Iron-ore-rich West Africa has been tagged as ‘The New Frontier’ and ‘The Next Pilbara’, with major investments from large diversified miners and junior miners; however, the region still presents significant risks for these companies, says research and consulting firm Wood Mackenzie iron-ore market analyst Gavin Montgomery.

He highlights that Guinea’s new mining code, adopted in September last year by President Alpha Condé, has significant implications for those wanting to invest in exploration and mining operations in the country. The new code, for example, allows government to take a share of up to 35% in these projects.

In addition to the capital-intensive effort of having to develop infrastructure to support the mining sector, companies risk losing a great portion of their investment to the local government.

“In many ways, West Africa is unchartered territory for a lot of these companies. Still, they definitely want [the region] as part of their portfolio,” says Montgomery.

He says local governments in the West Africa region are becoming impatient with mining companies, which may have slowed down project progress in recent years, owing to the global recession.

Montgomery cites Gabon’s 2010 review of its Belinga iron-ore project deal with engineering and trade company China Machinery Engineering Corporation to speed up the development of the project as an example of an impatient government taking matters into its own hands.

He also mentions Guinea’s impatience with diversified mining major Rio Tinto, in 2008, because of its slow progression in the northern blocks of the Simandou deposit. Brazil-based major Vale now has a $2.5-billion stake in Simandou, preventing Rio Tinto from acquir- ing full ownership of Simandou, which is expected to be the world’s next great iron-ore province.

Another significant challenge facing West Africa investors is China’s sluggish growth. With China being the world’s biggest importer of iron-ore, Montgomery warns that the industry will be in deep water without the giant Asian consumer.

“If there is a potential oversupply of iron-ore, some of these West African projects will probably not be viable,” he says.

He highlights that in addition to Rio Tinto and Vale’s interests in West Africa, both mining majors are advancing their projects in Australia and Brazil respectively, taking an approach that favours ‘build over buy’.

“If the market slows down [further], it is likely that more major companies will focus on brownfield expansions closer to home, rather than progressing capital-intensive projects in West Africa, which has a risky political profile,” he explains.

With the market’s current stagnant state, however, Mining Weekly reported in May that analysts were encouraging companies to buy into the market, as they were still certain that Africa had significant investment opportunities. As a result, there is still much to look out for in the mergers and acquisitions field.

Moreover, China has not stopped investing in West Africa. It is still intent on owning 50% of iron-ore in the region, as it ultimately seeks to import from its own investments.

Montgomery also stresses that mining giants such as BHP Billiton and Rio Tinto seek to hold a diversified portfolio of assets, and projects in West Africa are part of this strategy.

“They obviously have to think ahead and there’s still a lot of potential to supply China. The very nature of mining is that reserves are depleted over time; therefore, mining companies need to look for new sources and West Africa is one of those.”

Growth Potential
Montgomery has earmarked Australia-based iron-ore developer Sundance Resources’ Mbalam project, in central West Africa, as a project with strong growth potential owing to China-based Hanlong Mining’s $1.65-billion takeover of Sundance, which has been delayed to November.

While the Mbalam project is not necessarily on the same scale as Rio Tinto’s Simandou project, Montgomery highlights that, with the help of Hanlong, Sundance is developing a 500 km railway line to a new port in Lolabé, Cameroon, which it plans to share with other projects in the area.

This would increase growth potential in Gabon, the Republic of Congo and Cameroon, he points out.

Montgomery also views Rio Tinto’s Simandou project as a significant game-changer in the iron-ore sector, as it will probably be one of the largest iron-ore projects in history, with a potential to produce 90-million tons a year of high-quality product.