by Dr. Grain Wyson Phillip Malunga
Malawi finds itself in the perfect position to benefit from the global mining resurgence. Electrification, decarbonisation and green energy are topics that government and large industry all over the world are talking about. Key to the delivery of these global initiatives are the raw materials required to drive the technologies improvements and Malawi is in a fortunate position to have many of these minerals as natural resources, including rare earths, graphite, uranium and critical metals. The question is how Malawi and its people can benefit from these natural resources.
Building a mine and operating it is a high-risk business that requires a highly skilled team with experience in construction, operations, financing and marketing. The amounts of money that needs to be invested by the companies wanting to develop these mines is large, running into 100’s millions of dollars (US$). As Malawians would lend money from banks to buy houses and cars, these companies look to international banks, investors or other lenders to obtain the money required to start up and operate the mine. Private banks and investors will only invest their money if they are confident that the project can provide returns on investment that match the risk they are taking, similarly to banks who lend Malawians money to buy houses and cars that will only do so if the person being lent too is earning enough money to pay their debts back to the bank. The Malawian government is responsible for creating a fiscal regime which attracts investors to invest in Malawian companies. Investors will only invest if they know that the project is capable of paying back a return on their investment.
Malawi’s mining industry is still in its infancy with only one large scale mining operation ever having been operated in the country, the Kayelekera Uranium Mine, which subsequently closed after only five years of operation as it was not profitable. Any business that is not profitable will not be sustainable and because of the large investment required to start up mines, as well as the large risks associated because of the swing in commodity prices, and variable production costs, banks and other investors need to ensure they are not exposed to unnecessary fiscal regime risk (free carried interest, royalties, taxes) and sovereign risk (corruption, government stability, fiscal regime stability). Each mine is different and needs to be dealt with by the mine operator, government, investors and the community differently. For instance a uranium mine can not operate under the same fiscal rules as a gold mine or coal mine as they are different types of mine with different risks from commodity prices through to mining operations and even transport. In other words, one set of mining laws and regulations does not necessary apply to all different mines and this is why it is important that government and the mining company need to negotiate a mines development agreement (MDA) that is relevant to that specific mine. If the fiscal regime does not work for a specific mine it will never operate and all stakeholders (Government, communities, mine operators, investors) will not benefit.
In order to develop and grow the mining industry, the Malawian government needs to partner up with the mining companies and demonstrate to the investors that Malawi is a friendly mining jurisdiction in which to invest and operate. The key to achieving this is understanding how investors and mining companies view and take-on risk, with the requirement that the entity taking on the most risk must have the opportunity to receive enough benefits to deal with the risk. For example if a company goes to the bank and borrows US$200 million to build a new mine then the bank and the company have taken on significant risk until such time as the loan and interest is repaid.
A recent example of this in Malawi was the Kayelekera Uranium Mine which when is operated between 2009 and 2014. The owners of the mine
- Spent US$300 million on building the mine
- Had export proceeds of US$567 million
- Spent US$347 million on local supply
- Paid US$52 million in taxes and royalties
- Put US$18 million into social development projects
But as a company they lost US$37 million as a result of their investment, with no returns to any of the original investors. The groups that made money out of Kayelekera were the government, local businesses and suppliers. These statistics are all public with the Malawi Revenue Authority as well as in Paladin Independent audit documents which were all done by independent auditing companies.
All communities in the Kayelekera and Karonga area benefited immensely from having Kayelekera Uranium mine operating. The myth in Malawi however is that the Mine Development Agreement between Paladin and the government was in Paladin’s favour. How could that be if the mine has not been operating for eight years as it was not profitable at the time when it opperated. The fact that Paladin has sold the mine to a willing operator being Lotus Resources should be seen as encouraging, however Lotus management are confident that the mine can not be profitable if a mutual beneficial MDA is not agreed as it will not secure investment as it would make substantial loss under the current laws and fiscal regime outlined for mines.
If Malawi wants to develop its mining industry then it needs to recognise who is taking the risk in developing the mine and who is responsible if the mine fails to meet its targets and returns.
With all the risk that the company and its investors are carrying the company needs to be in a position where it is certain it can receive enough of the revenue stream to repay its loans and cover any other liabilities. In order to do this there must be a fair equitable fiscal regime negotiated and agreed by the government and the mine owner to which the project operates under as these would be substantially different for each commodity being mined.
A remedy for this is for the government to enter into a Mine Development Agreement with the company so that initial relief can be used to attract investment into the company by reducing some of the fiscal parameters associated with the project (e.g. royalty rates, import duties) to start up the mine and make the project viable and sustainable in the long term for all stakeholders. This Mine Development Agreement can be for a fixed period of time which is negotiated between the government and the Company so that investors are attracted. On completion of this time period (known as the stability period) the standard fiscal parameters for a company operating in Malawi are reinstated as the risks for the operation after a certain period of time are considered to be reduced. This is a very common approach to attracting mine development funding in developing and developed countries.
There are currently four international companies in Malawi that are looking to build and operate mines within the next few years. Each of these mining companies mine very different commodities and have very different operating and profitability parameters. They will all need to raise large amounts of money to build these mines and the only sustainable way this can be done is in partnership with the Malawian government who needs to actively address the issue of sovereign and fiscal risk and set an environment that is conducive for investment to occur through the negotiation of an attractive and investor friendly Mine Development Agreement.
Malawian mining companies and mining projects are competing against many other countries around the world for investment dollars and if an attractive and low-risk environment cannot be developed that attracts and supports investors and world class mining companies then the Malawian mining industry with all its potential will never be developed. This would be detrimental to the country’s economic development plan which is focused on creating mining as a primary economic sector.