Guinea's billion-dollar bauxite question

Will Guinea impose mandatory beneficiation requirements?

During a research trip to Guinea earlier this year, we visited Africa's oldest alumina refinery in Fria. Unofficial reports stated that the facility had restarted operations after a six-year hiatus and we had to see it for ourselves. We were in luck: smoke was billowing out of the chimney stacks and masses of red bauxite were piled up beside the refinery ready to be fed into the furnace.

Guinea has the best-quality bauxite in the world and exports more of the commodity than any other producer

National output is forecast to rise even higher over the next five years, but the facility in Fria remains the country's sole alumina refinery. As a result, the vast majority of bauxite is exported in its raw form, representing a major missed opportunity for the country. Instead of obtaining taxes and royalties on exports of refined alumina worth more than US$400 per tonne, the state generates its revenues from raw bauxite (grade 36%-48%), which commands approximately US$30 per tonne - depending on the grade.

Refining on the agenda

Unsurprisingly, refining was a recurring theme in our conversations with mining officials and industry players. Lacking the necessary resources to get value-adding projects off the ground, politicians in Conakry are looking to mining companies to invest big.

But how can the government persuade firms to commit huge amounts of capex to a country with a history of political instability and corruption? That is the billion dollar question.

Despite the prospect of a change of government in 2020, there is little chance of following Indonesia's policy to impose mandatory beneficiation requirements on companies.

Here's why.

So many promises, but still nothing to show

On the surface, the prospects look good for extra refining capacity. We spoke with several officials from Guinea's Ministry of Mines in June that confirmed the six to eight alumina projects on paper.

In May, the German-owned Guinea Bauxite Corporation signed a US$1.4 billion deal for the construction of a mine and alumina plant near Kindia. Set to become operational in 2022, the project should produce 8 million tonnes of bauxite per year - of which 5 million would be transformed into alumina at the refinery.

But the situation is not as rosy as it seems.

The country has been here before. During President Condé's first term between 2010 and 2015, several companies signed contracts requiring them to construct refineries - subject to feasibility studies − to accompany their mining developments. Yet none of them made a real effort to deliver an integrated project, despite the government offering a strong financial incentive. While the state takes a minimum share of 15% in mining-only developments, this falls to a mere 5% for integrated projects, enabling firms to retain a bigger slice of the profits. However this inducement has been unable to outweigh companies' concerns over the lack of skilled workers and of energy sources locally to power refineries.

Amid this failure to construct more refineries, Cellou Dalein Diallo -the leader of the main opposition party - has repeatedly derided Condé's boasts about Guinea's ever-increasing bauxite production. Diallo argues that every tonne of bauxite exported represents a lost opportunity to promote industrialisation.

Many officials in the mining ministry recognise the problem. But the alternative would be to spend years in the courts trying to enforce the withdrawal of mining concessions ― a costly process that would have inevitably deterred other investors.

A new government, a new beginning?

With Condé's presidency due to end in 2020 and the ruling RPG lacking an obvious replacement, Diallo will never have a better chance to become president. Although Diallo has been a staunch advocate of getting companies to build refineries, it remains unclear how he would achieve this in practice. As a career economist, Diallo is fully aware that legally requiring firms to commit billions of dollars to building sophisticated facilities is a sure-fire way to discourage investment.

Despite its prized reserves and growing output, Guinea is still in no position to get tough with companies. Members of Action Mines Guinée, an NGO based in Conakry, pointed out that the state can't even measure the quantity of bauxite produced. Furthermore, mining products account for about 80% of all the country's exports. Other sectors would need to be much stronger before the government could adopt an uncompromising stance towards the mining industry. It has no credible back-up plan.

China holds the key

The primary obstacle for Guinea is due to its development strategy being dependent on its mining revenues. Last September, the government obtained a US$20 billion loan from China to develop the economy over the next 20 years. The loan is guaranteed by the taxes and royalties the state will receive from the mining activities of three Chinese companies ― Chalco, CPI and Henan Chine.

China is also set to finance and construct most of the planned new railways that will help Chinese companies export their bauxite more cheaply. Thus, the prospect of the next government ― whether RPG or UFDG ― seeking to punish companies, including the Chinese, for not building refineries is extremely remote.

In fact, the Chinese firms operating in Guinea are the most likely candidates for delivering an integrated project. They would have much less difficulty raising the USD2 billion needed to construct a refinery thanks to their access to state-controlled banks. With China placing more importance on securing mineral supplies for the next few decades rather than short-term profitability, these firms have a distinct advantage.

Moreover, growing concern about air pollution in China is encouraging Beijing to consider building more refineries abroad. And transforming the bauxite into alumina in Guinea before it is shipped to China would drastically reduce shipping costs.

So, there is a good chance that forcing companies to build refineries won't even be necessary: the economic, geopolitical and environmental considerations for China will probably become overwhelming. Within the next 10 years, Guinea should finally have its second alumina refinery, further reducing the threat of investors encountering mandatory beneficiation obligations.

Sean Smith

Senior Analyst, West Africa