making it readily available to the market and operators.”

Nigeria is moving to rectify this. The mining roadmap laid out by the previous administration called for the production of geological maps on a scale of 1:100,000 covering the whole of the county by 2020. The costs associated with such an undertaking will render this target particularly challenging. Nevertheless, Buhari’s government has already taken steps towards this target.

In January 2016 James Entwistle, US ambassador to Nigeria, announced plans for substantial collaboration between the US Geological Survey (USGS) and its Nigerian counterpart to look into mineral reserves in the country. Entwistle told the local press that the USGS will partner with Nigeria to begin to see what kinds of technical cooperation might be possible, particularly in the areas that involve determining exactly what minerals Nigeria has in which regions, and assessing the quality and quantity of the deposits.

Investors 

Given the challenges of geoscientific data collection, it is perhaps unsurprising that the pipeline of greenfield projects in the country is relatively slim. The current trends in the market are likely to produce an environment where foreign investors look for acquisitions rather than greenfield projects. The approach in some ways mirrors efforts in recent years to boost indigenous ownership and activity in the oil sector – a strategy that has met with some notable successes – as locally based companies look to ally with foreign partners or offer up commercially feasible sites. “Our policy is not to go into full production. We develop a greenfield project and then sell out or develop through a partnership,” Darku told OBG.

The government hopes that the expansion of geological data, along with the new incentive structure, will encourage a jump in foreign investment. There have been a handful of early arrivals, such as Kogi Iron. The company, a 100% Australian-owned mining firm, is one of a handful of foreign investors currently active in Nigeria’s mining sector. However, it is positive about the environment and prospects in the country. Kogi is responsible for the Agbaja Iron Ore project, a shallow mine in Kogi State that will begin production in 2017. The processing plant associated with the operation is expected to produce 5m tonnes per annum, while the mine is estimated to contain ore reserves of 600m tonnes. The Australian company is bullish about the project’s feasibility. With a capital expenditure of $497m, the company estimates that Agbaja will have an internal rate of return of 23.7% and a capital payback of four years.

Other investors will likely look at this project with interest. “If this private investment works, others will come,” Joseph told OBG. Furthermore, while substantial foreign investment into the sector has yet to materialise, several local companies are looking at the prospects of forming partnerships with international operators. For example, in May 2016 the domestic firm Granite and Marble Nigeria signed a $55m deal with a Chinese company, Shanghai Shibang Machinery, to build a granite plant in the country.

Financing 

As with many sectors, access to credit represents a challenge for many Nigerian miners. “Banks will help come up with guarantees and bonds but they won’t bring any capital,” Joseph told OBG. In such a capital intensive industry, many local firms are struggling to get a footing.

The government is now actively working to change this situation. In May 2016 the Buhari administration announced nascent plans for an intervention fund to assist the sector. Fayemi told the local press that the fund would help to make the mining business “viable and profitable”. The federal government has held discussions with a number of the major national banks about actively investing in the fund and hopes to improve the financing environment for the industry. “With the government stepping in, banks are starting to show more interest in the sector,” Darku told OBG.

Transport 

The mining industry – as with many other sectors in Nigeria – must also grapple with high overhead costs for infrastructure access. Indeed, for a greenfield project, these associated costs comprise a greater expense than the production facility. Power and transport considerations – both on and off site – mean that infrastructure can account for up to 70% of the initial investment in a mine project in Nigeria. These costs have a substantial impact on the country’s ability to export minerals. “Coal and iron ore in the north are a big problem,” Darku told OBG. “Low-priced minerals are not competitive because of transportation costs.” The government has fast-tracked rail projects to help reduce delays and increase volumes (see Transport chapter), although it will be some years until those lines are operational.

Security 

The other major impediment, particularly in the north of the country and in the Delta region, is security. This was brought into sharp focus in June 2016 when seven employees of the Australian mining and services company, Macmahon Holdings, were kidnapped. Although they were subsequently released, it presents a challenge for the government as it looks to encourage foreign investment in the sector.

Outlook 

Nigeria has abundant reserves and a potentially massive underserved domestic market to tap into. Furthermore, the government is becoming aware of the latent prospects of the industry and, as such, is putting in place a strong regulatory and taxation environment that should reassure possible investors about the security and potential of their capital in Nigeria.

Nevertheless, given the paucity of mineral data and the high capital requirements of exploration in this nascent market, foreign entrance into the sector is likely to come from acquisitions and partnerships in the short-to-medium term.