Mining

Investment opportunities

Bribery Act

Risk and reward

Banning backhanders Scarcity value

There’s a wealth of opportunity out there but it needs careful navigation | Page 4

Rare earths

New laws mean mining firms will have to do more than simply avoid corruption in their overseas operations | Page 9

They aren’t that rare but they are vital to everyday technology like the smartphone and demand has soared | Page 10

Glencore flotation

Money to burn?

What impact will the public listing of Glencore have on the rest of the mining sector? | Page 13

June 2011

Distributed within the Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

Going underground Mining stocks have leapt 50% in a year but will it last? A report on the global industry

Business Reporter · June 2011

an independent report from lyonsdown, distributed with the sunday telegraph

Foreword

Mining – in this issue

3

Boom or bust?

Post-recession, the mining industry is witnessing a shift in both the players and the power base Dina Medland Mining is on a roll. According to the Dow Jones General Mining Index, stocks have risen by more than 48 per cent in a year. Meanwhile, a report out earlier this month from Pricewaterhouse Coopers (PwC) reveals that the 40 largest miners made a combined profit of $110 billion (£67.7 billion) last year up 156 per cent on the previous year, despite growing challenges of supply and cost management. The composition of the top 40 is of particular interest: in the past eight years, the share of emerging markets companies in the index has grown to 45 per cent.

As we look here at some of the challenges facing mining companies in 2011, Mine: the game has changed provides some powerful statistics as a backdrop. Together the top 40 mining companies have announced more than $300 billion (£185 billion) of capital programmes, of which more than $120 billion (£74 billion) is planned for 2011, doubling 2010 capital expenditure. The top 40 also own nearly $1 trillion (£0.61trillion) in assets, including $100 billion (£61 billion) in cash, and are largely debt free with net gearing of just 8 per cent.

Commodity prices have played their part in the overall largesse of the global mining story – in 2010

almost all major metals saw higher average prices than in previous years, from gold – which people buy for all sorts of intangible reasons, to iridium, one of the rarest of rare earth metals and essential in devices such as iPads and flatscreen TVs. As consumer appetite for high-tech applications soars, we look at the growing frenzy around rare earths metals which is providing opportunities for new entrants and alliances, and is a good example of rapidly shifting players in the industry.

We also examine the arrival on the publiclylisted stage last month of Glencore International, the world’s largest commodities trader, which is still causing reverberations. Based in Switzerland, the company now has a share register resembling the financial world’s equivalent of Debretts. It is likely to remain in the spotlight as the world tries to digest what it is (miner or trader), what it knows (opportunities, commodity demand and working in tricky and far-flung political locations) and how it moves forward (acquisitions).

Just over 10 days ago, Glencore CEO Ivan Glasenberg made a rare public comment from his vantage point of controlling a large share of trading in a wide range of industrial raw materials. He warned of a “pullback” in demand for commodities from China and the US, but was positive about “underlying strong fundamentals”.

It was, perhaps, a timely reminder of just

one of the multiple considerations that need to be factored in to the strategic direction of any mining company. We take a look at the others – from the need for kind weather, capital and long-term planning, to paying attention to corporate governance and the law as it applies to publicly listed companies, particularly those listed in London and subject to the Bribery Act which becomes law on July 1.

However, in a world reeling from economic recession, the opportunities in the mining industry are compelling. So are the demands increasingly being made both by countries whose resources are being exploited and by investors in mining plcs. Nor is resource nationalism restricted to countries like Venezuela, Zimbabwe or Zambia, or feared only in resource-rich countries such as Peru, which has just elected a left-wing President, Ollanta Humala.

As we go to press the curtain has not yet fallen on the London Stock Exchange (LSE) bid for TMX Group, which operates Canada’s Toronto and Montreal exchanges and has one of the largest concentrations of mining shares in the world. We look at events around the creation of the Maple Group, a consortium of Canadian financial institutions which has now taken its own bid for TMX hostile, and consider the flag waving there.

In the fast lane

4

Yardstick

5

Waving the flag

7

Risky business

8

Earthly success

10

Core concern

13

Mining is bouncing back The industry in figures

Canadian banks fight London bid

Overcoming the pitfalls

Why do we care about rare earths?

How will Glencore spend its cash?

Contributors Publisher Bradley Scheffer brad@lyonsdown.co.uk

Production Manager Nicki Sitaras nicki@lyonsdown.co.uk

Managing Editor Lucie Carrington lucie@lyonsdown.co.uk

Project Manager Shola Adeniran shola@lyonsdown.co.uk

Editor Dina Medland

For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk Online www.lyonsdown.co.uk

Creative Director Martin Nolan studio@lyonsdown.co.uk

Dina Medland is an independent writer and editor. Her first job was writing for the BBC. She then spent a summer with The Economist before moving to the Financial Times where she spent eight years.

Today she is a regular FT contributor and writes on a wide variety of subjects, including boardroom issues.

Trevor Merriden has been a journalist for 20 years. He was deputy editor on Management Today and editor of Human Resources magazine, and has written several well-received business books.

As well as writing about business he also runs a consultancy that helps businesses make their content more relevant to buyers.

Lynn Strongin Dodds is a freelance business and financial journalist.

She is editor of Best Execution Magazine and is a regular contributor to several publications including FTSE Global Markets, Financial News, Investment and Pensions Europe and Global Pensions.

Seamus Gillen is director of policy at the Institute of Charter Secretaries and Administrators (ICSA). Seamus has held senior positions in the public and private sectors. He was private secretary to the John Gummer, Secretary of State for the Environment and Deputy Prime Minister John Prescott. In the private sector he was company secretary and director of regulation at Anglian Water and head of public policy and regulation at O2.

Tim Huff joined RBC Capital Markets’ global mining and metals research group in 2010 where he covers London-listed mining and metals companies, as well as European steel and smelting companies. Before joining RBC, Tim was an equity analyst at Royal Bank of Scotland covering the mining and steel sectors. He has worked at Cargill, Citigroup and Credit Suisse.

Business Reporter · June 2011

4

an independent report from lyonsdown, distributed with the sunday telegraph

Business opportunities

Riding the supercycle Having emerged bullish from the recession, the mining industry faces fresh challenges in adapting to the complex patterns of global demand

By Trevor Merriden

Mining is an industry being fed today by a socalled supercycle of demand for commodities across the globe. It was in a period of consolidation ahead of the 2008 financial crisis, but for the industry the fall-out of recession this time has been relatively short and sharp, according to mining analysts. China alone typically makes up 40 per cent of the demand for global metals, driven by rapid urbanisation and the need for copper for wiring and aluminium and iron ore for the general construction of homes.

There has been a surge across all commodity prices over the past 12 months of over 40 per cent, according to data from the International Monetary Fund (IMF). But changing patterns of global demand, in addition to new, multifaceted and costly challenges to greater supply, are making mining a more complicated market to be in than ever before. The real challenge of 2011 is to keep pace with this rapidly changing landscape to make the most of the opportunities.

By 2014, the share of developing and emerging economies in world GDP is likely to have overtaken that of the so-called developed economies. In addition to Chinese needs, there are greatly increased levels of demand from India and across Asia, Latin America and eastern Europe. Jon Lambert, director of the UK mining assurance practice at professional services firm Pricewaterhouse Coopers (PwC), says: “This is a new era – there is demand here that won’t just go away or disappear.”

Buoyant demand has resulted in strong cash reserves for leading players. Lambert says: “The industry has changed. It’s now all about growth.

There’s lots of cash around and the question is what to do with it for the most effective use.”

Investment is one answer: the top 40 global mining companies, according to PwC, plan to double spend on investment in 2011 from 2010 levels to $120

Good salaries could attract younger talent

Rising global demand has brought major business opportunities in the mining sector Ian Murphy

billion (£74 billion). Acquisitions are another answer with the number of mergers and acquisitions at an all-time high as big players gobble up less efficient competition.

In 2010, PwC counted nearly 2,700 global mining deals worth $113 billion (£70 billion).

The industry looks set for a heightened pace of deal activity in 2011, especially in the five

key resources of gold, copper, coal, fertiliser minerals and iron ore. But Debbie Thomas, UK head of mining at professional services firm Deloitte, points out that recent crises have highlighted both market weaknesses and the threat of volatility: “It takes events like, say, the floods in Queensland to show an over-dependence on coal from Australia or the tsunami in Japan and

its knock-on effects to show us that, to be frank, nobody can really predict with certainty which way prices will go,” she says.

On the flipside of strong demand there are also very real and difficult challenges in increasing current levels of production. On the one hand, at a national level, countries are looking to safeguard their positions. China supplies the world with

Voting with their feet

Voting with their feet

Voting with their feet

Demand is up, but a lack of skilled people could see industry growth stall

age. Figures from the Minerals Council of Australia suggest that by the year 2020 an additional 58,000 members of the labour force will be needed simply to keep production at current levels.

Other resource-rich countries such as South Africa and Canada are facing comparable problems.

A report released last year, from executive search firm Landelahni, reported that South Africa will experience an acute shortage of suitable mining industry staff over the next ten to 15 years, with the average age of mining professionals currently well over 50 years. And in Canada, 40 per cent of the mining workforce will retire in the next ten years, meaning an extra 81,000 skilled professionals will be required. In China, information is less prevalent, but key skills are known to be in short supply.

Even in good times, it has been difficult to paint mining as an attractive profession. India and Russia, as well as many of the OECD’s so-called developed

nations, have high proportions of engineering graduates choosing careers in information technology careers ahead of those in mining. It’s no real surprise says Brian Gordon, a partner at Holman Fenwick Willan (HFW): “Many mines are located in really hostile conditions. There’s lots of isolation and life is really tough if you’re away from the family.” While young ambitious workers seem likely to be attracted by increasing salaries, interest is lacking among experienced middle-aged and mid-career managers.

It’s against this unpromising backcloth that the battle for skilled labour is being fought and the surge in global demand is making shortages more obvious. As Gordon says: “Rapid expansion globally hasn’t allowed the industry to keep up with enough physical boots on the ground.” The pairs of boots already in situ seem likely to keep on walking: in spite of a chance to charge a premium for their services, many older miners are determined to press ahead with retirement. TM

A sudden lurch from recession to strong demand for commodities over the past year has left the mining industry facing acute skills shortages across the world. ”Frankly, there are talent problems for this industry everywhere,” admits Debbie Thomas, UK head of mining at Deloitte. The battle against demographics is the major driver. But the reputation of mining as a profession is another major challenge. Both problems have become more exposed as demand accelerates.

While difficulty of finding skilled labour is worldwide, it is most immediately obvious in Australia.

A lack of suitably experienced staff in an inherently dangerous profession, even before the current upsurge in demand, was proving difficult to handle. Now, however, there is a shortage of engineering and production managers, mining engineers and geologists to take the place of older miners nearing retirement

Business Reporter · June 2011

an independent report from lyonsdown, distributed with the sunday telegraph

Business opportunities

5

Mining industry at a glance Top 40 firms, total shareholder return 2007-10 Companies from traditional mining countries hold assets around the world, but emerging market players have still performed better.

250% 200% 150%

many of its natural resources, including rare earths, but took steps last year to safeguard its own supply by curbing its exports, something that made many other resource-hungry countries distinctly nervous. On the other hand, China cannot fulfil its own demand for resources, so is a net importer. To reduce the uncertainty that this creates, Chinese businesses are keen to acquire overseas players in the mining sector.

China has been a notable new presence in merger and acquisition activity with its businesses involved in acquisitions worth nearly $12 billion (£7.5 billion) in 2010 in mining. But few Chinese buyers have successfully secured major stakes in leading mining companies.

Other economies are also flexing their muscles.

Last year, India increased its export duty on iron ore and is seeking to secure more overseas acquisitions to secure a supply of resources.

Mining companies are also facing considerable tax challenges from governments all over the world. The imposition of government taxes and royalties on mining – whether on foreign or domestic players – is a trend which has come to be known as “resource nationalism”.

The Australian government has made much of its threat to introduce higher taxation on mining profits while Chile, Zambia, Tanzania,

It’s now all about growth.

There’s lots of cash around and the question is what to do with it for most effective use South Africa and Burkina Faso have introduced a supertax, albeit with less fanfare.

The motive is not always financial but often a move to play for popular and nationalistic support. At the end of last year, for example, the Canadian government stopped BHP Billiton’s bid for Canada’s Potash Corporation.

Leading mining industry figures have expressed their frustration. Earlier this year Rio Tinto’s CEO, Tom Albanese, criticised politicians for the “curse of resource nationalism”. He claimed that the development of new global mining projects to meet booming demand was slowing significantly because of more state intervention.

He said: “There are stronger profits, stronger margins for a sustained period [but] we see pressures for higher taxes, higher royalties, [and] governments taking a stake in the resources.”

Others see it differently. Driven by high prices, mining businesses are looking to new and/or unpredictable markets, such as Mongolia, Botswana and Mozambique’s says Debbie Thomas at Deloitte. “Governments are certainly making the most of the situation and in some ways you can’t blame them for that – they want their share of the spoils. But there are good examples of government and businesses working well together,” she says, citing a joint agreement between a mining business and the Zambian government, whereby the former pays royalties

100% 50% 0%

Emerging market

Traditional market

Source: Bloomberg and PwC analysis

Return on equity and return on capital employed 2002-2010 Net profit for 2010 reached more than £100 billion for the first time. Despite this ROE and ROCE lagged well behind 2006 peak of 31 per cent.

Albanese: criticising resource nationalism AFP/Getty Images

only when the price of the commodity mined goes above a certain level. “It is quite possible,” she says, “for government and business to find a good and sensible way forward.”

Mining companies are also facing a need to focus increasingly on their people. Today most mining companies are contending with a shortage of skilled workers. In Australia, the shortage is now acute (see box), but the problem is worldwide as many miners reach retirement age with no one with suitable experience to replace them.

Thomas says the talent shortage is everywhere.

Frankly, some retiring miners will stay on but in so doing they will charge a premium for their services – something which will increase the costs of production further.

As it moves into increasingly unpredictable, hostile geographical locations, the mining industry finds itself having to play an unfamiliar role, that of sustainability champion. Local communities, concerned with the impact of mining on the local environment, are becoming more demanding and more vocal. Understanding and managing political risk is likely to be increasingly critical to the success of such deals overseas.

In future, there will be a need for those in the industry to put far more thought into a range of social issues. The more remote the region in which an operation takes place, the more likely it is that mining companies will also find themselves helping to provide basic infrastructure and even education services.

One way to ease this transition has been to bring in representatives of non-governmental organisations and environmental groups into the boardroom. Jon Lambert at PwC says that all mining businesses “need to say to stakeholders, ‘Look, we will look after you and yes, we will fill in the holes we dig’. It’s a real cost for the industry but it’s also a fact of life in 2011”.

Safety and sustainability have become central to the reputation of the international mining industry.

Year

ROE

ROCE

2010

22%

18%

2009

13%

9%

2008

17%

13%

2007

28%

22%

2006

31%

23%

2005

25%

18%

2004

20%

14%

2003

12%

8%

2002

7%

5%

Commodity prices Higher commodity prices contributed to improved margins and profits in 2010 with copper, gold, coal and iron ore reaching new average highs.

8

Iron ore US c/dmtu

7

Copper $/tonne

6 5

Thermal coal $/tonne Gold $/ounce

4

Aluminium $/tonne

3 2 1 0

2003 avg

2004 avg

2005 avg

2006 avg

2007 avg

2008 avg

2009 avg

2010 avg

Source: Bloomberg, AME Outlooks

Risk versus reward Returns from the industry fall into three categories: returns to the company (net profits); payments to governments (taxes and royalties); payment to employees (pay and benefits). Returns to mining companies carry the most risk.

8 7 6

2005

2006

2007

2008

2009

2010

5 4 3 2 1 0 Source: PwC analysis

Company

Government

Employees

2010 close

Business Reporter · June 2011

an independent report from lyonsdown, distributed with the sunday telegraph

Mergers and acquisitions

7

March on the maple leaf The London Stock Exchange bid for the TMX Group would create the largest resource exchange in the world. TMX is keen but shareholders could have a different view

By Lynn Strongin Dodds The fight continues over the Toronto Stock Exchange (TSE) but the battle has turned nasty.

The London Stock Exchange (LSE) is still very much in the running with its C$3.2 billion (£2 billion) all-share offer but it will have to up the ante to win over shareholders of the Canadian bourse. Otherwise the Maple Acquisition Corp, the bank and pension fund-owned consortium, which has launched a hostile bid, could walk away with the prize.

“The Maple offer at C$3.7 billion (£2.33 billion) is at a premium and shareholders may be inclined to take it regardless of whether the deal with the LSE looks better on paper,” says Herbie Skeete, managing director of consultancy Mondo Visione. “If Maple does win then the LSE will be in a vulnerable position because there are several other exchanges that have already found partners and have truly diversified their revenue streams into derivatives, cash, settlements and clearing.”

Should the LSE increase its offer, there is no certainty that a higher offer would not come with new strings attached. “If the LSE puts more money on the table, they may want something in return,” says Michael Partridge, partner at Toronto-based law firm Goodmans LLP. “That could mean that the merger will no longer be one of equals as promoted.”

At time of writing, TMX, operator of the Toronto and Montreal stock exchanges, is recommending the LSE and not the hostile Maple bid on the grounds that together they would be a much more powerful competitive force on the global exchange stage. In addition, TMX has stated that the Maple cash and share bid does not offer enough of a takeover premium and that it would saddle the Toronto exchange with too much debt.

US-based Glass, Lewis & Co, a proxy advisory firm, has also thrown its weight behind the LSE deal stating that it “represents the best alternative

for TMX shareholders”. Their recommendation may well persuade investors to back the London offer.

On the domestic level, TMX is arguing that the LSE deal offers Canadian companies, particularly mining firms which dominate the exchange, access to a wider pool of investors as well as capital. At 1,543 listings and with a market capitalisation of C$541 billion (£341.98 billion), the TSE accounts for over half of the world’s mining companies including global giants such as Barrick Gold Corp and Teck Resources. However, over the past five years the TSE has lost a few

LSE: may lose fight for Toronto exchange

of its domestic stars to foreign owners. Alcan, the aluminium group, was recently acquired

by UK-based Rio Tinto, while nickel producers Inco and Falconbridge are now controlled by Brazilian-based Vale and Switzerland-based Xstrata, respectively.

The criticism from Maple is that there will be a shift of gravity to London resulting in Canadian companies, especially the smaller firms, losing out in the larger pool. The consortium believes it

can create a national champion and fuel growth by merging the Alpha Group, an alternative trading platform controlled by the banks, as well as CDS Inc, Canada’s equity and fixed-income clearing house.

However, Thomas Caldwell, founder of Toronto based securities firm Caldwell Securities believes: “These smaller firms do not understand what they are missing. A deal with the LSE will create the largest resource exchange in the world which will attract more awareness of the companies listed on the TSE and in turn a greater number of shareholders. Also, they will gain easier access to Europe and Middle East funding through London.”

In recent weeks, the mining companies have been keeping a low profile. This is mainly due to their strong relationships and reliance on the large banks that are part of the Maple consortium bid.

But this could change after the Ontario Securities Commission (OSC) holds hearings in mid-July.

The OSC is only one in a long line of regulatory hurdles. The proposed deal will also be put through its paces by other provincial securities regulators such as Quebec, British Columbia and Alberta. The biggest test and one that is needed to seal the deal is a federal review under the Investment Canada Act. The government must determine whether the deal provides a “net benefit” for Canada. Anglo-Australian BHP Billiton’s US$39 billion (£24 billion) bid for Canadian based Potash Corp, the world’s largest fertiliser maker, failed the test and did not get the green light.

The proposal from Maple Group would face the same regulatory obstacles as the LSE but many believe the jingoistic card could win through.

However, there are important differences between the TMX/LSE transaction and the Billiton bid, which was a hostile bid for a strategic natural resources asset, says Partridge. “The LSE is making significant undertakings to address concerns about how the transaction would affect Canada.

However, nationalism is clearly a factor and there is strong political support for the Maple bid.”

Riches beyond gold A vast deposit of nickel unearthed by its geologists in Tanzania is set to be the making of one small UK company It sounds like the old, sad story: the prospectors who went looking for gold and only found nickel.

Except that this tale has a US$22 billion (£13.6 billion) happy ending that should transform the fortunes of a small UK company and a major

There’s nickel in them there hills

east African nation.

When geologists from African Eagle started drilling for gold on a hill at Dutwa in northern Tanzania in 2008, it was known to be the right terrain for nickel but no one had ever found it.

“As soon as the results started coming out of the ground our sharp-eyed team realised that the nickel laterite deposits were indeed there, and in much more significant quantities than anyone had realised,” says Mark Parker, African Eagle’s CEO. The estimates kept rising until the geologists became convinced that the top of the hill was almost solid nickel ore to a depth of around 50 metres. The company reckons it can extract around 100m tonnes of ore containing almost 1 per cent nickel.

Nickel is an essential component of stainless

Dutwa deposit: decades of employment

steel, specialist alloys and batteries, with a current market value of around US$10/lb (£6.16/lb) making the Dutwa deposit worth almost US$22 billion (£13.6 billion).

As well as being easy to extract, the Dutwa ore contains very little iron, which will enable African Eagle to process it cheaply by leaching

A bid too far?

9 February 2011 The London Stock Exchange surprises the market with its C$3.2 billion (£2 billion) all-share offer for the TMX Group which owns the Toronto and Montreal Stock Exchanges.

Billed as a merger of equals, the merged entity will encompass 20 trading platforms across North America and Europe as well as asset classes including cash equities, derivatives, fixed income and energy.

The merged organisation would rank second in the world by market value of listed companies.

Currently, LSE is ranked fourth and TMX is ranked eighth.

15 May A counterbid of C$3.6 billion is launched

by Maple Acquisition Corp, a consortium initially involving four Canadian banks and five pension funds.

26 May Maple launches hostile bid after its offer is rejected by TMX. 1 June Documents sent to regulators reveal that the combined transatlantic group would be called the LTMX Group, with LSE owning 55 per cent and TMX holding 45 per cent.

3 June Canada’s Commissioner of Competition issues a “no action letter” which means it doesn’t intend to challenge the proposed tie-up.

13 June Four more financial services firms join the Maple consortium which offers to acquire 70 per cent of TMX shares for C$48 a share in cash.

30 June TMX and LSE shareholders will vote on the deal.

Mid-July Provincial regulators including the Ontario Securities Commission are expected to make their decisions. A pronouncement is also anticipated from the governmental review undertaken as part of the Investment Canada Act to determine whether the deal provides a “net benefit” for Canada.

(dissolving the nickel in weak sulphuric acid).

While iron-rich deposits must be cooked at high temperature and pressure, the Dutwa plant will operate under ambient conditions, resulting in a significant saving in capital cost. The cost to develop Dutwa is estimated at US$600m (£371.7 billion), considerably cheaper than the iron-rich deposits, which can cost up to US$4.5 billion (£2.8 billion) to develop. The predicted operating cash costs of around US$3.37/lb (£2/ lb) place Dutwa around the median of the global nickel production curve.

The Dutwa deposit – one of the largest base metal discoveries in east Africa for decades – will be a huge contributor to the national economy, says Parker, creating decades of employment for many thousands of people, directly and indirectly.

As for African Eagle: “It will be the making of us,” he says. “It’ll change the company from a small exploration specialist into a major nickel producer. Last year we hired one of the world’s top nickel laterite research metallurgists and we’re now seeking a new CEO who’ll build up a team to construct the mine, which should start production around 2015.” www.africaneagle.co.uk

Business Reporter · June 2011 Business Reporter · June 2011

an independent reportreport from lyonsdown, distributed with thethe sunday telegraph an independent from lyonsdown, distributed with sunday telegraph

Business risks 88 Xxxxxxxxxxxxxxx

Xxxxxxxxxxxx Global mining plc:

gain and pain Xxxxxxxxxxxxx The world economic picture for mining is rosy but the prospect of moving into territories such as Liberia and Afghanistan carries significant business risk XXxxxxxxx

By Dina Medland

Xxxxxxxxx

The global mining industry is in exceptionally good health. but while there is huge potential for profits, being a mining company today is also increasingly a complicated and risky business.

Until 2008 the industry landscape was changing rapidly with consolidation into the four ‘majors’ – bhP billiton, Rio Tinto, anglo-american and Xstrata. “They sucked up a lot of the midtier in the mining area. So if you look across the sector now there aren’t many companies left with open registers – they either have a family stake or a controlling shareholder,” says andrew Keen, global head of metals and mining equity research for hSbC. Mining is a very capital-intensive business, and capital spending across these four companies “in 2011 is about 45 per cent higher than in 2010 – and they are intending to hold it at that level or even grow it over the next few years”, Keen adds. There is very little debt within the industry and a high rate of reinvestment, but the price of equipment and skilled labour is also high, and the lead time for return on investment can be long.

“Mining companies are there to make money for their shareholders. but there is an incredibly long lead time to develop projects – from suspecting that there is copper in the rocks to starting to do anything at all can take five years. and developing a copper or iron ore project could cost $3–$5 billion (£1.9–£3 billion),” says Ian Coles, head of mining and minerals at international law firm Mayer brown.

Matching the development cycle with the price cycle can be difficult, as costs rise in countries such as the US where regulations on environmental standards can cost mining companies money. but when mining companies venture further

Coles: mining is a long-term investment

afield where the cost to exploit may be cheaper, they run into all sorts of other issues.

Mayer brown has worked on mining projects in almost 50 countries across the globe and has recently been hired for a project sponsored by the US government in afghanistan, which has a wealth of mineral reserves that could be valued in excess of $3 trillion (£1.9 trillion). The law firm’s role here is to develop a legislative and regulatory framework so that investors have the right level of comfort and confidence to invest, and a transparent tender process so that all bids are handled fairly.

Where there is so much investment involved, and so much at stake, companies need to keep a finger on the pulse of the country they are in The need for such legal expertise is great for any mining company faced with the increasing challenges of finding its way in far-flung countries across the globe. “It’s getting much more difficult in terms of location, and mining is increasingly in frontier territory – places like Mongolia, liberia and guinea – rather than, say, australia,” says Jason burkitt, UK mining leader at Pricewaterhouse Coopers, the professional services firm. “There are often greater infrastructure needs upfront. but it is one thing to spend large amounts of money to expand ports and railways in your own country or one you know well, and another to spend it in an african country you do not know.” he adds: “a mining company is never more vulnerable than when it has just built a mine – and sunk all its costs.”

That vulnerability is now coming into sharper focus, as resource-rich countries become more demanding in terms of what they consider to be fair payback from mining companies. Today the demands are coming not only from african countries such as guinea and Zimbabwe, which are mandating shares to be held by local people and government, but also from australia, where talk persists of a super mining tax, says alexander Keepin, head of the mining team at law firm berwin leighton Paisner. “all these demands are aimed at getting back interests for the people... and investors are becoming more aware, which the mining companies then have to manage carefully,” he adds.

Copper mining in Utah

Investors also have a way of asking awkward questions of debt-free mining companies regarding the lack of dividend pay-outs, which have to be calculated even as the companies invest for the longer term. but addressing local concerns remains a key issue that they face.

“Where companies are visibly very profitable, they are eager to impress that they are reinvesting locally. bhP [billiton] and Rio [Tinto] have been extremely vocal about the fact that they are reinvesting into the countries in which they operate” says hSbC’s Keen.

These countries can vary widely in terms of the overall ease of doing business there. To measure the contributing factors, the World bank group publishes rankings against different topics, benchmarked against regional and high-income economy (oeCD) averages. In its Doing business 2011 rankings, the resource-rich Democratic

Burkitt: beware far flung places

Business Reporter · June 2011 Business Reporter · June 2011

independent report from lyonsdown, distributed with the sunday telegraph anan independent report from lyonsdown, distributed with the sunday telegraph

Xxxxxxxxxxxxx Business risks 99

Xxxxxxxxxxxxxx

Xxxxxxxxxxxx Xxxxxxxxxxxxx

“A mining company is never more vulnerable than when it has just built a mine – and sunk all its costs” – Burkitt Republic of Congo (DRC) has risen marginally overall from 179 in 2010 to 175 in 2011. but it has declined in ranking under the categories of getting credit, protecting investors, paying taxes, trading across borders and closing a business.

So not only can it be difficult to do business, but the parameters of that business can change rapidly. Where there is so much investment involved, and so much at stake, companies need to keep a finger on the pulse of the country they

are in. “These days Ceos (of mining plcs) talk a great deal about the time they spend talking to government,” says Keen. and for london-listed mining plcs, there is also the UK’s bribery act 2010, set to come into force on 1 July to consider (see box). Doing business in some of the countries which have the world’s most sought after mineral resources can involve the need to grease palms and the bribery act is wide in scope, making failure to prevent bribery and corruption a crime, rather than focusing only on those who are actively involved in such practices.

Natalia Misciattelli of Pa Consulting, who specialises in commercial compliance, says: “If you’re a big multinational the hard bit is working out exactly what you’re doing in some of these far-flung places . . . the issue may be how do you change the culture of the company to make people understand that everyone needs to understand the demands of the act, and not just at hQ.”

National treasure

Double jeopardy

Resource nationalism is not a new issue for the global commodities market, but it is rapidly becoming a major concern in the mining sector

When the Bribery Act 2010 comes into force next month companies will not only have to avoid the crime but must take steps to prevent it, too

By Trevor Merriden

By Seamus Gillen

in the 1970s, it was common for oil and gas companies to be under state control through taxation, nationalisation and even international cartels. mining in this period as a whole escaped the attention of governments, partly because of its dominance by powerful private multinationals. the more recent phase of government interest in mining began within the last decade. Commodities generally suffered tax increases between 2003 and 2008 as governments sought a larger share of profits. this interest faded quickly when prices collapsed in the face of the global recession, but with demand now once again outpacing supply, the mining industry is facing stronger challenges from resource nationalism. these challenges take one of three forms. a regulatory strand of resource nationalism has developed, with governments not seeking ownership of mining companies for themselves but very keen to assert where it should reside. this form emerged last year, with the Canadian government stopping bhp billiton’s bid for the potash Corporation and the australian government preventing the same business from pursuing a joint venture with rio tinto. a fiscal form of resource nationalism also gathered pace last year with australia threatening a supertax on profits while other countries, such as Chile, Zambia, tanzania, south africa and burkina faso introduced similar taxes on mining. this represented a more direct attempt to assert that more money earned from a nation’s resources stays within the country in which it is mined. the third and more assertive form of control, nationalisation, remains more rhetoric than reality at this stage, but there are early warning signs of possible action, particularly in africa. in south africa, for example, there have been calls for full state control from elements of the anC but this stance is backed neither by president Zuma nor the mining unions. even so, mining businesses based in africa will need to demonstrate closer bonds with the countries in which they operate if they are to avoid a future in which ownership is forcibly transferred.

one of the many challenges facing the global mining industry is that natural resources businesses cannot choose where they wish to be based. since many of the resources in the first world countries have now been significantly depleted, mining companies have no option but to operate in parts of the world with less developed economies. these are often associated with weak systems of governance. given the challenges presented by these environments, mining plcs tend to have installed more stringent anti-corruption mechanisms than many other industries. however, the bribery act is a timely reminder for them to consider strengthening their procedures further to avoid being caught out by the new legislation.

Resource-rich countries want fair share of profits

mining plcs are certainly at risk when it comes to bribery. to operate in a particular country they have to have a licence, and virtually every jurisdiction has strict controls over the licensing process. in practice, the system often requires prospective licence-holders to commit to significant social development work in order to retain their prospecting or mining permit. with the ongoing possibility of revocation, there is always the risk of an accusation of bribery or corruption, which would need to be investigated under the new legislation. the terminology of the act, particularly sections six and seven, is likely to prove a headache for mining plcs. section six creates a standalone offence of bribery of a foreign public official and section seven deals with the failure of commercial organisations to prevent bribery. however, whereas section six states that giving any financial advantage can be regarded as improper purpose, the bribery act guidance published in march seems to backtrack on this, citing a specific example of a mining company being allowed to pay for foreign public officials to visit their distant mining operations.

Joint ventures are also common in this industry and interpreting section seven is a complex process. according to the guidance: “in the case of a joint venture operating through a separate legal entity, a bribe paid by the entity may lead to liability for a member of the joint venture if the joint venture is performing services for the member and the bribe is paid with the intention of benefiting that member.” however, the situation is different if a joint venture is conducted through a contractual agreement or if the bribe is paid by an employee or agent. with the act coming into effect on 1 July, all company boards will be updating their procedures. the extractive industries, which have historically set the bar with their anti-corruption policies, are going to have a busy start to the summer.

seamus gillen is policy director at the institute of Chartered secretaries and administrators

Business Reporter · June 2011

10

an independent report from lyonsdown, distributed with the sunday telegraph

Rare earths

The frenzy begins There are just 17 of them and they are tough to extract, but the elements known as rare earths are essential to the manufacture of smartphones and other technologies and demand for them is soaring

By Dina Medland Rare earth metals are getting a lot of people very excited. An alliance of three of the world’s leading business schools even used them recently in an advertisement for an executive MBA programme. Linking the image of a smartphone with that of a rare earth mineral, the text reads: “Yes, it’s complicated . . . the relationship between smartphones and rare earth. Global supply and demand of this critical commodity represents complex economic, political and social challenges.”

Smartphones are a good example of the direct link between the technology increasingly in

US companies are searching worldwide for replacement suppliers of rare earth elements, and chemical companies are trying to come up with substitutes demand across the world and the need for rare earths. Iridium is a little-known rare earth metal used in the manufacture of back-lit screens used in phones as well as tablets and flat-screen televisions. It is also used for environmentallyfriendly lighting in domestic and commercial environments. According to Johnson Matthey, the precious metals refiner, demand for iridium more than quadrupled last year.

It is not that all rare earths are even rare, but “the difficulty is finding deposits that are viable in terms of economic extraction”, says Michel Geographic concentration of 14 critical global resources

Russia 24%

Others 40%

China 19%

North Korea 17%

Source: Mineral commodity summaries, USGS, January 2010; Mikolajczak, Clair, “Availability of indium and gallium”, September 2009, via www.indium.com

Nestour, director, mining and metals at the professional services firm Ernst & Young. While only small amounts of the 17 elements from the periodic table that comprise rare earths may be needed in manufacture, they are essential, and cannot be replaced with anything else.

China – which varying estimates suggest produces anything from 90 per cent to 97 per cent of the world’s total output, primarily from a single mine in Inner Mongolia – lies at the heart of the growing attention on rare earths. The country’s decision to reduce its export quotas two years ago aroused concern that now often borders on panic. Earlier this month the US Geological Survey warned the US Congress that demand for rare earths is increasing at 8 per cent a year, and US Congressmen have cited national security as a driver for the need to reduce reliance on foreign sources. US companies are searching worldwide for replacement suppliers of rare earth elements, and chemical companies are trying to come up with substitutes.

The global automotive industry is watching closely as rare earth magnets are needed for batteries for hybrid cars. So is the clean tech industry where rare earth metals have been identified as a potential risk for a number of prominent clean energy technologies including wind turbines, electric vehicles, fuel cells and energy-efficient lighting.

According to market research and consulting firm Pike Research: “Demand for rare earths in the clean tech industry will reach 12,920 tons per year by 2017, up from approximately 9,000 tons annually in 2011, which could place an increased strain on global supply for these emerging applications.”

Differing analyst reports, difficulty in quantifying future demand for new applications, confusion about what are rare earths and plain old fear at the thought of China cornering the world market have all contributed to opinions on the true value of rare earths and the extent to which there is need for concern on potential shortfalls.

In a recent paper Technology minerals: the rare earths race is on, Ernst & Young predicts a supply shortfall for the next three to five years, but says there are a large number of projects aiming to fill the estimated supply gap. It outlines what it sees as the race for the next generation of advanced exploration of rare earths and it concludes that the greatest opportunity over the short- and medium-term lies in five rare earths – neodymium, dysprosium, europium, terbium and yttrium.

Nestour takes this further. While two firms – US-based Molycorp and Lynas, which operates in Australia and Malawi – have stolen the lead in what are known as light earths and are set to produce more than 20 per cent of world supply by 2013e, there is still time to develop a number of other players. First-mover advantage will be significant, Nestour says: “It is a race to the finish line to produce the next producing asset.”

There is certainly a great deal to play for. Ernst & Young estimates that the rare earths market will grow to $4-$6 billion (£2.8–£3.7 billion) by the middle of the decade from its current value of about $2 billion–$3 billion (£1.24–£1.86 billion).

One thing is clear: the attention focused on rare earths spans global industry and national governments alike. Japan imports more rare earths than any other country and dominates some of the technological processes which use rare earths, such as polishing hard drive platters with

Screen test: rare earths are essential to flatscreen viewing

cerium oxide. It is now busy securing alternative supplies, and exploring new production with Vietnam and Mongolia. Australia is looking at a commitment to provide long-term supply of rare earths to countries like Japan, whereas India’s goal on rare earths “is likely to feature increased exploration to map out existing resources in addition to welcoming external inward investment”, according to the Ernst & Young paper. It also expects the US, Japan and South Korea to stockpile rare earths.

Brazil, which has large reserves of rare earths, is in a prime position to become a future exporter and a supplier to a technology industry it has been wooing with tax breaks for foreign companies.

The Brazilian mining company Vale, which is the world’s biggest iron ore producer, has

been gearing up to move into rare earth mining, according to media reports.

All countries, in particular those that are resource-poor when it comes to rare earths, are looking to recycling as an answer to a shortage of supply. “Urban mining, or recycling, is being explored – one company in France, for example, is starting to recycle light bulbs – but such steps rely on putting in place the infrastructure for the recycling to take place,” says Nestour.

Technological solutions include General Electric working with the US Department of Energy to consider how to make permanent magnets using nanotechnology to reduce rare earths content by 80 per cent. But for the immediate future, it looks as if the frisson of excitement around our reliance on rare earths will continue.

Business Reporter · June 2011

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

11

A buying opportunity?

Gold mining shares may have fallen but the appetite for gold itself has soared and it looks set to stay strong, according to experts at Baker Steel Capital Managers We are witnessing an unprecedented divergence between the performance of gold equities and gold prices.

Gold and gold mining shares have long been closely correlated; however, gold equity share prices are reaching near record low levels relative to gold, while the gold price per ounce is reaching record highs.

Baker Steel Capital Managers, established in 2001, has extensive experience of investing in the gold equities sector. At the end of May 2011 Genus Dynamic Gold Fund, Baker Steel’s flagship fund, had returned 29 per cent p.a. on an annualised basis since it began in 2003, successfully outperforming the gold price by approximately nine per cent p.a. and significantly outperforming benchmark gold equities indices.

This year has brought mixed fortunes for investors in the gold sector. Despite the current average gold price in 2011 being over $200/oz higher than the 2010 average and a new high of $1,563/oz being reached on 29 April 2011, gold equity values as a group have fallen 9.7 per cent in the year to date (FTSE Gold Mines Index).

The perception of rising operational costs for miners, combined with concerns about gold prices being overblown following gold’s rapid climb of 30 per cent over the last year, appear to have reduced investor appetite for gold equities.

In addition, general profit-taking has dampened sentiment in the mining and resources sectors.

With leading gold shares such as Newmont Mining trading on only ten times prospective 2011 earnings, about one third of its average price to earnings ratio over the last decade, and arguably discounting a long-term gold price of nearer $1,000/oz, there appears to be a strong case for buying gold mining shares – assuming that gold prices can consolidate at around the current level of $1,500/oz.

The drivers of the bull market remain in place: central banks, notably China and India, have been net buyers of gold since early 2009 Baker Steel does not consider the current gold price to be unsustainably high, certainly for as long as interest rates remain low. The rapid rise of the gold price over the last year is partially a result of the cocktail of geopolitical events and sovereign debt concerns which have plagued markets both last year and this. But the drivers of the bull market remain in place: central banks, notably China and India, have been net buyers of gold since early 2009 and many, particularly

in emerging markets, appear set to continue to increase their gold reserves.

During 2011 the central bank of Mexico has increased its holding by over 90t while Russia and Thailand increased their reserves by 18.8t and 9.3t respectively. While the fiat currency base continues to expand through quantitative easing and bailouts, world gold production has stalled over the past decade with approximately 2,500t mined each year, reinforcing its “hard currency” credentials.

Baker Steel’s specialist funds aim to provide attractive exposure to resources equities through stock selection based on the investment team’s strong technical background in geology and mining engineering, coupled with its financial markets and fund management experience.

Baker Steel’s focused bottom-up approach to identifying quality mining assets and companies extends into private equity and special situations investment with the London-listed Baker Steel Resources Trust (the ‘Trust’). It was launched just over a year ago to capitalise on the attractive returns that this part of the market can potentially generate. The largest holding in the Trust is Ivanplats at 27.1 per cent of NAV, a private company which is developing copper and platinum mines in Africa.

In addition to its current range of investment products, Baker Steel is planning to launch an innovative new UCITS fund next month. Baker

Enthusiasm for gold has soared

Steel Alpha Gold Fund is aimed at investors in gold who wish to increase their portfolio’s exposure to gold equities while reducing the volatility associated with this asset class. The Fund’s strategy combines Baker Steel’s gold equity stock selection with active exposure management. www.bakersteelcap.com

Business Reporter · June 2011

an independent report from lyonsdown, distributed with the sunday telegraph

Glencore flotation

13

Where there’s muck, there’s brass The eyes of the mining industry are on the flotation of Glencore International.

How will the newly quoted business invest the billions it raises in equity?

By Dina Medland

Life after the IPO

Glencore International, the world’s biggest commodity trader by revenue, floated its shares in London and Hong Kong last month and instantly came under the public scrutiny to be expected by a company with a listing of over $50 billion (£30.8 billion). While the media gasped at the fortunes made by its impossibly young 13-strong management team (average age 46) who became instant billionaires, analysts and investors pored over the 1,600-page prospectus and wondered what next.

There is no other company quite like Glencore, except possibly Noble Group, the Hong Kong trading house. Since official trading started, its share price has roughly tracked that of other listed trading houses including Noble Group. But Glencore doesn’t only trade: organised along commodity lines, half of its business is in production (with a significant amount of mining) and half is in marketing. It also sources from third parties – which most miners don’t do – and then supplies oil, metals and minerals and agricultural goods to its customers. Because of its third-party supplier relationships, Glencore may well have access to opportunities that pass other companies by.

Having started as a marketing company 37 years ago, its production assets have all been acquired as opportunities. Its CEO, Ivan Glasenberg, is quintessentially a trader. A South African who joined trading company Marc Rich & Co in 1984, he was canny enough to buy the company for $600m (£370m) from Marc Rich, the controversial oil trader, 10 years later. (Rich was a fugitive in Switzerland from tax evasion charges in the US at the time, and sold out to management, thereby planting the first whiff of intrigue around the company. He was later famously pardoned by US President Bill Clinton. Today Glasenberg owns a 15 per cent stake in the renamed Glencore, making him one of Europe’s richest men.

Glencore is likely to remain one of the more topical mining investments over the coming 18 months.

It has brought much attention to the diversified mining sector in 2011, not only through its listing but also by igniting interest in further industry consolidation. At RBC, we have valued Glencore at £6 per share and, with index buying continuing over the coming months, we believe the stock could trade as high as £6.10 during this period. However, for the stock to trade significantly above its current price, the sector will also need to re-rate.

Glencore has a strong industrial production profile centred on five main assets – Kassinc (KZ), Prodeco, Katanga, Mopani and the Xstrata stake.

Glencore’s industrial activities accounted for approximately 60 per cent of EBITDA contribution in 2010 and RBC forecasts industrial EBITDA will nearly double (+98%) to over US$7 billion (£4.3 billion) by 2013e with these five assets accounting for 90 per cent of that growth.

All four of the Glencore consolidated assets (Kazzinc, Prodeco, Katanga and Mopani) have significant growth projects being delivered in the next four quarters. Near-term, we think the most exciting asset is Kazzinc where Glencore is poised to take its 51 per cent stake up to 93 per cent, by purchasing another 42.3 per cent for US$3.2 billion (£1.97 billion) using some of the IPO proceeds.

Commodities marketing exposure is likely to be a positive for Glencore in 2011. In a year like 2011, where the market is questioning commodity pricing direction and waiting for economic growth to be reignited, we think Glencore has a distinct advantage over other major diversifieds. While prices remain volatile, Glencore has a business model oriented towards making money from that volatility through its marketing division. In 2011e, we forecast the marketing division to deliver US$3.1 billion (£1.91 billion) of gross EBITDA (48 per cent of that from metals and mining), a 31 per cent increase year over year and just 4 per cent below its 2008 high.

With approximately US$20 billion (£12.33 billion) of capital forecast to be allocated to this business this year, indications of a strong 2011 first quarter, and good progress in energy (which had sub-par returns in 2010), 2011e could prove a bumper year in trading for Glencore.

On our numbers, Glencore should generate at least US$4 billion (£2.46 billion) of net cash flow in 2011e and has allocated just over US$2 billion (£1.23 billion) for the purchase of the KZ stake. Subsequent to the KZ stake increase, Glencore may consider spinning off the considerable VasGold assets as Altyntau Gold in 2012e. Excess cash could be used to repay debt as stated, but could also be used for smaller acquisitive growth in the coming 12 months.

If Glencore manages to spin off Altyntau Gold as well, it should have significant cash reserves by 2012e.

Despite the heavy media focus on a potential Glencore /Xstrata combination, we do not believe that this is a near-term focus for either company.

Glencore’s historical transactions imply that it is unlikely to try to take full ownership of Xstrata near-term as Glencore doesn’t typically go for 100 per cent stakes in companies. Over the coming year we think that both Glencore and Xstrata will follow separate growth paths, but a potential combination of the two companies could be reassessed if the opportunity arises to put the capital reserves of both companies to good use.

Glasenberg AFP/Getty Images

Mopani Copper Mines, Zambia: “serious concerns” about Glencore’s involvement Bloomberg/Getty Images

Apart from the size of the company and the enormity of private wealth created, industry watchers have been struck by the sheer scale of its trading operation, which controls up to 60 per cent of some markets. According to a report in the Financial Times, the Switzerland-based company controls half the so-called third-party market for zinc and copper; 45 per cent of the third-party lead market; 38 per cent in alumina, and between 20 and 30 per cent for aluminium, cobalt and thermal coal.

At the time of writing, Glencore is still within the 40-day rule whereby many analysts and banks can still not comment on the company at all, having had some involvement with the IPO. The blackout doesn’t end until 28 June. However, off the record, many have been so struck by the lack of historical precedent that they prefer to watch closely.

“I’m not sure Glencore is a mining company at all – it will change every year depending on what happens with commodity prices – it’s a much more complex business,” says the head of mining at a professional services firm.

Glencore’s reasons for flotation have been seen by business analysts as necessary to give it financial firepower in the further consolidation of mining and natural resources industry. Its most valuable mines are in Kazakhstan, Democratic Republic of Congo (DRC) and Colombia. Its exposure to resource-rich countries – which are also some of the world’s most risky in which to conduct operations – will be watched closely by investors, as well as its rivals among London-listed miners such as Rio Tinto and Anglo American.

As resource nationalism continues to gather pace and the world remains flattened by economic recession, the political risks for the company remain considerable. Most of what is written about doing business in the DRC is on the subject of corruption, and only last year the DRC government stripped London-listed miner First Quantum Minerals of two copper assets. Having become one of the biggest investors in the DRC-Zambia copper belt – alongside Kazakhstan’s ENRC and

As resource nationalism continues to gather pace and the world remains flattened by economic recession, the political risks for the company remain considerable.

the US company Freeport-McMoran – Glencore now has to navigate that territory under international public scrutiny.

Post-IPO, the company has also swiftly attracted attention in terms of its corporate governance. The UK’s corporate governance watchdog PIRC was unhappy with its selection of directors for the board of miner Xstrata, in which it has a 34.5 per cent stake. At the time of writing, the European Investment Bank, the European Union’s financing institution, had also blocked financing to Glencore as it investigated “serious concerns” about governance around and beyond the company’s 73 per cent-owned Mopani Copper Mines subsidiary in Zambia. A Glencore spokesman welcomed the EIB “taking a close look at Mopani”, saying that “we are confident that we will be completely exonerated”.

The arrival of Glencore at centre-stage of the profitable world of mining and trading has been one that the whole world is watching, precisely because there is so much to be gained – or lost.

Tim Huff is equity analyst at RBC Capital Markets

Business Reporter · June 2011

14

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

A new dawn for Sierra Leone The launch of London Mining’s Marampa mine is geared towards promoting economic growth, boosting local business and high investment returns Many companies claim to be pioneers, but London Mining has a stronger claim than most.

“We are restarting production at the historic Marampa iron ore mine in Sierra Leone in Q3 this year. It will be the first new iron ore project in the country in 30 years,” says Graeme Hossie, chief executive of AIM-listed London Mining.

The Marampa mine at Lunsar, 125 miles from the Sierra Leone capital of Freetown, has lain abandoned for over three decades.

London Mining estimates that the mine could yield 16 million tons of 65 per cent ore annually for 26 years. Total deposits at the site are estimated at over a billion tons.

It is investing $200 million (£123 million) in the first phase of the project which is on schedule to start production at the end of Q3 this year.

“We are able to start production quickly using the 40 years’ worth of tailings left by previous mine activity and will build up quickly to 3.6 million tons in phase one,” says Hossie.

Phase two production is expected to reach 8 million tons per annum production by the end of 2014, for a $659 million (£406 million) investment, and the final phase should produce another 8 million tons for an investment of $1.2 billion (£740 million). The company has recently signed a five-year agreement with Glencore

International which will sell a portion of the 65 per cent iron sinter feed concentrate produced at the mine to steel manufacturers in Europe and China.

The operation has simple, low-cost logistics to supply global iron ore markets, which can be scaled up simply as production is expanded.

The project is more than the restart of mining at Marampa, however. It will help re-energise the entire Sierra Leone economy, set back by a nine year civil war that ended in 2002.

“The biggest challenge has been overturning the international investment community’s out-of-date view of Sierra Leone. It is still seen as risky, but that view is, in many important respects, five years out of date,” says Hossie.

“The government is investing in infrastructure and sees natural resources as key to building up its economy.

“As the first of the new West African projects coming into production, the Marampa project will de-risk Sierra Leone among the international investment community, making it more attractive to future long term capital investment across many sectors.”

In Marampa, London Mining is investing in local labour – 93 per cent of its employees are locals. Hossie says: “We have calculated that

for every employee, 12 to 20 other people will indirectly benefit.”

The mine will also bring economic growth to local companies set up to service and supply Marampa. London Mining has pledged to invest one per cent of its revenue in community development projects, locally and nationally, focusing on schools, libraries, health and agricultural development activities, and aims to build sustainable, long-term businesses in preparation for the closing of the mine in about 30 years’ time.

The company is also supporting the build-up of local skills by partnering Father Mario of the St Joseph’s Technical Vocational Training Centre in Lunsar.

“The mine will need skilled people such as technicians, plumbers, geologists and mining engineers and we are helping the centre build up training systems, and providing training ourselves,” says Hossie.

Many of the skills that existed among the mining community before Marampa mine closed three decades ago have now been lost locally, but the company’s international experts are training local labour.

“Some of our hires are Sierra Leonean nationals with mining industry skills who had moved abroad and are now returning,” says Hossie.

The training support complements a raft of corporate social responsibility projects focused on health, education and the environment.

In 2010 the company provided 106 teacher co-ordinators for school library projects at 53 schools, 367 scholarships for school pupils around Marampa, and the donation of six motorbikes to local councillors to ensure they can reach their wards.

Hossie also expects that Marampa will bring rewards for shareholders. London Mining is currently listed on the AIM market in London, but as production comes on stream, the company has plans for a listing on the main board of the London Stock Exchange.

The company has built a base of over 30 institutional investors.

“It’s an exciting time,” says Hossie. “This is a gem of a project in a gem of a country.”

Graeme Hossie is CEO of London Mining www.londonmining.co.uk