Egypt is hoping to draw investors to its gold mining sector, announcing a new national company to explore the country’s gold reserves and a revamp of the legislative framework governing the industry.
The ministry of petroleum and mineral resources has recently announced plans for the creation of a new company to explore gold reserves in the country’s eastern desert. Sameh Fahmi, minister of petroleum and mineral resources, said on the ministry’s website that after establishing the new mining corporation, the government would sell part of its shares on the open market, in order to fund feasibility studies for other potential gold mining plots.
The new company will join the handful of gold producers already operating in Egypt. The Australian-Egyptian company Centamin runs an open-cut mine at Sukari, in southern Egypt’s Red Sea hills area. In 2007, Centamin estimated that the Sukari deposits contained some 9m ounces of gold, worth around $6bn at the time. Hemsh Egypt, a joint venture between the government and Cyprus-based Matiz Holding, is also operating in the country, as is SMW Gold, a subsidiary of international firm SMW Engineering.
The government welcomes the foreign interest, aiming to reap the benefits of high gold prices, currently around $870 an ounce. In order to achieve this, however, the country’s regulatory system needs modernisation. Last year, in a bid to revamp the sector, the government partnered with the International Finance Corporation (IFC)International Finance Corporation (IFC), the private arm of the World Bank, to upgrade Egypt’s mining legislation.
“We hope to have the new legislation ready in three months,” Amgad Ghoneim, undersecretary for mineral resources, told OBG. “That will make us more attractive to foreign investors who want to operate in the Egyptian gold mining industry. We realise that the legislation in place is not satisfactory for foreign operators.”
The current legislation requires foreign companies enter into joint ventures and production sharing agreements with the government. The practice is common for the oil and gas industry, but makes gold exploration a risky business. Mineral deposits are harder to determine than oil and gas plots, making gold miners uneasy about entering into long-term agreements without a comprehensive understanding of a block’s potential. According to Frank Sader, senior operations manager for Middle Eastern policy reform at the IFCIFC, under the current system, more than half of a company’s revenues go to the Egyptian government.
Some industry players have suggested Egypt’s gold mining regulations need to move towards a system of royalties and taxes, often used in other countries where mining is a key industry. This allows companies to explore and operate mines independently without having to partner with government, instead paying a percentage of their profits.
“This would reduce government intervention in the sector and allow it to develop faster,” Karim Matar, managing director for SMW Gold in Egypt, told OBG. “There is huge potential.”
Another issue yet to be resolved involves complicated licensing procedures that can hold mining operations back. Exploration permits for land plots need to be obtained from such diverse authorities as the ministry of petroleum and mineral resources and the Egyptian army. “There is a lot of overlapping,” said Matar. In addition, the availability of equipment and human resources is somewhat limited, not just in Egypt but throughout the global mining industry, and higher input prices are having an effect.
“There are not too many companies that can do drilling, for example, and that means they can charge more for their services,” Matar said, adding that most senior gold mining engineers operating in the country are foreigners.
Nonetheless, high gold prices means companies still want to invest despite the challenges. SMW Gold plans to spend $15m during 2008-09 in order to develop two concession blocks in the eastern desert, at Um Balad and El Fawakheir. Having completed initial studies, the company is in the process of testing mineral samples and plans to start drilling this summer.
The government expects that a friendlier legislative framework will bring more international players to Egypt’s gold mines, and local market observers have no doubt about the growing interest. Josef El Raghy, the chief executive officer of Centamin, recently told the local press that five of the world’s top 10 gold producers had visited Egypt in the last two years.
“There are definitely lots of mining opportunities here,” El Raghy said. “The key to unlocking them is in applying the new framework. Reform is long overdue.”