Madagascar’s geological potential is being held back by political crisis.
ANTANANARIVO, MADAGASCAR – Located off the southeastern coast of Africa in the Indian Ocean the Malagasy Republic, now more commonly known as Madagascar, is the fourth largest island in the world. In June 2012 a project financed by the World Bank through Projet de Gouvernance des Resources Minérales (PGRM), and recent work with the Japanese government, released updated geological data from 1974 on Madagascar’s mineral wealth, indicating a highly diversified mineral base including gemstones, industrial stones, and other minerals including chromite, copper iron ore, bauxite and gold. It is only recently, however, that this geological potential is starting to be properly exploited. This is being kick started by the development of Rio Tinto’s QIT Madagascar Minerals (QMM) (Rio Tinto (80%) and the Malagasy State (20%)) Ilmenite project and the environmentally contentious nickel and cobalt Ambatovy project, owned by a consortium of four shareholders: Sherritt International Corporation; Sumitomo Corporation; Korean Resources Corporation; and SNC-Lavalin Inc.
The Ambatovy project is one of the most ambitious industrial undertakings in the history of Madagascar, Africa, and the Indian Ocean Region. Production commenced in 2012 and it will soon produce 60,000 tons of refined nickel and 5,600 tons of refined cobalt and 210 000 tons of fertilizer in the form of ammonium sulfate every year for the next three decades. Nickel and cobalt will then become part of the most important export products of Madagascar. Ambatovy is positioned to become the world’s biggest lateritic nickel mine by 2013/2014.
Despite massive investments, dig slightly below the surface and see that the political upheaval brought on by the coup in 2009 remains. Currently, up to 92% of Madagascar’s population live in poverty, according to a World Bank report. The four-year-old political crisis has led to a deterioration in the business climate and greater loss of control in governance, and worsened the living conditions of the population.
Madagascar’s economic growth was a negative 4.1% in 2009, a stagnant 0.5% in 2010, and a slow 1.6% and 1.9% in 2011 and 2012 respectively: far below the 5.3% average growth of sub-Saharan African countries estimated by the International Monetary Fund (IMF) in its October 2012 Regional Economic Outlook. Madagascar’s growth rate places it amongst Africa’s 10 slowest-growing economies in 2013, along with Sudan and Equatorial Guinea. The mineral sector is the primary driver of what little growth there is, a role it is expected to maintain: with good governance the World Bank predicts GDP growth to hit 4% per annum as the aforementioned mining projects ramp up to full production.
Greater loss of governance was evident earlier this year as major upheaval was seen at Rio Tinto’s site in Fort Dauphin through community protests about high unemployment, political corruption and unsatisfactory relocation reimbursement. This $931 million mining operation could have supplied a tenth of the world’s ilmenite, but several weeks after the Fort Dauphin fiasco, Rio Tinto announced a major scale-back on their future investments Madagascar. Plans for a second and larger mine in St. Luce will be shelved until further notice. This stems from the larger issue. On paper the mining legislation, taxation and royalties appear extremely attractive but their implementation has much to be desired. The key issue is the fair tax distribution across regions and municipalities affected by mining activities. There is little to no transparency and good governance with the mining sector revenue. The communities are not benefiting from any of the funds provided and the distribution system is still unclear, resulting in major community clashes across the nation.
Questioning the issue of transparency even more has been the delivery of mining permits. Since 2009 the issuing of mining permits have been suspended. The Ministry of Mines ordered a study of all pending applications of mining permits. However before lifting the suspension of permits, Wuhan Iron & Steel Co (WISCO), China’s third-largest steelmaker was awarded exploration permits in 2010 for the right to explore the Soalala iron deposit after paying $100 million signing bonus, which would have helped cushion the loss of foreign development assistance. WISCO also fast-tracked their environmental permits in a matter of weeks: a highly unusual precedent in a country that, with 90% of its wildlife found nowhere else on earth, has always had a laborious environmental permitting process.
The Minister of Mines, Honourable Rajo Daniella Randriafeno Daniella is champion of the Extractive industries Transparency Initiative (EITI) in Madagascar [http://eiti.org/Madagascar]. Madagascar submitted itself as an EITI candidate country in 2008, but in 2010 the international secretary of EITI suspended Madagascar’s candidacy. The Minister has put major efforts to improve the transparency in the mining industry and produced the required report for EITI, and in 2012 received a letter from the international secretary of EITI that Madagascar was technically compliant with EITI standards, but officially remained suspended because of the political situation. When the political situation was stabilized, they would be welcomed back. Now the Ministry of Mines needs to arrange for a return to normalcy in the licensing mining area.
Unlike regional neighbours, Madagascar offers flexibility on foreign employment. To date, quantification of the concept of “local content” for mining operations through the exchange of tax and non-tax contributions, the development of national skills base and the issue of local sourcing has yet to be determined. There is an agreement in place that companies will hire local as much as possible, but as it stands now there is no stipulation to limit the number of expatriates on each project, nor is there for the employment of local citizens which certainly helps alleviate the challenge of education and the scarcity of human resources. Despite this companies such as Ambatovy and Henri Fraises and Fils founded in 1921 and the exclusive dealer of caterpillar equipment have created training centers and employs less than 1% of expatriates amongst its 600 employees. Steps are being put in place to define the ways and means to maximize local content for mining activities.
Smaller investors such as the Toliara Sands Project, the flagship project of World Titanium Resources to develop the Ranobe Mine, a high-grade, long-life, mineral sands operation, as well as Energizer Resources Minerals SARL, Pan African Mining Madagascar (PAMM) and Madagascar Consolidated mining (MCM) still maintain their presence despite the crisis: some continue to invest in exploration. Madagascar is now entering into the small circle of mining countries with major potential for future development. As a newcomer Madagascar needs more serious investors and the prospective international investment community is watching and waiting to see how major projects such as Ambatovy and Rio Tinto will play out. It is only with legal compliance and good governance of the mining sector that the investment security and reputation of Madagascar as a country for mining investments will be preserved.
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.