Sierra Leone mining dispute shows familiar signs of contract risk

SL Mining exported its first three iron ore shipments from Sierra Leone in June. Now it wants to suspend work over a government ban. The case shows familiar signs of contract and political risk catalyzed by a change in government and the need for raising revenues.

Situation Report

Sierra Leone’s mining sector has been struggling to recover from the 2014 Ebola outbreak and the subsequent fall in international iron ore prices. Iron ore output in Sierra Leone fell from more than 20 million tons to virtually zero in 2017. But things appeared to be looking up in 2017 after SL Mining, a unit of London-based Gerald, received a license in the country (under former president Ernest Bai Koroma’s All People’s Congress (APC)) and subsequently exported three shipments in June this year. However, that development has come with increased scrutiny. 

General elections in March 2018 were won by the Sierra Leone People’s Party (SLPP) and President Julius Maada Bio, who appointed Foday Yokie as mining minister in July this year. The same month, Yokie ordered SL Mining to temporarily suspend operations and in August he prohibited the firm from exporting. The minister’s demands included royalties for the shipments and a USD1 million performance bond for “having failed to make substantial progress” in developing the mine since license acquisition. The firm claimed the royalty payments were not yet due according to its agreement with the government. It also referred to the recent shipments as proof of substantial progress.

The government has specifically informed SL Mining that it intends to renegotiate the firm’s mining and license agreement, and the firm has agreed to cooperate on the condition that its right to export is restored. However, the government’s  demands (e.g. advance payment before every five shipments) and its restrictions on SL Mining’s business before a renegotiation indicate a coercive tendency. These indicators also raise the risk of breach of contract. 

The government’s moves are telling of the risk of contractual dispute in the extractives. Specifically, it reflect growing fiscal pressure and political pressure which have stoked increased government appetite for mining revenue. Between 2012 and 2014, the iron ore boom pushed up the extractive sector’s share of annual GDP to 14%.[1] However, the government collected only 4% of GDP in receipts, mostly due to weak fiscal requirements in the mining legislation and mining contracts. President Bio took charge in 2018 following a popular campaign on reviewing those arrangements, and Minister Yokie, himself a former lawmaker, has strongly expressed the same intention since assuming office.

Sierra Leone’s revenue constraints are putting a strain on public finances and have led to a debt crisis. External debt grew by a quarter between 2017 and 2018 and Sierra Leone’s debt stock is 66% of GDP. On the streets of Freetown, many also worry about the state of public services and infrastructure. These pressures and plans for a new tuition-free programme for secondary schools make it particularly pressing for the government to extract more money from a sector already perceived to be underpaying its dues.

Outlook

The dispute signifies the onset of increased regulatory oversight that should especially concern prospective investors in the extractives. Furthermore, we may well see changes to the legal framework for those sectors, including the Mines and Minerals Act 2009. We would expect the government to focus on addressing gaps in the law and special agreements in order to strengthen the fiscal regime. For now, we do not expect the scope of scrutiny to go beyond the extractives sectors.

 To discuss further with the team, please do drop us a line: questions@songhaiadvisory.com

[1]It was only 4% in the three preceding years.