January 24, 2017    3 minute read

Why Gold Mines in Egypt Are Attractive Again

A Golden Opportunity    January 24, 2017    3 minute read

Why Gold Mines in Egypt Are Attractive Again

 

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The nationalisation of much of Egypt’s mining wealth by President Gamal Abdel Nasser in 1961 and 1962 preceded the departure of local and foreign geological talent. The potential of the sector has been largely ignored for the past 55 years. For the first time since 2009, Egypt invited gold miners to make bids for exploration rights in five areas of the Sinai and the Eastern Desert by April 20. Thani Stratex, Centami, and Aton Resources have stated that they will not be taking part in the exploration tender.

State Interference

David Hall, CEO of Virgin Islands-based Thani Stratex Resources, expressed concerns with the nature of the current terms for investors which will include a production-sharing agreement allowing the government to gain revenues in profits.

A production-sharing agreement made between an investor and the state gives the investor the right to share in profits of the commodity when it is discovered in economic quantities and to recover the costs of exploration and production.

While it may work relatively well in the oil and gas sector, it can prove more challenging for organisations in the mining sector. Unlike oil investors who can recover costs in a shorter time frame, the high operational costs of mining combined with high mineral exploration risk may make this particularly difficult for investors to recover costs in the short-term.

There is much at stake as successful bids will assist the nation in generating foreign currency and jobs. The introduction of a new mining law that encourages a streamlined royalty and tax regime may make it easier to achieve these long-term objectives for Egypt’s economy.

Even without this law, the high-risk appetite of junior explorers may be enough to encourage more innovative measures that guide new reforms. Incumbent firms within the sector will also play significant roles in guiding new reforms.

Mining for Profits

Egypt shows great potential for investors willing to take calculated risks in its gold mining sector. Presently, the sector contributes less than 1% to the country’s GDP. The government aims to ensure that the contribution is over 5% within ten years. Following the record production at Sukari, Centamin recently rewrote its dividend policy.

The FTSE 250 miner said it would pay at least 30% of its free cash flow in dividends to investors. Centamin is forecasted to produce 540,000oz at a cash operating cost of $580 per ounce and an all-in sustaining cost of $790 per ounce. On production, CEO Andrew Pardey stated:

“Production of 136,787 ounces from Sukari in the fourth quarter marked a seventh successive year of growth, with 2016 full year output […] exceeding the top end of our revised annual guidance range.”

Since 2016, Centamin has paid the government $40m in profits and $80m in concession fees. This may be evidence of growing progress as Egypt continues to introduce reforms to reduce debt levels and increase foreign capital flows. Experts remain positive regarding the potential of the vastly untouched land. London-based research firm BMI Research expects more interest to grow for Egypt as a mining country as its gold mining sector is expected to grow by 6% a year between 2017 and 2021.

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