Upstream Mining Risks: Security of Tenure
January 03, 08
Diamond merchants investing upstream in mining properties have, in recent years, encountered a problem, which, in mining terms, could come under the heading of “security of tenure.” This refers to the following: a holder of mineral rights must know that (1) he has sufficient time to carry out exploration and/or mining operations; (2) after discovering a deposit, he also has a virtual automatic right to mine what he has discovered; and (3) there are clear and objective cancellation procedures of one’s concessions.
This issue is very relevant today. I personally know of at least two diamond manufacturers who invested huge amounts in a southern Africa producer country, but when they actually found a promising kimberlitic deposit, the government awarded the mining license to a third party, which had “special relations” with government officials. When investors have no security of tenure, the exploration and mining risks become so high that it is better to stay away from such countries.
In Sierra Leone there is a new government and, naturally, the international investment community is closely following the conduct of the new administration. In an intriguing decision, the government of Sierra Leone has formerly ordered the temporary closure of the country’s sole operating kimberlite diamond mine after illegal mining activities by artisanal diggers in Koidu Holdings’ concession area made it impossible to safely exploit the deposit.
This may represent the new government’s first mining crisis, and it seems that demonstrators and illegal diggers are testing the resolve of the new president and his new ministerial team. Mining rights are usually granted for periods of up to 25-50 years, and are usually renewable one or more times. [Remember that the government of Botswana used the renewal of the Jwaneng diamond mine to extract all kinds of beneficiation and marketing rights from De Beers.] In Sierra Leone, the mining lease granted (by Act of Parliament) to the Koidu mine started in 1995 and is valid for a 25-year period.
The mining lease doesn’t really provide the government with the right to suspend operations, unless there is, of course, a clear force majeure such as wars, etc. When I last visited the mine a few years ago, in the context of a DFID report on effectiveness of donor assistance to rehabilitate the war-torn mining areas, I got the impression that, in the absence of clear local regulations, the Koidu mine had adopted the high standards and best mining practices in force in South Africa.
This is specifically for underground and open-pit mining operations, which make use of explosives in blasting the diamond ore. Blasting is probably a hitherto unknown experience to the area’s residents. To accommodate the local community, Koidu Holdings has committed itself to a relocation program through which it is building an estimated 150 new houses for some of the affected residents in the mining area. The building of some 90 units has already been completed.
Illegal Encroachment of Mining Area
The problem facing Koidu’s managers is the presence of illegal diggers on and around the Koidu concession, which endangers people. The concession area covers some four square kilometers. Attempts to remove those diggers have led to demonstrations and clashes with the police, which culminated with the tragic death of two demonstrators a few weeks ago. The maintenance of law and order must and should be the responsibility of the democratically elected government and law enforcement; the return to “private armies” should be resisted.
A DRC-type of situation must also be avoided. The MIBA mine there purchased state-of-the-art mining equipment, and when, last year, a South African engineer came to install the machinery, local diggers sabotaged and wrecked the equipment and killed the engineer. They felt threatened that if the mine could recover diamonds in a systematic, organized and efficient manner, “their” alluvial (illegal) mining, carried out by trespassing on the MIBA concession area, would be “threatened.” The MIBA mine has been out of operations for almost a year.
The situation in Sierra Leone is not the same, but community hostility towards efficient, organized, mechanized mining is a reality in many alluvial mining areas, including Sierra Leone. According to a company statement, the Koidu Kimberlite project is the single largest private foreign investment in post-war in Sierra Leone. Koidu Holdings is the largest taxpayer in Sierra Leone, and has been one of the nation’s largest employers, with 500 local and 70 expatriate employees. The wages for these unionized workers are the highest in the mining industry in Sierra Leone.
Reminiscent of what has happened in the DRC’s MIBA mine, and, unfortunately in some other mining areas, in recent months Koidu Holdings has repeatedly expressed its growing concerns about a dramatic deterioration of security in the area and an encroachment of illicit diamond miners into the Koidu Kimberlite project site.
The government’s inability to guarantee safety of both the mining workers and the surrounding community represents a serious worry to the owners of Koidu Holdings, who have so far invested close to US$40 million in the operation and are about to commit a further investment of US$70 million.
After suspending the mine operations, the government has announced the formation of a Commission of Inquiry, which will look at the illegal mining activities and community relations around the mine. The mine management has pledged its full cooperation with the Commission, which is supposed to make a report within a three-week period.
It isn’t clear whether security is the main issue or whether the population is testing the government. It might be neither, and there are some talks – more about that later – that the government is simply looking for a valid excuse to cancel the mining rights and transfer them to a third party that has bought favor from the new government. The latter would represent a major setback. The country’s new president, Ernest Bai Koroma, promised zero tolerance on corruption in his inaugural speech. He also said he'd fight against the mismanagement of state resources. If anyone in his administration has a “hidden agenda,” this will be the time for the president to take decisive action.
But anyone mining the property, present owners or otherwise, will still face blasting issues. One local source, present in the area on the day of the killings, estimated that many of the problems were caused by the illegal diamond miners who have infiltrated the area since the elections. He reported that “local people were saying that with the change of Government they would be supported in encroaching onto the Koidu lease. Whether one wants to believe that or not is a different story, although my source feels that there is some truth in it. On the day of the riot, people apparently had demanded that the company stops blasting as it was destroying houses in the area. After the blast had taken place, hundreds (if not thousands) of people then started stoning the security station, company vehicles and people. They damaged several vehicles, property and seriously injured an employee of the mining company. The police on site fired teargas to disperse the crowd but soon used all of their teargas. The crowd threw the teargas back at the police and continued stoning; the police were then forced to open up with live rounds. The riot was eventually broken up with the assistance of the army.”
What should be of greatest concern to outside investors, foreign donor countries, and the owners of the Koidu mine itself, is whether they are facing a genuine government inability to assure safety, or whether the government is looking for “excuses” to take the license away. Rumor has it that a major international mining concern, which is not presently active in Sierra Leone, is waiting in the wings. That company must (finally) learn that one earns a mining lease through hard work – not through corruption.
International Community Watches Events
According to some published reports, World Bank officials are deeply concerned about the closure of the mine, which provides the country with much needed revenue and vital employment. It has already conveyed these concerns to the Sierra Leone government. Bank officials note that the closure wasn’t caused by a force majeure or natural disaster but rather because of administrative or logistical reasons, i.e. the lack of deployment of sufficient personnel to guarantee safety. That doesn’t seem to be a reason to close a mine, say World Bank officials, and neither the law nor the Mining Lease Agreement allows for such a closure. It was also learned that the U.S. government, which has actively supported mining rehabilitation programs in the aftermath of Sierra Leone’s civil war, is also worried about these developments.
At the end of the day, the government is autonomous, and it will have to decide how to solve this crisis. It has to do what is best for Sierra Leone and its people. Populist measures that inevitably will impede organized and mechanized mining operations have, in the past, led to anarchy and worse. At the end of the day, to the outside world, it comes down to Security of Tenure – whether one can safely invest and exploit one’s deposits. The Koidu management seems to have confidence in the new government.
Koidu Holdings Director
Actual and potential investors should give President Koroma a chance to signal clearly to the international community his unwavering resolve on positively ending this crisis – anything less will not be good enough.