Will Malawi benefit from being the last born?

Malawi’s mining future hangs in the balance.

Sharon Saylor

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LILONGWE, MALAWI – Known as the warm heart of Africa, Malawi, an undiversified, agriculture-driven economy, is home to a stable democracy but a GDP-per-capita that ranks amongst the 10 lowest in the world. Landlocked and bordered by some of the most mineral-rich nations on the continent, including Zambia and Mozambique, it would be a stroke of bad luck should Malawi’s small 94,280 square km land area not be blessed with the same.

Recent funding from the World Bank for $25 million has been allocated to produce new geological, geophysical and geochemical maps: the information currently available dates back the 1950s. This is part of the initiative by the “first” Minister of Mines for Malawi The Honourable John Bande, who has been tasked to prioritize the mining sector as part of the nation’s Economic Recovery Plan (MERP). Part of this initiative involves the implementation of a new mining code and steps to remove the bottlenecks in energy and infrastructure.

Interest in the mining sector rose significantly in 2009 when the Kayelekera uranium mine entered production (operated with an 85% stake by Paladin Energy Ltd (TSX:PDN)(ASX:PDN)), reaching a record of 789,430 lbs for the June 2013 quarter, and 2.9 million lbs for the financial year, a 20% year-on-year increase. This equaled a predicted 10% to 13% contribution to GDP in 2013, finally putting Malawi on the mining map.

Paladin, despite these positive results, is nonetheless faced with a litany of problems. The terms and conditions of the mining contract coupled with strained governmental relations has led to poor profitability, according to Greg Walker, country manager for Paladin in Malawi. The uranium miner may need to renegotiate their contract, which was not set to expire until 10 years after signing. Bande, however, has reiterated they will not renegotiate previous contracts, although they will ensure Malawians receive greater benefits with any new contract moving forward. The recent rejection of their application for an exclusive property license extension, growing public dissatisfaction and criticism from the country’s complaintive media, and a recent fatality at the mine’s engineering workshop have all served to a dampen excitement in the project.

Malawi’s second major mining investment, estimated at $300 million, is by Globe Metals & Mining (ASX:GBE). Their primary focus is the advanced multi-commodity Kanyika niobium project, which will produce niobium pentoxide and tantalum pentoxide. As of the time of writing, negotiations with the Government of Malawi to secure a project development agreement and approve the project environmental impact assessment are still ongoing.

A group of international legal experts are currently working with the government to agree on a win-win solution for government and mining companies. The Malawi government has proposed a 5% royalty for the Globe Metals & Mining project, 2% higher than the royalty received from Paladin’s Kayelekera mine, as well as a 30% local shareholding in the mine, double that of Kayelekera. As with other African countries, discussions around local participation including royalties and taxation threaten confidence and Malawi has yet to offer concrete reassurances to prospective investors.

Nonetheless, many still view the country in a positive light. Calgary-based Mkango Resources Ltd’s (TSX-V: MKA) CEO William Dawes plans to spearhead rare earth development in Malawi, and aspires to be the first official rare earth producer on the continent. “When deciding where to launch our exploration work, we originally considered Central Asia and the Middle East, as well as other countries in Africa. However, we decided to pursue our work in Malawi based on the country’s mineral potential as well as its ease of doing business for an exploration company.”

The Songwe Hill project, the company’s flagship mine, is located in Chilwa Alkaline province in southern Malawi. “We possess a number of advantages compared to other rare earth projects internationally, our infrastructure-related costs are low, and Malawi is a stable place to operate, with weather conditions that allow us to work all year round coupled with a very favorable mineralogy for processing.”

As one of the larger private investors in the mining sector in Malawi, Mkango Resources initial assessment of the work environment have been positive. “The procedure for beginning an exploration project has been relatively transparent. If you follow the government’s procedures, and you fulfill your commitments to them, the system works well,” Dawes concludes.

Malawi has followed suit from its regional neighbours with reformed financial systems and a liberalized monetary policy to improve its attractiveness to foreign investors, and now the same needs to happen in the mining industry. “All of the countries in the region already had liberal exchange rates, except for Malawi. Malawi is now floating its national currency, and as part of that process we devalued the kwacha. We also removed all restrictions in foreign exchange transactions. Exporters that bring foreign exchange into Malawi are no longer required to meet any surrendering requirements; all proceeds are returned to the market, and the market distributes the foreign exchange across the most productive sectors. We are also working on harmonizing our exchange rate policies with the SADC and COMESA protocols. Overall conditions are favorable for mining investment, and more recently the government has reintroduced tax exemptions on the import of machinery for mining,” remarks Ralph Tseka, senior director, Reserve Bank of Malawi.

If Malawi can diversify from its tobacco-dominated agriculture-based economy, this will provide the economy with consistent foreign exchange throughout the year and develop Malawi from a donor-led economy to a sustainable one. Malawi arguably hosts the most underdeveloped mineral sector in the region, which can be used advantageously, should the country create synergies in the region and learn from the mistakes of their neighbors. Ultimately, it will be the way in which the government deals with the current mining disputes around resource nationalization as well as the implementation of a sound mining legislation that will shape the future of the mining industry in Malawi.

This article was produced as part of the research conducted on African mining jurisdictions by Global Business Reports (GBR) as part of our partnership with African Mining Indaba LLC. The aim of this partnership is the production of the single most comprehensive intelligence report on the continent’s mineral sector. The Official Mining in Africa Country Investment Guide, will be launched next February 2014, as the only official publication providing country-specific information at Africa’s top mining event, the 2014 Investing in Africa Mining Indaba™ held in Cape Town, South Africa. Related articles and interviews can be found at macigindaba.com.

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