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Mineral Sector Overview

AN OVERVIEW OF THE SIERRA LEONE MINERALS SECTOR

Facts in Brief

· Sierra Leone’s primary mineral resources are diamonds, rutile, bauxite, gold and iron ore. The mineral sector in Sierra Leone is made up of three sub-sectors: a) large-scale production of non-precious minerals – rutile and bauxite; b) large scale production of precious minerals – diamonds; and c) artisanal and small-scale production of precious minerals – mainly diamonds, and to a much lesser extent, gold.

· The mining sector contributed around 20% of GDP and fiscal revenues equal to 8% of GDP until the closure of the bauxite and rutile operations in 1995. It continues to supply 90% of exports due to the thriving artisanal diamond component. Mining and quarrying employ about 14 percent of the total labour force.

· The value of minerals exports reached more than $140 million in 2007, thereby returning, at least in nominal terms, to the previous peak achieved in 1991. With the prospect of new modern gold and diamond mines opening in the next 3-5 years, it is estimated that annual mineral export revenues could exceed $370 million.

Recent History
Prior to the civil war, Sierra Leone had established an active mining sector built upon significant exports of diamonds, rutile and bauxite. Although relatively modest by global standards, the sector was significant in terms of the country’s population and GDP. It underpinned much of the country’s formal economic activity, contributing 20% of GDP, as much as 15% of fiscal revenues, and accounting for over 90% of exports. Mining and quarrying provided a livelihood for over 250,000 people, and employed about 14% of the total direct and indirect labour force. Despite the sector operating at only a fraction of its potential, its contribution was significant enough to qualify Sierra Leone as a resource-rich country.

The Impact of Hostilities

Sierra Leone slipped off the investment radar for most major mining companies well before the outbreak of hostilities in 1991. The effective nationalization of the diamond industry and increasing political instability relegated the country to, at best, a speculative exploration target. Although the established rutile and bauxite operations continued to play an important economic role, large-scale exploration activities effectively came to a stand-still more than 20 years ago. As the sector’s economic importance declined, so too did the capacity of key Government departments to regulate sector developments.

Recognising the need to establish an enabling environment for attracting new investment into mineral exploration and development, new mining policies were adopted in 1995 and 1998. The fact that these policies coincided with the forced closure of two foreign-owned mines meat, however, that their impacts were neglible. Without a return to peaceful times and greater political stability, credible international investors would not consider Sierra Leone as a potential exploration target.

The End of Hostilities
The end of hostilities marked the start of a strong economic recovery. Double-digit economic growth during 2001 and 2002 led to a significant period of economic expansion. Real GDP growth averaged nearly 8 per cent per annum for the period 2003 to 2006 and is forecast by the International Monetary Fund to continue at over 6 per cent per annum in the medium-term.

The mining sector has played an instrumental role in Sierra Leone’s nascent economic recovery. In four of the last five years, the rate of growth recorded in the mining sector has exceeded that in the remainder of the economy. The resurgence of the mining sector has been two-fold. First, the Government – with external support – has had considerable success in increasing the proportion of diamonds mined that pass through official channels. Official exports have increased to 582,000 carats in 2006, with 84 per cent of this amount being mined by artisanal and small-scale miners. The U.S. dollar value per carat has also increased significantly, suggesting that larger, more valuable diamonds are increasingly returning to official export channels.

Second, three mechanized mines have been reactivated. The country’s first Kimberlite diamond mine has been operating since 2004 and is progressively expanding production. Also, both of the rutile and bauxite deposits that were developed before the war are once again being mined. The rutile mine is on-track to return to pre-war production levels this year, and plans are in place to expand operations further. The mine’s owners have also acquired the rights to mine bauxite at Moyamba and successfully produced over 1 million tons in 2006.

In 2006, the estimated value of official mineral exports reached a record of US$176 million. This represented around 91 per cent of total export earnings. Faced with a large current account deficit, which creates reliance on foreign aid to fund Sierra Leone’s import needs, the rapid increase in mineral exports has provided a much-needed injection of foreign exchange.

As a result of the many channels through which revenue streams flow from the mining sector to Government, it is difficult to accurately determine the sector’s contribution to public revenues. It is clear though that it fell significantly as diamond smuggling increased and the formal mining sector collapsed. The World Bank estimates that having provided 8 per cent of Government revenues immediately prior to the civil war, the sector’s fiscal contribution plummeted to only 1 per cent of total Government revenues by the end of the hostilities. Despite the strong rebound of the mining sector in recent years, its contribution to public revenues remains weak, in part reflecting significant continued avoidance of official export channels. It is estimated that the sector contributed around 29 billion Leones to public revenue in 2006, which is equivalent to around 3.1 per cent of total public revenues.

The resumption of rutile and bauxite mining has re-established the two mines as two of the largest private sector employers in Sierra Leone. Prior to their closure these mines employed over 3,000 workers. The vast majority of income-earning opportunities generated by the mining sector, however, are in artisanal diamond mining. The World Bank has estimated that up to 40,000 people are directly engaged in mining for diamonds and that the associated population of immediate family dependents could include 100,000 to 200,000 people. If those people that are indirectly dependent on artisanal diamond mining through forward and backward linkages are included, the World Bank estimate reaches 200,000 to 400,000 people dependent upon artisanal mining for the greater part of their livelihood. This represents between 4 percent and 8 percent of the population.

The Future
Notwithstanding its relatively small size, Sierra Leone is widely recognized as a highly prospective target for mining activities. The return to political stability in Sierra Leone coupled with positive global developments in the mining sector now offers the ideal opportunity to rejuvenate the domestic mining sector and to allow it to once again underpin the formal economy and support the Government’s developmental objectives.

Key developments that have significantly improved the prospects of the Sierra Leonean mining sector include:

· The successful implementation of an IMF-supported economic reform programme, which has established a sound macroeconomic environment. Inflation has been kept under control, the exchange rate has stabilized, and access to foreign exchange has improved;

· The introduction of the certificate of origin scheme and implementation of the subsequent Kimberley Process, which has facilitated a rapid return of diamond exports to official channels. This has drawn the attention of the international community, which has increasingly shown its willingness to support wider sector reforms; and

· Strong global demand for minerals, underpinned by rapid growth in emerging economies such as China, which has fuelled an investment boom in the mining sector. Worldwide exploration budgets have quadrupled from US$1.9 billion in 2002 to an estimated US$7.5 billion in 2006, an increasing proportion of which is being spent in Africa. Of particular interest to Sierra Leone is the dominance of junior exploration companies in this revival, since they will be most likely to underpin the exploration investments needed to establish Sierra Leone’s mineral potential, and the increasing appetite of major mining companies to make large investments in high-risk, emerging economies.

While the resurgence of the Sierra Leonean mining sector has been impressive, it has so far focused on the re-establishment of closed mines or exploitation of previously proven reserves. There is now an urgent need to actively encourage new investment in the sector.
Sector Assessments
The only attempt to quantify the economic potential of the Sierra Leonean minerals sector was a study undertaken jointly by the World Bank and the Government of Sierra Leone. Updated in 2005, the study concluded that successful realization of the country’s large-scale mineral potential could result in up to 8 mines within a decade, as follows:

Diamonds
Global production of diamonds reached 179 million carats in 2006, valued at over US$ 13 billion. Official diamond exports from Sierra Leone have begun to plateau. Total carats exported fell in 2005 and 2006, although the price realized per carat continues to rise. The only Kimberlite mine operator, Koidu Holdings, was forced to defer plans to mine a second pipe when the ore grade turned out to be sub-economic (although it is now understood to be investigating plans to mine a second pipe in late 2008 and proposes to develop its Tongo resources (kimberlite dyke deposit) as early as 2009.

Rutile and ilmenite
Rutile is a high-grade titanium ore, which is processed into titanium dioxide overseas for use mainly in paint, paper and welding rods. Sierra Leone is known for its particularly high-grade rutile. Titanium has a wide range of applications and is the metal of choice for the rapidly-growing aviation industry. In the medium-term, demand for the metal is expected to continue to be driven by the Chinese commodity boom.

Bauxite
Bauxite predominantly serves as a feedstock for aluminium production. The global market continues to grow with global production rising from 137 million tons in 2001 to 177 million tons in 2006. Sierra Leonean production makes up just under 1% of this volume. Vast reserves of bauxite are already proven, and as is the case for rutile, demand for bauxite in the medium-term will continue to be underpinned by robust economic growth in China and India.

Gold
Globally, mineral exploration for gold has grown significantly in recent years, driven largely by the rapid acceleration in prices since 2004. The rapid emergence of a middle class in both China and India has led to significant increases in demand, while total gold output has remained largely unchanged since 2000. A recent characteristic of the gold market that could benefit Sierra Leone is the shifting pattern of global gold production away from the traditional producers. South Africa, Australia, the United States and Canada have all seen significant falls in production over the last decade, while new gold producing countries like Ghana and Tanzania have rapidly risen in prominence.

Exploration activity has resumed in recent years. Cluff Gold and Mano River Resources both have active appraisal programmes. The former continues to define the Baomahun discovery. Recent results have already identified a mineral resource of over 1.1 million ounces of gold, and a scoping study confirmed that an open-pit mine could produce between 140,000 to 200,000 ounces annually. Mano River Resources has three gold exploration concessions, which coincide with the richest traditional areas of artisanal gold working in Sierra Leone. All three deposits are considered to have the potential to host gold deposits significantly larger than the known gold deposits at Baohamun and Komahun.