Nigerian investors focus on growing mining sector

Although the oil and gas sector has driven economic growth in recent decades, Nigerian mining offers considerable potential gains. Home to abundant, untapped reserves, and increasingly the focus of pro-business policies, the sector is poised for robust near- and midterm growth as investors move to capitalise on opportunities in iron ore, gold, zinc and lead, among others.

Supported by a host of incentives, an increase in investment from large multinationals should help the government meet its mid-term growth targets, while rising mining royalties offer an important source of revenues as the country continues recovering from a recent economic downturn. Although sector development remains nascent and is dominated by small-scale operations, the increased availability of geological data should support new investment and activity, significantly boosting its contribution to the broader economy in the coming years, even as it offers knock-on benefits like job creation and export diversification.

Oversight

The Ministry of Mines and Steel Development (MMSD) was founded in 1985 on a mandate to spur the development of the country’s solid mineral resources and contribute to broad objectives of job creation, poverty reduction and rural economic growth. To those ends, the ministry is responsible for identifying deposits, advising on rules and regulations that guide prospecting, quarrying and extraction activities, issuing permits, licences and leases for mineral sales and consumption, collecting rents, fees and royalties from mining firms, and attracting foreign investment. In addition, the MMSD supervises 11 parastatals, including the Nigerian Geological Survey Agency (NGSA), the Nigerian Institute of Mining and Geosciences, the Mining Cadastre Office and the Nigerian Mining Corporation.

Law

The Nigerian Minerals and Mining Act 2007 ( Mining Act) is the latest update to the principal legal framework enforced by the MMSD. The act establishes the federal government’s ownership of all properties containing commercial quantities of exploitable minerals, elaborates provisions for the issuance of exploration and exploitation licences, and prioritises mining over other activities if mineral development is deemed to serve the public interest. Mining leases may even override a right of occupancy for previous activities, pending the approval of a given state governor.

Licences

In 2011 the MMSD introduced a series of amendments to the Mining Act. Among the new regulations were provisions intended to increase accountability and reduce discretionary selection during licence issuance, as well as specifications for the lifespans and geographic scopes of five such titles. Today, companies can obtain a one-year, annually renewable, non-exclusive reconnaissance permit; a three-year, 200-sq-km exploration licence that permits drilling and may twice be renewed for two years; a quarry lease, which gives permission for five years over five sq km; a five-year, small-scale mining lease, for artisanal projects not exceeding three sq km, employing fewer than 50 employees and minimising explosive and chemical use; and a mining lease, which carries a duration of 25 years and allows for extraction of areas up to 50 sq km.

According to the Nigeria Extractive Industries Transparency Initiative (NEITI), a federal agency that applies global accountability standards to monitor the movement of money between extractive firms and relevant federal agencies, firms held 4305 valid mineral titles in 2015, divided among 1579 exploration permits, 1865 quarrying licences, 657 leases for artisanal practices and 204 large mining leases. Of that sum, 1220, or 28% of all active titles, were issued in 2015 alone.

Deposits

According to a January 2018 report published by Professor Uriah Alexander Lar at the University of Jos, entitled “Geology and Mineral Resources of Nigeria and Their Uses,” Nigeria holds significant reserves of precious and base minerals, industrial minerals, energy minerals and metals. Among other reserves, the report estimates that Nigeria possesses deposits of 42bn tonnes of bitumen, 3bn tonnes of iron ore, 3bn tonnes of coal, 1bn tonnes of gypsum, 40m tonnes of talc, 10m tonnes of lead and zinc, and 1.5m tonnes of rock salt. Of those reserves, the report estimates that less than 5% are currently being mined, processed and marketed.

The MMSD, for its part, identifies sufficient reserves for production of 44 separate minerals, and adds that some of these reserves are of a particularly high quality. For instance, the lead and zinc veins in Bauchi state are estimated to contain 22% zinc, compared to a global average of 6%. The MMSD has also identified seven strategic minerals as holding high future growth potential, including iron ore, lead and zinc, gold, coal, barites, bitumen and limestone, and reports that at least one of these minerals is present in every state in the country.

Growth Strategies

While its tin, columbite and coal export industries were central to the Nigerian economy a half century ago, the discovery of hydrocarbons and the migration of capital away from solid mineral extraction caused sector activity to fall sharply in the late 1970s. More recently, recognising weak prices on the global oil market and the considerable growth potential outlined above, the federal government has moved quickly in recent years to draft and implement policies that can catalyse the sector’s maturation.

In August 2016 the MMSD published its Roadmap for the Growth and Development of the Nigerian Mining Industry, which proposes short-, mid- and long-term goals, as well as discrete strategies for achieving them, including developing industrial minerals, energy minerals and steel; encouraging cooperation between federal agencies, state governments and the private sector; building a skilled workforce; broadening credit access; improving the business climate; and increasing the availability of geological information systems (GIS) data.

The success of the roadmap will hinge especially on its success in filling the long-standing gap in that informational base, which has challenged recent investment efforts. The federal government has focused on improving the collection and dissemination of such data via, among other methods, the launch of an interactive GIS web portal, updates to the website and laboratories of the NGSA, and the acquisition of multi-tech core drilling rigs that will accelerate data collection. Moreover, under its ambitious Economic Recovery and Growth Plan (ERGP) 2017-20, the government intends to complete its countrywide geological survey before 2020.

More broadly, the ERGP identifies solid minerals as a key sector for development and targets 8.5% annual growth in its contribution to GDP over the course of the plan’s duration, in part by facilitating coal production to fuel power plants, formalising informal operations and promoting processing and value-addition industries to strengthen backward and forward linkages.

Recent Performance

Owing to the prevalence of informal operations, annual estimates of solid mineral production vary at the margins. Even so, top line data from the National Bureau of Statistics (NBS) is suggestive of a trend – the production of coal, metal ores and other solid minerals rose from 21.9m tonnes in 2011 to 47.1m tonnes in 2014, and though output fell to 39.3m tonnes in 2015, volume recovered amid the recession to 45.7m tonnes in 2017. Of that sum, Ogun, Kogi and the Federal Capital Territory, which all lie in the country’s south, led state-by-state production with 23.3m tonnes, 5.2m tonnes and 4.5m tonnes, respectively. In descending order, the three largest volumes of extracted solid minerals were granite, limestone and laterite, at 17.5 tonnes, 14 tonnes and 3.7 tonnes.

From start to finish, production is largely artisan. According to a report published in February 2017 by the global consultancy KPMG, the lion’s share of the exploration and mining is claimed by small mining firms and local, integrated manufacturing companies working in cement production and limestone processing. Most marketing and transportation is undertaken by individuals and indigenous firms, while midstream processing and beneficiation are almost absent from the sector.

The value of minerals has changed roughly in parallel with the growth of total volume described above. The GDP of coal, metal ores and other mined and quarried materials surged from N52.5bn ($170m) in 2011 to N109bn ($352m) in 2015, dipped during the recession to N102bn ($330m) in 2016, and rebounded to N126bn ($407m) in 2017. Despite growing by 240% between 2011 and 2017, the value of mining as a share of total GDP shrank over the period, from 0.14% to 0.11%.

While sector activities remain peripheral to the economy at-large, export revenue from solid minerals makes up a larger share of foreign exchange (forex) earnings. According to data from the NBS and the NEITI, these goods earned N55.8bn ($180m) in 2014, good for 0.58% of revenue. Exports value grew to N69.2bn ($224m) in 2015 but shrank by share to 0.42% of foreign trade. Sales crashed to N11.2bn ($36m) in 2016. Amid the recession, NEITI attributes this sudden drop-off to insecurity rooted in the northern insurgency and strictures on issuing quarry explosives. However, exports have rebounded as oil prices have slumped, posting N77.2bn ($250m) in sales in 2017 – good for a 0.57% share – and N48.8bn ($157m) in the first half of 2018.

Setting aside naphthalene, a petroleum derivative used in moth repellents and some plastics, sector growth between the second quarters of 2017 and 2018 has thus far been concentrated in three segments. Cement products including limestone grew by more than double, from N2.3bn ($7.4m) to N5.9bn ($19.1m), and were sold overwhelmingly to regional neighbours Niger and Togo. Zinc and lead ores and concentrates grew, respectively, from N681m ($2.2m) to N3bn ($9.7m) and from N54m ($175,000) to N1.3bn ($4.2m), almost exclusively on the strength of trade with China.

Royalties

Given state ownership of all commercial mineral tracts, mined and quarried materials are subject to royalties payable to the Mines Inspectorate Division (MID) of the MMSD, irrespective of a title-holding company’s status as foreign or domestic. Fixed royalty rates are assessed ad valorem, based on a July 2016 market estimate, and range between minerals from 3% to 5%. Emeralds net the MID N375 ($1.21)/gram, while crude limestone earns the division N30 ($0.10)/tonne.

Per NEITI datasets, which must reconcile the receipts declared by extracting firms and revenue collectors, royalty payments on solid minerals have been on a strong growth path in recent years, increasing nearly three-fold between 2007 and 2015, from N394m ($1.3m) to N1.1bn ($3.6m). However, royalties’ share of total revenue dwindled over the same period, from a high of 5.4% in 2008, to a low of 1.8% in 2015, as revenue from the withholding tax has surged.

Investor Incentives

In an analysis published in June 2018, the law firm SPA Ajibade & Company listed a host of incentives available to those that invest in minerals and mining companies, including a 95% capital allowance – such that 95% of a firm’s expenditures on assets may be claimed as expenses against its pre-tax profits – and four years of loss relief provisions. SPA further notes that the Companies Income Tax Act and the Mining Act provide for tax holidays of three and two years, respectively, while the latter law also exempts operators from Customs and import duties for equipment used exclusively in mining activities. Lastly, SPA finds that sector-pertinent corporate income taxes range between 20% and 30%, which the firm describes as “quite competitive in the international market”.

Foreign Investment

In March 2018 the Ministry of Budget and National Planning launched the first of its ERGP Focus Labs, an initiative that convened public and private stakeholders to identify investment opportunities and the means to facilitate such investment in three broad sectors – agriculture and transportation, manufacturing and processing, and power and gas – where capital financing would help to bring the ERGP to fruition. Vis-a-vis the second tranche, the lab stated among its outcomes that it had set a target of attracting $17.4bn in investment in solid minerals by 2020.

Speaking in late August at the 2018 Africa Down Under Conference, MMSD minister Abubakar Bawa Bwari claimed that, under the rubric laid out in the ERGP, Nigeria had attracted $3.3bn in such spending to date, owing in large part to recent and significant improvements in the business climate, and investment is still on the rise. He also listed a series of major mining projects currently under way, including the venture between Symbol Mining and Goidal Resources to extract lead and zinc, First Patriots’ monthly production of 5000 tonnes of lead and zinc concentrates, Thor Explorations’ work on the Segilola gold project, the Eta-Zuma Group’s two coal mines and Promethean Resources tin and columbite mining and export operations.

Employment

With much of the sector dominated by informal workers, it is difficult to obtain accurate estimates of total employment in the sector. In a January 2011 report for the World Bank, Wardell Armstrong Engineering & Environmental Solutions estimated direct employment in mining and quarrying stood at 72,962 in 2007, of whom 11,058 were salaried workers.

In January 2018, NEITI reported that employment in mining and quarrying employment at 42 of the country’s largest mining companies rose by 9% in 2015 to hit 15,035. The total number of expatriate employees rose by 39% to hit 1842 over the same period, while national employees fell by 12% to 4445. Local employee levels rose by 18% in 2015 to 8748 in total.

Outlook

Although the development of the mining sector is still in a nascent stage and requires significant investment in building the facilities and skills bases necessary to meet its ambitious targets, solid minerals offer a plethora of opportunities for profitable inward investment. Business-friendly changes to the regulatory framework and rising interest in high-potential minerals should help the sector’s GDP contribution, forex earnings and royalties continue on upwards trajectories in the coming years, supporting mid-term economic growth and structural diversification that could help to transform Nigeria into a regional mining powerhouse.