Thursday, May 23, 2024
Interview"In mining, luck is better than knack," Wondemagegnehu Gebre-Sellassie

“In mining, luck is better than knack,” Wondemagegnehu Gebre-Sellassie

Counselor and lawyer at Wonde and Associates, a mining law firm, Wondemagegnehu Gebre-Sellassie specializes in mining law. Educated in the United Kingdom, he has worked in Ethiopia’s mining industry for over three decades. He currently acts as an advisor to foreign firms conducting exploration and production in Ethiopia. His areas of expertise include the environment, natural resources, mining, and petroleum. He began his career in the 1980s at the Ministry of Mines (MoM), where he helped draft several mining laws that softened Ethiopia’s strict mining laws.

Wondemagnehu’s client base has shrunk by 40 percent over the past six years as a result of instability in Ethiopia, but he sees encouraging trends unfolding now. However, there are enormous challenges that must be overcome to fix the long-standing issues in Ethiopia’s mining sector. The oddities in Ethiopia’s mining industry were discussed in depth during an interview with Ashenafi Endale of The Reporter. Excerpts:

The Reporter: In the past few years, Ethiopia’s mining performance, particularly its gold exports, has fluctuated significantly. However, the country requires gold for its foreign exchange and reserves. What is the cause of the irregularities?

Wondemagegnehu Gebre-Sellassie: There are several complicated factors behind it. In the past 30 years, several efforts have been made to reshape Ethiopia’s mining sector. When I was at the Ministry, there were several projects implemented to modernize the artisanal and traditional mining of small-scale miners. Many things have improved since. For instance, at that time, artisanal miners had no licensing system. Today, at least some of the artisanal miners are able to use some small-scale machinery. Yet, artisanal mining still remains traditional.

Especially the production system of gold and metal items is not modernized in Ethiopia. Artisanal mining and Legedembi remain the only sources of Ethiopia’s exports. Large-scale mining in Legedembi began at the end of the 1980s. Of course, there was Adola gold mining even before that, but Legedembi is the first modern, large-scale gold mining in Ethiopia.

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Unlike Legedembi, the artisanal mining sector is not structured, modernized, or tamed. Several pieces of legislation on supplying licenses, the value chain, and gold transactions were enacted over time.

Despite all the efforts, the amount of gold that flows to the central bank fluctuates. The major reason is related to the production methods and flaws in the value chain. There are also no additional large-scale gold mining projects operationalized. Most of the gold is still mined by human labor. So, many small-scale miners are licensed. The government might be able to control them, but many gold miners are also mining gold without a license. The gold is also being supplied to the central market informally. Gold is also being smuggled out of Ethiopia and into other countries. This has continued for the past three decades.

So the biggest reason is the failure to control and regulate the miners.

The second big reason is the failure of the National Bank of Ethiopia (NBE) to control and regulate gold suppliers. The gold suppliers are licensed to collect gold from artisanal and small-scale miners and then supply it to the NBE. Additionally, the suppliers’ price is much lower than the premium on the gold parallel market. So the legal suppliers could not compete with the contraband gold buyers. It is very complicated.

Small-scale miners, particularly in Benishangul, which has one of the biggest gold reserves, say the government does not support their operations and only requests gold. They urge the government to provide machines, technologies, and other support before demanding gold. They claim they have the right to sell gold to anyone who offers a better price because they discovered the gold on their own without government assistance.

Why has the government failed to provide lease-financed equipment to small-scale miners? Why doesn’t the government regulate gold suppliers? Why are suppliers necessary when miners could directly deliver gold to local NBE branches?

This is a matter of the government’s decision.

The Ministry and regional mining offices tried to modernize the artisanal mining sector, but the government’s support was not sufficient. There are over one million artisanal miners in the country. It is very difficult to provide support for all of these. So the government tried to mobilize them through cooperatives and a special small-scale mining license. So compared to the large number of artisanal miners, there is not sufficient support.

NBE also cannot directly buy from all the artisanal and small-scale miners. The central bank cannot open a branch in every area where miners are located. Therefore, the gold has to be collected through licensed suppliers and then reach the NBE. Of course, it would have been better if the NBE could open branches everywhere. But that would be more expensive.

The proliferating contraband is not only hurting the country’s revenue but also contributing to environmental degradation. Deforestation and soil erosion have increased due to these irresponsible activities. There is also the illegal use of chemicals to wash the gold-containing soil. Federal and regional officials and all stakeholders must cooperate to solve the problem.

Which miners do you think have more capacity—artisanal or large-scale miners?

Basically, artisanal and small-scale miners mine surface gold or alluvial gold. Only commercial miners with the necessary technology can mine the hard rock mineral, which is located deep underground. It requires a complicated process.

First, you have to find the rock bearing gold. Then you mine the soil, which is crushed, and then washed rock enters the processing machine, after which the gold is separated from the soil. It is a huge industrial project.

In the past, before Legedembi was mined at an industrial level, it was mined at a surface level. Then the exploration at the industrial level took 14 years. Underground gold mining requires complicated machinery installations. Industrial miners in South Africa, for instance, use shafts up to two kilometers underground.

Usually, people say the mining sector’s contribution to Ethiopia’s economy is small. They only focus on the revenue from gold exports. Salt, construction materials, marble, granite, limestone, pumice, and others are also minerals that can contribute hugely to the economy. Of course, gold production fluctuates a lot. But other minerals also require attention.

Several large-scale gold and other mineral mining projects have been in the works for several years. How do you explain the length of time it takes for large projects to become operational?

This is not a problem limited to Ethiopia. The trend is similar across the world. Gold exploration is like searching for a needle in a haystack. Even after the mineral is found, it takes longer to start operation. The feasibility study, machinery installation, right-of-way issues, and other processes take time. Finding finance also takes time.

Almost all commercial mining companies mobilize finance after they secure the exploration and feasibility study. It does not mean they have no money, but they might lack liquidity at hand. Especially commercial mining companies at medium levels face liquidity problems. They cannot raise half a billion dollars at once from their own pockets. Plus, they have already spent their money on exploration.

By the way, not all mining companies succeed. Most of them remain in the exploration stage. Very few can succeed in all stages and reach production level. The peace and stability of the country also determine it. The license’s life also matters. The availability of manpower in domestic settings is also crucial. Conflicts in Ethiopia, COVID-19, financial market shortfalls, and other factors are contributing to the delays.

According to international studies, it takes 15 years on average to finalize large-scale exploration. Then, to start production, it takes another 10–15 years. So in general, it takes over 25 years to find and operationalize a new industrial-level mining project. This might vary from mineral to mineral. Mining is a different sector from any other, and the challenges might be harder in Ethiopia.

Legedembi is a very good example. It succeeded after continuous work on it. Russian geologists performed the exploration. It took over 10 years. The development phase took close to four years, and production started after 14 years. This is a very good example. It succeeded in a short time because the government allocated a budget every year. Private investors might face more challenges due to financial mobilization. But it is evident that if the government aggressively works, many projects can be realized in a short time. Yet success is not always guaranteed in mining.

Several projects were launched when I was at the MoM a long time ago. The UN Mineral Promotion Project was also providing substantial support for these projects. Several legal reforms were introduced, and foreign mining companies started to come to Ethiopia. Many of them were granted licenses. This was some 20 years ago. Only Midroc’s mining is operational. Many of them are still in the pipeline, transferring licenses from one company to another. Of course, the conflict in Ethiopia in the past few years has also affected their progress.

Currently, very few mining firms are active. So there is almost no new company currently starting production.

Most foreign mining companies usually transfer their licenses to new foreign mining companies when their exploration licenses expire. And following license issuance, the majority of businesses look for financing. Is this the result of the Ethiopian government’s failure to choose the best mining company from the outset?

This is not related to the government. It is more a problem of the companies’ challenges. Especially midsize and small-scale companies are well known for conducting exploration. This is because these companies can effectively use their resources. The first company progresses somehow and then transfers to the next company.

Mining is usually like a relay until the final company finalizes it. Several big international companies came to Ethiopia, including those in potash, gold, and others. The government cannot select companies.

For instance, the Ethiopian Geological Survey has conducted several explorations. The investing companies use this as a stepping stone. So they do not start from scratch. Mining is more about luck than skill or a company’s status. Mining companies would not want to leave if they were in a position to reach production. Therefore, the reason why the first company transfers its license to the other company is because they are not lucky or they are not big enough to mobilize the capital. Some companies are good at exploration, while others are good at production. Therefore, it is normal for mining companies to transfer licenses.

A company can spend USD 50 million on exploration and leave without any result. Then another company can come and spend the same amount and find the mineral. There is a famous proverb among mining professionals. Some miners are highly skilled professionals. Others are just lucky. In mining, luck is better than knack. The lucky one is preferred.

Sometimes, mining failure is not about capital, skill, capacity, or technology. It is just about luck. Many scholars accuse foreign mining companies of coming to Ethiopia just to beef up their stock market valuation in their country of origin.

Of course, they have to report to the stock markets in their country. However, these companies will reap better revenue if their project succeeds. The stock market listing may help raise exploration finance. But the stock market cannot be the major reason why foreign mining companies come to Ethiopia.

But it does not appear that exploration is the issue in Ethiopia. Several gold mining companies have confirmed that they have located the reserve and have been granted vast expanses of land. However, it takes years before production begins. Some insiders even assert that these commercial mining companies are smuggling gold out of the country despite not having officially begun production.

One day, a Member of Parliament called me and mentioned the name of a large-scale gold mining company that is in the exploration stage. The MP asked me why this company is not paying tax.

The company is actually doing trenching. They dig and take samples of soil to study the minerals in the soil. But the MP confused that, as if the company was already taking out the gold and selling it. Companies drill and take out samples. That does not mean production.

Currently, the commercial gold mining companies in western Ethiopia have finalized exploration. They were in preparation to proceed to production. However, the state of security in their area over the past few years is not something we can avoid.

The development stage takes significant money. The investor wants to be sure how the money is to be invested and translated into results. How the infrastructure can be networked, the local community relocation, security, labor, processing plant, spare parts supply, and many other issues have to be road-mapped before the investors disburse the capital.

Since 2014, there have been continuous protests in Ethiopia. Even after the regime change in 2018, there were ups and downs in security. Currently, it seems that things are normalizing. So it is not easy for investors to throw money where such issues are not predictable.

Installing the machinery and laying down the industry is the most difficult process in the development stage. It takes complicated tasks, including using dynamite, to clear the way. They have to lay down the logistics to transport the mineral-bearing ore to the processing plant. The ore has to be crushed before it is processed, and then it goes through chemicals to separate the soil from the mineral. It takes years to lay down such an industrial system.

For instance, when Legedembi was closed due to security issues in the past few years, some people said the company was mining gold secretly. How can it do so while the machines are off and employees are not there? Such claims are baseless.

I know several large-scale companies have taken development licenses, and they are in progress to start production. But that does not mean they are mining gold secretly.

Revenue from gold exports reached a record high of around USD 600 million nine years ago before falling to less than USD 100 million in two years. Despite last year’s improvement, this is declining again this year. Where does the difference go? Can we attribute the difference to contraband, or are artisanal miners ceasing operations?

I cannot say the gold production has declined. So the logical reason could be that the government failed to collect the gold properly. There are probably market players who purchase the gold at a higher price and smuggle it out of Ethiopia. So I do not think miners are stopping production. Instead, the produced gold is ill managed, especially in the market chain. The market disturbance is also related to the instability in the areas where the gold is mined.

There are several factors causing Ethiopia’s gold performance to fluctuate. The suppliers are not offering attractive prices for the miners compared to the parallel market. Instability is another issue. The only fact we know is that the supply of gold to the central bank is declining.

Many insiders criticize the government’s system for being exposed to corruption and contraband. How do you evaluate the role of the Ministry in this regard?

I cannot comment on that since I am not an employee of the Ministry. But there can be several challenges in the sector. The officials and staff of the Ministry might lack proper knowledge about the sector. The instability in regional states might also contribute. There are layers of factors.

The central bank buys gold, adding 35 percent to the international market price. Currently, the Ministry and the NBE are conducting a study to increase the gold purchasing premium to 85 percent, according to The Reporter’s sources. How much premium do you think would be proper?

This is a difficult question.

The reason the central bank is buying gold at a higher price in birr is because the government wants the forex revenue generated from gold exports. So I do not think that the government would create an obstacle that could hinder the supply of gold.

So the major reason why gold is going to the contraband market is largely due to those challenges. I cannot say the government would intentionally allow obstacles.

There are upstream and downstream players in the mining sector. The upstream work includes exploration, financing, consulting work like I do, and preparations for development. Downstream includes everything from production to the consumer. I am not the expert to determine the premium rate.

To determine the premium margin, it is better to calculate the international market price, finance costs, production expenses, and other factors. So, the bankers should make this decision.

The NBE is purchasing gold at a loss in terms of Birr. This indicates that the margin is already higher than the international market because the government needs foreign exchange. In contrast, the gold contraband market offers a higher profit margin because the gold price is calculated using the black market exchange rate. Is the government not competing with the black market exchange rate?

My knowledge of financial analysis is limited. I am not qualified to answer this.

How many mining companies do you represent currently?

We specialize in mineral mining and petroleum. We provide consulting services for different international companies in the sector. We also worked with the World Bank at different times on the environment, energy, and other areas.

As a mining law firm, we represent mining investors and companies in petroleum exploration. But currently, their number is declining. Compared to six or seven years ago, the number of our clients has dropped.

How much is the drop?

At least by 40 percent.

What are the major tasks you do for the mining companies?

The first thing foreign companies need when they come to Ethiopia is legal due diligence. We provide them with Ethiopia’s legal procedures on how they can get exploration licenses, mining licenses, renewals, and other legal services. Tax issues, court processes, arbitration, the status of local service providers, and other due diligence work are also required.

Based on the due diligence we provide them, the companies then make their decisions. So we provide them with our legal advice as long as they are active in Ethiopia. If they are about to close their company, then we provide them with what Ethiopia’s law dictates.

Can you tell us about your involvement in the petroleum and natural gas exploration and production efforts in Ethiopia?

Sure. There are companies in this sector that we are advising.

Do you think there will come a time when Ethiopia stops importing fuel?

A long time ago, there was a study regarding how to develop and use the natural gas resource in Calub Hilala. The World Bank committed to providing the financing required to conduct the study. That was the good old days.

During the Derg regime, all mining activity was under government control. But the UN, World Bank, and others were recommending reforms. So when I joined the Ministry towards the end of the Derg era, new mining proclamations were introduced. Then the study on Calub was started.

Finally, the study recommended that Ethiopia start small-scale production of natural gas at Calub Hilala. This means production of natural gas can start on a small scale. Then fertilizer companies were proposed to be established in the same area. The fertilizer factory uses the byproduct of the natural gas. A pipeline was proposed to be laid between Calub and Awash. There, the natural gas is supplied to markets in barrels.

This whole work was estimated to cost around USD 500 million at the time. This was toward the end of the 1990s. Since that time, Ethiopia has been waiting.

Ethiopia still needs to decide and arrange how it can start production of the natural gas and utilize it.

Just like the mineral mining sector, the petroleum exploration and mining sector also has its own set of challenges. Gas itself has problems. Unlike crude oil, you cannot just put natural gas in barrels and sell it.

The market also needs to be secured. Do we need it for power generation, household, industries, export, local market, or other purposes? Infrastructure and regulation are also other aspects. The availability of the resource alone is not sufficient. The local community also needs to benefit.

Potash is another industry mired in difficulty. After Alana potash, why did everything come to a halt?

There are companies still working on potash in Ethiopia. Had it not been for the chaos Ethiopia faced in the past few years, Ethiopia could have seen good progress in potash production. Especially the past three or four years have taken us aback. At least there were three companies in that area.

There were a lot of efforts, including arranging the infrastructure required to develop the potash. There were a lot of plans for how the potash could be exported, including logistics through the Djibouti port. If there is peace, I think potash production will start soon.

To what extent is politics involved in mining? Does the origin of the investor matter in Ethiopia’s mining industry?

This is difficult to answer. The market is the ultimate determinant. Most of the companies working on potash in Ethiopia were western companies. I cannot guess why they were forced to leave their projects in Ethiopia because I know there were many positive and constructive efforts.

The biggest problem foreign mining companies’ face in Ethiopia is a lack of stability and predictability. Unprecedented challenges happen frequently. Such things lead to higher expenditures, which investors do not want. Such big investments require stability. Mining investors also need relentless and efficient support from the government. But there are shortcomings in this area.

If all the support needed is fulfilled, big results can be achieved in Ethiopia’s mining sector.

Ethiopia is embarking on coal mining and import substitution while the world discourages coal. How do you see this from an environmental perspective?

Such decisions can be seen as emergency situations. For instance, the Germans were using gas, which is clean, but after the Ukraine war, they were forced to shift to using coal because the gas supply was cut. Germany’s coal mining sites are now active.

There are countries where coal is used on a massive scale. In Ethiopia, coal is needed only for the cement industry. Ethiopia will not pick coal as a solution if we have other options. If there is international cooperation, the use of coal can be minimized. Ethiopia has to grow.

Many countries have developed through activities that are contributing to the climate change we are seeing today. They developed, but they created problems. So how can they tell Ethiopia to stop using coal? There is poverty, underdevelopment, and many other problems in Ethiopia. If the international community wants Ethiopia not to use coal, they have to provide an alternative. But hunger and underdevelopment cannot be the alternatives.

Many scholars assert that gold smuggled from Ethiopia and other African nations ends up in the reserves of the BRICS nations. They claim they are stockpiling gold reserves to back a new currency in an effort to dedollarize. What do you think about this?

Gold is usually sought after because it is used as a commodity that never depreciates. Gold was the determinant of paper money’s value. But I am not sure whether the gold contraband is related to BRICS or not.

But correcting the irregularities in Ethiopia’s gold performance and ending the contraband requires a huge task.

What is your recommendation to solve the problem?

Filling legal loopholes, understanding the industry, providing support for investors, efficiently implementing the laws, regulating the market, and having enforcers are highly critical.

But ultimately, the stability, security, and predictability in Ethiopia need to improve for the mining sector’s performance to improve.

[speaker]
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