The Great Egyptian Gold Rush

October 2007

The Great Egyptian Gold Rush (Source: BusinessToday)

Over the next 12 months, the Ministry of Petroleum will be reviewing the nation’s mining legislation. If it follows international best practices, international mining majors are expected to flock to the desert to follow the lead of gold miners like Centamin. Is your company ready to ride the wave?

By Tom Gara, Photography by Kim Piper

Worth its weight in gold. A golden opportunity. A potential gold mine for business. These kind of metaphors are regularly used to describe a lucrative new opportunity. But how does one describe an actual gold rush — an explosion in economic activity surrounding the exploitation of a massive untapped gold reserve — that is about to materialize and reshape an economy?One reason why the language surrounding gold is more often metaphorical than literal is that gold rushes just don’t happen very often. Thanks to smart business people, the discovery of a lucrative new export market, or growing domestic consumer demand, happens on a monthly basis. For most countries, the discovery of massive, world-class gold reserves is more of a once-in-history kind of event.

Gold mining is an industry that creates enormous knock-on effects for an economy, creating entirely new mining towns and supplemental industries, not to mention the macroeconomic impact of a massive influx of hard currency. A gold rush spreads its tentacles out across multiple sectors, creating huge employment opportunities. In the 1850s, gold rushes in both the United States and Australia were instrumental in the growth of cities such as San Francisco and Melbourne, which remain international economic centers to the current day.

As anybody who has walked around the Egyptian Museum would know, Egypt’s gold rush was in full swing about 3,000 years ago. The Pharaohs were pulling gold out of the ground like nobody’s business, giving pretty much anything and everything a decorative coating of gold — if it wasn’t already made of solid gold in the first place. They were so effective at puling gold out of the ground that for the thousands of years following that golden age, everybody assumed that there was none left.

As any regular reader of Business Today Egypt would know, that assumption has since been proven very, very false. Thanks to the trailblazing work of Centamin, an Australian mining business run by a pair of Egyptian-Australians, we now know that Egypt has a literal gold mine beneath its feet. The remarkable story of Centamin and its discovery of vast reserves of gold in the Eastern Desert — and the mammoth challenges it has faced to make production a reality —has been covered extensively in bt since 2001.

For those who haven’t followed the story, the short and sweet of it is this: Inspired by the sight of a 3,200-year-old Pharaonic map showing the locations of ancient gold mines, Centamin Mining founder Sami El-Raghy decided to have a closer look at the long-dormant gold zones of the Eastern Desert. Through the 1990s, the company gradually realized that far from exhausting the country’s gold reserves, the Pharaohs had hardly made a scratch.

Centamin Egypt now has a gold exploitation lease for a 160-square-kilometer area known as Sukari Hills, located close to Marsa Alam. The company has already located a proven reserve of 9.79 million ounces of gold, worth around $6.85 billion (just under LE 39 billion) with current gold prices hovering around $700 per ounce. And that is just the start — Centamin has repeatedly stated that the figure will rise and rise as further exploration takes place.

(Indeed, as we went to press, Centamin issued a statement saying it had found another 666,000 ounces of gold, pushing its total to 10.45 million ounces worth around $7.31 billion.)

To put things in perspective, July 2007 set the all-time record for Suez Canal revenues, clocking in at $406 million (LE 2.3 billion). With an entire year of these record revenues, Suez — currently Egypt’s second largest revenue source — would pull in just 70% of what Centamin’s current Sukari reserves are expected to deliver. And that is just one portion of one small site in an area littered with potential new deposits. Sami El-Raghy has told bt again and again that as other finds are discovered and exploited, he believes Egypt’s yearly revenues from gold will one day be greater than revenues from the Suez Canal, tourism and the petroleum industry combined.

The Ministry of Petroleum, which assumed responsibility for regulating Egypt’s mining industry in 2005, announced in March of this year that gold exploration was to commence in eight new locations across Egypt — seven of which are in the Eastern Desert, with one located close to Dakhla Oasis in the west. The explorations are being carried out by joint-venture companies involving the government and international private-sector partners from Canada, Russia, Cyprus and the UAE.

In April, a milestone in the Egyptian gold sector was reached: The production of the first bar of gold bullion in over 50 years. The brick of 99.9% pure gold was produced by Hemsh Misr, a joint-venture between the government and the Cypriot Matiz Holding Company. Although this was the result of experimental production activities, a Ministry of Petroleum announcement stated that large-scale production will begin by mid-2008.
Knock-on Effects

Mining is an industry with a particularly long trail of associated industries, ranging all the way from transporting and accommodating mine workers to running advanced metallurgical analysis on extracted ore. Asked what kind of opportunities exist for Egyptian businesses to get in on the action, El-Raghy runs through a seemingly never ending list of goods and services needed by a large-scale mining operation.

“There will be whole towns established for mine workers,” he says, “meaning that there will be a demand for all sorts of construction work, from building roads and houses to commercial facilities, even schools. Then you have opportunities for manufacturing companies: anything from basic cloth or plastic bags to pumps, machinery and spare parts. Engineering consultants will be needed, and there will be big demand for skilled experts: laboratories and testing facilities for analyzing ore, consultants in mining engineering, exploration geology and metallurgy.”

In addition to the industries directly supplying the mining companies, El-Raghy sees a need for new centers for technical education, as well as specialist training providers that can develop the type of skills mine workers and managers will need. Waves will be felt even further downstream, in areas such as smelting and refining, as well as in the specialized financial services required by mining operators.

El-Raghy even predicts that a specialized mining section of the CASE will eventually emerge, with its own ecosystem of experts, traders and analysts.

For a look at how a mining boom can drive economic growth across the board, Western Australia is a fine example. El-Raghy’s adopted home since 1968, the Australian state is currently in a full-speed economic acceleration thanks largely to a boom in the mining sector. Driven by a spike in demand by emerging economies including China and India, the Western Australian economy grew by 10.5% in 2006. The state now does over AUD 15 billion (LE 70 billion) worth of trade each year with China alone — and AUD 13.8 billion (LE 64.6 billion) of that is exports, dominated by mining products.

According to information released by the Western Australian Chamber of Commerce and Industry (CCI), the fruits of massive export growth are being felt across the state, with business investment growing by 24% in 2006 alone (and at an average of 20% over the last five years). In the March quarter of 2007 alone, Western Australian businesses invested a record AUD 23.1 billion (LE 100 billion), with CCI Chief Economist John Nicolaou stating that the growth is unlikely to slow in the forseeable future.

“One can’t help but admire the scale of business investment that has occurred in Western Australia in recent years,” said Nicolaou in a July 3 statement, “and based on the number of large-scale investment projects waiting in the queue, it is likely the current cycle will continue for the foreseeable future [] The key feature of the Western Australia outlook going forward will be exports, which are expected to become the driving force behind the continuation of the current economic expansion.”

Tradesmen such as electricians, plumbers and construction workers can now command salaries of over AUD 100,000 (LE 460,000) per year working in the Western Australia mining sector, a salary far higher than would be paid to a Sydney- or Melbourne-based skilled graduate. With salaries going through the roof and over 25,000 Australians migrating to Western Australia in 2006 (on top of the 95,000 who moved there in 2005) a predictable explosion in housing prices and associated consumer spending has materialized, further expanding the economic impact of the mining boom.

It isn’t just workers who are gravitating to Western Australia in wake of the boom. On September 3, Chinese President Hu Jintao made a flying 24-hour visit there in the lead-up to the APEC summit being held that same week in Sydney. The Chinese premier, vice premier and chairman of the standing committee of the National People’s Congress (a position recognized as the third-highest in the Chinese leadership) have all visited Western Australia since 2005.
Mining Laws

There is still one major obstacle to a vibrant mining sector in Egypt: the current legal and regulatory framework for mining, which consists of an antiquated set of laws that have all but killed the mining industry here.

As El-Raghy sees it, the prospects for the mining sector are “very poor, and will remain so until new mining laws are formulated and put into action.”

While the oil and gas sector has taken off in recent years, with global players investing billions into the industry, mining has remained stagnant. The world’s mining giants have shown little interest in investing here, preferring instead to operate in emerging markets with more attractive regulatory and legal environments. Interest from local companies has also remained well below the radar.

At their core, the problems with Egypt’s mining laws revolve around the fact that the they are essentially an adaptation of petroleum extraction laws. While these laws have been successful in creating an environment that attracts large-scale oil and gas extraction, and corresponding revenues for both the state and private sector, they are not conducive to the unique characteristics of mining for gold and other minerals.

Many factors make gold mining a enterprise with a fundamentally different nature and economic rationale than oil and gas extraction. Although both businesses involve locating a precious commodity stored under the soil and getting it out of the ground, purified and sold on world commodity markets, that is where the similarities end.

The biggest difference comes with the cost structure. While locating oil and gas deposits is a fairly standardized affair, exploration for minerals such as gold demands a relatively customized approach, with extensive testing and analysis needing to take place to determine the viability of a deposit. The machinery, analytical approach and physical infrastructure needed to identify and prepare a mineral deposit for extraction is not at all standardized, with different approaches needing to be made according to the many variable factors inherent to the minerals sector.

As a result, the ‘ramp-up’ time between initial discovery and eventual extraction can be up to five years or longer, with equally high up-front costs.

Here is where the economics of the mining business clash with the current petroleum-oriented laws. As is the standard for oil and gas sectors across the world, joint venture partnerships and production sharing agreements are currently the norm here. Such agreements are practically unheard of in the global mining sector. With large initial investments required before extraction begins, and the extraction itself taking place over very long timeframes (Centamin expects Sukari to be active for 30 years), investors are particularly anxious to have control over their operations. Instead of joint venture and revenue sharing arrangements, the norm across the world for mining is for operators to pay a combination of taxes and royalties.

With many promising mining countries adopting the world-standard mining industry laws, global businesses are simply not interested in operating in Egypt, where the laws remain outdated and inappropriate. In addition, there are still many areas of Egyptian law where there is a lack of clarity and uniform standards, or question marks regarding the jurisdiction and role of different government entities regarding the mining sector. One such example is the transferability of rights — if companies wish to sell or otherwise trade their mining leases or rights, it remains unclear how such transactions will be treated under current law. Clarity on such issues is of deal-breaking importance if the country aims to attract large scale investment.

All of this uncertainty contributes toward a lack of confidence in the sector: Businesses making such large investments must feel confident in the long-term stability and reliability of the regulatory environment, otherwise profit and potential return-on-investment remain questionable. In a global market where scores of resource-rich emerging economies are competing for mining investment, this lack of confidence has been fatal to Egypt’s attractiveness among international minerals investors.

The government has recognized for some time the need to reform its mining policy. Although it had been working on a draft policy framework for some time, a key point in the reform process was a workshop held in December 2005, which brought together representatives from the Ministry of Petroleum, the Egyptian Mineral Resources Authority (EMRA) and experts from the World Bank Group, led by representatives from the International Finance Corporation (IFC).

At the workshop, both government and IFC officials committed to working in partnership on a full analysis of the current system, as well at the drafting and eventual adoption of a new mining regulatory framework that meets world’s best practice.

Frank Sader is a senior IFC expert currently working as chief strategist and senior operations manager for the Business Enabling Environments Initiative, a project being driven by the the IFC’s Private Enterprise Partnerships for the Middle East and North Africa facility. His work puts him in daily contact with the key players who are working to make mining sector reform happen, and he likes what he is seeing.

“The government is clearly very committed to seeing this reform take place, and both the Ministry of Petroleum and EMRA are working very hard to see it happen.” The initiative certainly seems to be moving along at a healthy pace: “So far, we have completed a full analysis of the legal, fiscal and administrative frameworks,” says Sader. “We will now sit with the government as well as the private sector to identify what are the key issues to be reformed, and exactly how the reform could happen. We will take about another year to do that.”

(The Ministry of Petroleum was unable to make available an official for interview by press time.)

With regulatory reform at least a year away, a gold rush is certainly not just around the corner, but it is coming, with a predictability that borders on the certain. Sader, who has experienced mining sector reform in emerging hotspots across the world, is sure that the global players will all make their way to Egypt once the reforms are implemented — but no sooner.

“Currently, investors have many concerns, ones that truly matter,” he says. “These concerns are very important from the perspective of expected profitability, for the expected rate of return of an investment. They make Egypt relatively less attractive than other countries.”

However, Sader feels that the underlying potential here will certainly attract interest once the reforms are completed. “Geologically, Egypt is a very interesting country,” he believes, “no doubt about that. They [global mining companies] would certainly come here with a new framework.” The IFC intends on doing more than just driving the regulatory reform, however — according to Sader, it will also support efforts to market and promote Egypt as a gold and minerals investment destination around the world.

The 12-plus months it will take to see regulatory reform implemented are a real opportunity for Egyptian businesses looking to capitalize on the potential of the industry. With the country currently not on the radar screens of international gold and minerals investors, consider the next year as lead time to work out where your business fits into the sector.

Whether it is in one of the many supplementary industries, as a provider of goods and/or services, or as a beneficiary of the boom in domestic spending and investment and the strengthening of the Egyptian pound, consider yourself notified:

A lot can be done in 12 months.
There’s Gold In Them There Hills

The allure of gold goes beyond its mere value as a useful mineral. Its conductivity, density, malleability and resistance to corrosion mean that it will always be in demand for precision manufacturing industries, and its visual appeal has made it an always-popular decorative metal in jewelry and luxury items.

However, it is gold’s historic role as a store of value that has led it to its position as one of the world’s most highly sought-after commodities.

The first currencies were literally made of gold, meaning that the value of a coin was its weight in gold. As this system became impractical with the rise of bank notes and more abstract currency devices, currencies became backed by gold. This would mean that a $100 note could — for example —theoretically be exchanged at the US Federal Reserve for $100 worth of gold. Every country had to back its currency in this way, which had the useful effect of limiting a government’s ability to print excess currency and spend more than it had in reserves.

The system of the “gold standard,” as it was known, eventually came crashing down as the scale of government and private spending reached a point where there was simply not enough gold available to match even a fraction of all the money in circulation. Most currency is now what is known as “fiat” currency, meaning currency backed by nothing more than trust in the institution that issues it. This system has worked relatively well in the last 50 years, although the underlying risk that a government will devalue its fiat currency by spending beyond its means remains a real one.

It is this risk that keeps gold relevant — and rising in value. As long as gold remains a physically finite resource that is recognized as a store of value, it will keep appreciating in price.

The US dollar has devalued significantly over the past 75 years in terms of its ability to purchase an ounce of gold. In 1935, it took $20 to buy one ounce — today, it takes over $700 (hovering around $720 at press time). Gold, relative to all major currencies and most-traded commodities, has consistently increased in value since the collapse of the gold standard, spiking in price whenever uncertainly grips financial markets. As of September 2007, gold prices are at a 28-year high. The last time it was priced as high as it is today was in late 1979, as the Iranian revolution, the Soviet invasion of Afghanistan and the OPEC oil crisis all shook confidence in Western economies. It was at today’s levels only in absolute terms however — adjusted for inflation, gold was priced at a staggering $2,100 per ounce back then.

Whenever there is skepticism regarding a government’s ability to keep its currency stable — whether this be due to runaway spending, budget or trade deficits or the printing of excess currency — people will purchase gold. In short, if the purchasing power of a currency is in decline relative to its interest rate, it is better to put your money in gold.

Gold prices have rallied since 2001, with international instability on the rise, and US, Western European and Asian developed economies running enormous budget deficits. These deficits have been funded largely by loans from China’s cash-rich central bank, which has also been — you guessed it — investing heavily in gold, purchased largely from the central banks of developed economies, who are slowly selling off their gold reserves as they see their paper fiat currencies become the standard store of wealth.