Gold mining promises big boost for Ethiopia’s development

Exploiting Ethiopia’s gold reserves should increase exports and diversify the economy – if the industry is properly regulated 

An engineer gives instructions to a drilling machine operator in the Lega Dembi gold mine in southern Ethiopia. Photograph: Sven Dumelie

By Matthew Newsome

guardian.co.uk, Thursday 30 August 2012

The outlook for many people in Ethiopia seems less than bright following the sudden death of the prime minister Meles Zenawi last week, yet as far as the country’s natural resources are concerned, the outlook is golden. Gold reserves could be a source of greater development for the country.

British firm Nyota Minerals is about to become the first foreign company to receive a mining licence to extract gold from an estimated resource of 52 tonnes in western Ethiopia. Its chief executive, Richard Chase, was involved in Tanzania’s gold boom in the 1990s. He believes Ethiopia has similar potential. “There are huge areas of relatively underexplored and unexplored prospective ground, and the infrastructure is not too dissimilar [to Tanzania], although the availability of cheap electricity is a definite plus,” he says.

Ethiopia also boasts gemstones such as diamonds and sapphires; industrial minerals including potash; and other precious and base metals. The development of these resources is a key plank of the government’s export-orientated growth strategy and allows Africa’s biggest coffee grower to diversify its economy to reduce reliance on agriculture, which accounts for 43% of Ethiopia’s gross domestic product.

“We expect our rich mineral wealth to contribute to economic development in Ethiopia,” says the state minister of mines, Tolesa Shagi. Ethiopia’s openness to foreign investment over the past decade is beginning to pay off, Tolesa believes. “As an African country we have not had the knowledge or the resources until recent years,” he says.

A recent survey increased estimates of gold resources to 500 tonnes. The government says production could rise to 40 tonnes a year from just over four tonnes last year, earning the country around $1.7bn (£1.1bn) at current prices. This could dramatically boost development and reduce dependency on imports. In the meantime, the mining sector is forecast to increase exports and earn foreign currency.

The largest gold mine in Ethiopia is Lega Dembi in the Sidamo province of southern Ethiopia. It was transferred from the government to a company called Midroc Gold, owned by billionaire Saudi businessman Mohammed Hussein al-Amoudi, for $172m in 1997. In 2010, Midroc began its second gold mining operation in Sakaro, near Lega Dembi. Amoudi has also made huge investments in Ethiopian agriculture, cement and transport. The relationship between the billionaire and the government has attracted fierce criticism from government opponents.

After gold, tantalum is the next most sought after mineral in Ethiopia. Chinese firms are eyeing a deal with a state-owned company that claims it is the world’s sixth-largest producer. Up to 80% of this precious metal is sold for use in the production of transistors for Chinese-assembled mobile phones, cameras and computers.

Ethiopia has licensed 250 foreign firms, from countries including China, South Africa, the UK, the US and Canada, to prospect for minerals. Investment in the sector reached $1bn in 2009, according to official figures. An overstretched mines ministry is not accepting any further licence applications while it deals with assessing existing applicants and monitoring investments. Companies are now required to include an environmental and social impact assessment in their applications.

A recent paper by the African Development Bank said a large number of resource-rich African countries are seeing little benefit from their mineral wealth. It also said some have not been accruing maximum benefit due to cushy deals for corporations.

However, this could change if new legislation focusing on regulating the excesses of transnational mining companies has the desired effect. Ethiopia is planning to sign up to Publish What You Pay. The international initiative, subscribed to by more than 70 countries, holds governments accountable for the management of revenues from the oil, gas and mining industries. Once fully signed up, Ethiopia will be expected to divulge all company payments and government revenues from its extractive industries.

“We want the mining industry to be for the people and not just for big business,” says Tolesa. “We have to be concerned about our community, our environment and the industry’s contribution to the development of our nation.”

The Ethiopian Mining Proclamation states that the government requests 5% free equity shares with every licensed mining company operating in the country, as well as 35% income tax and 8% royalties.

As well as more money to plough into development policies, by opening up the mineral wealth to foreign investment Ethiopians could benefit from improved infrastructure, such as roads and greater employment opportunities.

Investors see Ethiopia as a stable, investor-friendly country in the volatile Horn of Africa. Under Meles it attracted significant overseas investment – particularly from China – to help drive growth. Whether it will be business as usual in Ethiopia under Meles’s successor, Hailemariam Desalegn, will be interesting to watch. As Nyota’s Chase says: “Ethiopia is undoubtedly a frontier for exploration in Africa.”

–The guardian