Semafo Facing an African Gold Take-Away?

Lawrence Williams | September 1, 2010 | 2:58 pm

Perhaps one of the many problems facing mining companies in developing nations is that the locals – or at least some local politicians – often have little idea of the economics of bringing a mine to production. Even if this is not the case, then there are almost certain to be self-serving politicians taking an adversarial stance and creating problems for investing companies by highlighting what they claim to be deficiencies in contracts entered into between government and mining companies.

Canadian mining company Semafo seems to be facing this kind of problem in Niger, which has had, since February this year, a military government. According to a Reuters report issued on July 9, a government committee set up to tackle economic and financial irregularities has said it is studying a contract signed by Semafo to mine gold in the west of the country.

“Since this company started its activities, Niger has not seen a single franc despite its being a shareholder,” committee president Abdoulkarim Mossi told a news conference of the 20 percent state share in Semafo’s Samira Hill mine.

The statement is probably simplistic; Semafo will certainly have been contributing to the country at least indirectly through taxation, local amenities and infrastructure. If it is basically accurate in that the 20% government share itself has generated no income, however, then it was perhaps naive for Semafo to have come up with an agreement that might have seemed to promise direct revenues to the state that it has been unable to deliver.

Since the committee was formed, the company has vigorously defended itself against the allegations of not benefiting the host country with its operations. While Semafo may not yet have paid out dividends and will only do so when its capital expenditure on the mine has been fully recovered, Benoit La Salle, Semafo’s President and Chief Executive Officer, points out that the company had already paid more than $24.8 million in taxes, royalties and local salaries from 2004 to 2009, $14 million of which represented royalty payments. In addition, the local operating subsidiary company, Société des Mines du Liptako (SML), spent during this period more than $153 million on locally-purchased goods and services.

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Semafo points out further that, in 2003, and with the approval of the SML shareholders (which includes the Niger government), SML with Semafo as guarantor undertook a hedging program with bank Société Générale to obtain debt financing for construction of the mine and infrastructures. Since then, Semafo has invested in excess of $80 million in SML. Further, the company notes that in compliance with customary mining practices, SML intends to pay dividends to its shareholders once the capital has been reimbursed to its funding shareholder. In this regard, it is important to note that, according to West African corporate-governing regulations, dividends can only be paid to shareholders once the accumulated deficit has been cleared in full.

“We have always upheld transparent business practices. Our organization is governed by strong ethics and values and we certainly welcome any enquiries or comments in this regard. Our financial reporting and obligations are of the highest standards. We are confident that the Niger committee will confirm this fact and that there will be no major repercussion on SML as a result of this inquiry,” La Salle adds.

Niger is run by a military junta and one only has to see what similar autocratic governments can do in their dealings with foreign mining companies – Guinea for example – to understand that the company’s mine could be under threat given that the committee has, according to Reuters, the power to recommend that contracts deemed to be unbeneficial to the country be annulled.

Samira Hill is a significant operation for Semafo. It started up in 2004. Last year it produced 56,900 ounces of gold – about a quarter of Semafo’s West African production (its other mines are in Burkina Faso and Guinea) – and its latest resource has been estimated to contain some 2.4 million ounces of gold. One hopes for Semafo’s sake that Samira Hill does not become the next African take-away.

Lawrence Williams writes for Mineweb.