Nigeria: Gradual Mining Sector Development


BMI View: The Nigerian government's plans to diversify the economy away from dependency on oil revenues will drive greater investment into the country's mining sector at a gradual pace. We expect the coal sector to be the main beneficiary of investment growth, as the country's need for efficient power generation will allow for the development of coal mines to support coal-fired power plants over coming years. However, we highlight that attracting foreign investment will be difficult at this time, as weak commodity prices encourage foreign mining companies to focus on core assets, rather than undertake expensive new projects in frontier locations.

We expect greater investment to flow into Nigeria's mining sector over coming quarters as the government implements measures to revitalise the industry. The Nigerian government has stated its plans to reduce dependency on oil revenue, particularly as foreign exchange reserves have declined since mid-year despite high oil prices. Nigeria relies upon oil for up to 95% of foreign exchange income and 80% of government revenue. Consequently, interest is turning to the country's other mineral deposits. Nigeria's Minister for Mines, Musa Mohammed Sada, said in Q313 that the government's plan is to increase the mining sector's contribution to GDP from 0.5% at present to 5% by 2015.

Reserves Falling Despite High Oil Prices
Nigeria - Foreign Exchange Reserves, US$bn

We expect coal and iron ore to receive the greatest development over our forecast period to 2017. Although the bulk of mining operations are currently state-run in Nigeria, we expect this to change as the government incentivizes private investment in order to achieve its growth targets. In Q313, President Goodluck Jonathan stated his aim for 30% of Nigeria's electricity to be generated from coal. The main driver of growth will be the development of coal mines to tap coal resources spread over Enugu and Benue States. A Nigerian-Chinese consortium, HTG-Pacific Energy, signed a deal worth US$3.7bn in Q313 to develop the Ezinmo coal block and to construct a coal-fired plant in Enugu state.

Although iron ore mining remains heavily dominated by national and regional government bodies, Australian-listed Kogi Iron is developing the Agbaja iron ore project, which is expected to produce 5mntpa (million tonnes per annum). The deposit has resources of 488mnt at 42.7% ore grade. Iron ore will be sent by slurry pipeline to Banda Barge facility where it will be taken by barge along the Niger River to Port Warri. Although there is no fixed start date for production yet, we expect Agbaja to constitute the main driver of growth in Nigeria's iron ore production in coming years.

There is little prospect for growth in gold mining in Nigeria, as current production is accounted for artisanal miners and there are no new projects in the pipeline.

Mini Mining Sector
Nigeria - Coal & Iron Ore Production (kt)

Supranational Stimulus

The Nigerian government's aim to boost the mining sector will be matched by commitment from supranational institutions. The World Bank, the Canadian International Development Agency and the Australian Agency for International Development have provided a programme to support mines and steel development in Nigeria. The programme includes help to identify mineral deposits and provides training for mining sector employment. Parallel to this, the government has taken strides to reform regulation in order to attract investment into the mining sector. Exploration and mining licences may be held in full by private companies, royalty payments are low at beneath 5% and corporate tax is 35% of net profit, with mining companies exempt from any further taxation.

Too Little, Too Late?

The decision to redress the balance between Nigeria's oil and mining sectors has come at a less than opportune time, as commodity prices have passed their recent zenith. Broadly speaking, mining companies around the globe are experiencing reduced margins, precipitating restructuring and capex cutbacks. Consequently the Nigerian government will be faced with a sizeable challenge in attracting foreign investment as mining companies seek to focus on core assets where they can derive lower cash costs, rather than set up new operations in frontier markets where costs and risks are higher ( see 'Both Promise & Problems Ahead', October 21).

Nigeria - Metals, Minerals & Mineral Fuels Production (thousand tonnes unless otherwise stated)
2007 2008 2009 2010 2011
Aluminium na 10.6 13 21.2 17.6
Steel 500 500 450 410 400
Iron Ore 58 62 99 63 70
Coal 27.3 38.5 40.6 45.7 39.2
Crude (million 42-gallon barrels) 803.0 768.8 780.3 896.0 866.2
Natural Gas (million cubic metres) 68,404 64,776 52,026 67,758 67,972
Source: USGS
This article is tagged to:
Sector: Mining
Geography: Nigeria