Guinea: Condé plans to rejuvenate economy threatened by low commodity prices

23 Oct 2015

Guinea: Condé plans to rejuvenate economy threate...
  •   President Alpha Condé will prioritise economic growth during his second term in office, following his victory in the 11 October presidential election. 
  •   Condé has indicated the government will focus on infrastructure investment in an effort to bolster the country’s mining industry, which makes up 26 percent of GDP.
  •   Low commodity prices, wider infrastructure challenges and weak contract sanctity will threaten efforts to bolster mining production in Guinea.

Having won 58 percent of the almost 4 mn votes cast in the election, Condé has avoided a run-off poll, and though two of the smaller opposition parties have said they will appeal the result, this is unlikely to have any real impact. The Union of the Republican Forces and the Party of Hope for National Development gained only 6 and 1 percent of the vote respectively and have little chance of forcing a recount or a re-election. The result of the poll will almost certainly be ratified by the Constitutional Court on 25 October, ensuring Condé returns to power for a second term.

The president’s priority for his next five year term will be the economy. In the past year and a half the USD 6 bn economy has been hit by the ebola outbreak, which has cost the country an estimated USD 2 bn. The disease, which is continuing at a low level in Forecariah and Conakry, has killed more than 2,000 people, paralysed the agricultural sector and halted production in the mining sector. Hundreds of foreign mining staff were withdrawn from the country during the outbreak, while Rio Tinto stopped work on its Simandou concession. According to the Guinean finance minister, the epidemic also cost Conakry USD 142 mn in lost customs and tax revenues.

The ebola outbreak coincided with the decline of global commodity prices, also affecting Guinea’s mining-dependent economy. Guinea is the world’s top exporter of aluminium ore bauxite and combined with iron-ore reserves, diamonds and gold, mining constitutes 26 percent of GDP and 90 percent of export earnings. The government has indicated it will remain committed to reforms and investments that improve the operating environment for mining companies at a time of low commodity prices. In 2014 the minister of mines Kafalla Yansane announced ambitious efforts to attract up to USD 50 bn in investment in the mining sector within a decade. To this end, Condé has declared his commitment to continued power infrastructure improvements and in September 2015 he revealed plans for the USD 2 bn 550 MW Souapiti dam project, which is intended to almost double the country’s energy output. The project will reduce mining companies’ reliance on expensive diesel generators for a consistent supply of power. The completion of another hydropower project, the 240 MW Kaleta dam, in July 2015, tripled electricity production in Guinea and such developments will be welcome at a time when mining companies are looking for cost reduction and downsizing due to the six-year lows in the prices of aluminium and copper.

Despite these considerable improvements to power supply, investors in the mining sector will remain cautious due to high political risks, lack of transparency and other major infrastructure challenges. Transportation infrastructure remains limited, with roads largely unpaved and a number of transport links between mines and ports missing completely, making exporting minerals challenging. Camen Resources’ Telimele bauxite project in western Guinea is due to begin production in 2016 but says it will face delays in exporting bauxite since it will need to construct 110 km of roads linking its mine to a river port on the Rio Nunez first. Similarly, the Simandou mine, which holds the world’s largest untapped reserves of iron ore, has no connections to ports or railways. The Guinean government signed a USD 20 bn agreement with Rio Tinto in May 2014 to build a 650 km railway connecting the mine to a port- which it would also construct, but there is no estimated date set for the start or finish of construction. With iron-ore prices 60 percent lower at the end of 2014 than at a peak in 2011, Rio Tinto may be reconsidering these plans and the railway appears unlikely to be completed before 2020. 

Investors will also continue to be deterred by high levels of political risk, corruption in the tendering process and weak contract sanctity in Guinea. In 2014, a technical committee in Guinea recommended that the government revoke BSG Resources (BSGR) and Vale’s rights to the Simandou mine, angering BSGR and leaving new investors fearing costly legal action if they acquired production licenses in future tenders. Condé’s government has gained a reputation for unpredictable changes of policy in the mining sector and in March 2015, Conakry unexpectedly cancelled a tender for bauxite mining blocks in Boffa, without providing any explanation. A further sudden change of policy came in June 2015, when the government announced it was considering revoking UK-based mining company Alufer Resources Limited’s Special Interest status at the Bel Air Project, 120 km north of Conakry. The government added that it planned to give Alufer’s neighbouring concessionaire China Power Investment Corporation (CPI) access to some of its land, with the president’s explanation only that China was an important strategic partner. Although Alufer has since complained and discussions surrounding rights to the concession remain ongoing, China has become a key investor in Guinea, with the China International Water and Electricity Corp. financing both of the aforementioned hydropower projects. Signs of preferential treatment for Chinese companies in mining licenses or any further revocation of past contacts will undermine confidence in the competitiveness and transparency of the mining sector. 

The comparatively peaceful nature of the latest election and the improvements to Guinea’s power infrastructure are positive developments for mining interests in Guinea but the ambitious growth targets that the government has set for the sector will not be met while commodity prices remain low and mining companies’ appetite for capital-intensive operations is weakened. The development of the Simandou mine and associated infrastructure is critical to Guinea’s growth plans and will continue to be delayed due to market conditions, as well as persistent legal and political obstacles. Meanwhile, a failure to improve transparency in the bidding process, show commitment to existing and future licenses or initiate broader infrastructure improvements will continue to affect investor confidence in the Guinean mining sector, thus weakening Condé’s broader economic growth plans. 

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