1. TFR SEPTEMBER 201458
REGIONS: WEST AFRICA
Frontier opportunities
W
est Africa is awash with
commodities.
Whether your interest lies
in petrol engines or chocolate bars,
expensive jewellery or a good cup of
coffee, many of the commodities that lie
at the heart of the products we use every
day come from West Africa. And with
the continent increasingly in the news
for all the right reasons, more and more
investors are setting their sights on the
region. While the old regional stalwart
Nigeria continues to be the focus of
most, frontier countries such as Liberia,
Côte d’Ivoire, and Sierra Leone are seeing
increasing levels of interest.
But new opportunities need new
sources of financing, and this poses
challenges to those looking to support
these projects and underwrite the
risk financially. This article provides
a brief overview of the West African
commodity sector and discusses some
of the existential risks in the region, and
what they mean for those seeking to gain
commercially from the opportunities on
offer.
Lifting the lid
Oil
While the horrors of slavery in the 1700s
might have put West Africa, quite literally,
on the map, it was oil that in the modern
era made the region rich. And although
corruption and mismanagement has seen
the black gold viewed by many as the
region’s modern day curse, its economic
impact has been undeniable.
Africa’s proven oil reserves stand at
roughly 125,000 billion barrels. Although
Libya comfortably leads the pack with
approximately one-third of this total
supply, the next third is held in West
Africa (if one includes Angola), with
virtually all sub-Saharan oil located in
the region. Furthermore, potential new
exciting oil finds in a variety of countries
such as Ghana, Sierra Leone and Liberia
look to add to the regions’ interest (see
Figure 1).
Historically, Europe and North
Figure 1: Oil in Africa
While West Africa is a land of opportunity for commodities financing, significant risks remain.
Hugo Williamson provides an evidence-based overview of why lenders and investors should
consider taking the plunge
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2. 59www.tfreview.com
America have been the largest recipients
of West African oil. The recent shale oil
phenomenon in the US, however, has
fundamentally shifted this balance, due
to its output being of a similar quality
to the light sweet crude that West Africa
is known for. As a consequence, the US
now demands a US$20bbl discount on
oil shipped from sub-Saharan Africa,
in comparison to the prices that Asia is
willing to pay. As a result of this shift,
China has now become Angola’s largest
trading partner, swallowing up nearly 50%
of its oil exports.
Mining
Minerals have also long been a major
draw for the region. Although gold
and diamonds have traditionally been a
West African hallmark, numerous other
minerals litter the region’s red earth. While
the big players in this sector, notably
Guinea with its bauxite, Ghana with
its gold, and Angola with its diamonds
have enjoyed large scale commercial
operations for more than 50 years, other
markets have garnered increasing investor
attention. Liberia for example, which is
yet to commercially produce a gram of
gold, has seen a rush of investor interest
in recent years, with various new mining
firms such as Hummingbird and Aureus
Mining acquiring major concessions that
are beginning to reveal their potential.
China, unsurprisingly, has had a
significant impact on the region’s mining
sector, in particular with regards to iron
ore. Beijing has announced that by 2015
it intends to import 50% of its ore from
Chinese-owned foreign mines. The impact
of this on financing West African mining
projects has been seismic, with companies
such as Chinalco, Kingho Energy and
others taking increasingly larger stakes in
the region.
Notably in Sierra Leone, African
Minerals raised US$3bn in debt and equity
for its Tonkolili project. Half of this came
from China – initially from China Railway
Materials to rehabilitate and build a
200km railway line, and then subsequently
from Shandong Iron and Steel Group to
further expand the mine’s operations.
Agriculture
West Africa’s commodities don’t just
come from under the ground, but they
are grown on top of it as well. While best
known for its oil, Nigeria ranks sixth in
the world for its farming output, with the
agriculture sector contributing to nearly
27% of the country’s economy.
West Africa’s role in the global
agriculture supply chain is clear. The
region produces 70% of the world’s
cocoa. This is mostly grown in Ghana
and the Côte d’Ivoire, with the latter
producing the lion’s share. The palm
oil industry, while now dominated by
south-east Asian giants, originated in
West Africa, and is now enjoying a
resurgence of regional investment. Côte
d’Ivoire, which has the continent’s largest
refinery, is looking to double production
by 2020, and Asian companies, such as
the Indonesia-based Wilmar Group, are
looking at new plantation and refinery
opportunities across the region.1
Local demand
West Africa has traditionally been viewed
as a commodity production and export
hub. This paradigm is changing however,
as local consumption and demand for
raw materials rises. This change has been
largely driven by the substantial economic
growth the region has enjoyed over the
last decade – sub-Saharan Africa’s GDP
expanded at an average rate of 5.6%
between 2000 and 2012, up from 2.2%
the previous decade. Some countries
experienced far higher rates. Sierra Leone,
“Africa’s proven oil
reserves stand at roughly
125,000 billion barrels”
Source: Aureus Mining
Marvoe Creek diversion cascades for the New Liberty gold mine in
Liberia of Aureus Mining
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3. TFR SEPTEMBER 201460
REGIONS:WEST AFRICA
for example, saw 12% growth rates over
the same period, and earlier this year,
Nigeria became the largest economy on
the continent, eclipsing South Africa.
With this growth has come both a
new middle class and a higher demand
potential, making the region increasingly
attractive for commodity houses to sell
goods locally.
Demand for commodities has also
been driven by a chronic lack of historical
investment in the region. Nigeria, for
example, pumps roughly 2.5 million
barrels of crude a day, while its domestic
demand is only 300,000 barrels. However
the country imports nearly 80% of its
refined petrol products because its four
refineries are so mismanaged – operating
at just 25% capacity in 2011.
The result is that commodity houses
that have traditionally looked out from
West Africa are now looking in. Vitol,
the world’s largest independent oil trader,
acquired Shell’s downstream oil service
station assets in Nigeria in 2011. Trafigura
has pursued a similar strategy, acquiring
BP’s regional service station network for
nearly US$300m, and investing a further
US$1bn to expand its presence.
It is not just oil that has seen this
change in focus. Cargill has explored
investing in local cassava farms in the
region to feed the local population, while
Singapore-based Olam has invested
US$15m in a tomato processing facility
in Nigeria to process tomatoes grown in
California.
Impediments to growth
While West Africa offers substantial, and
growing, opportunities, it is a region fraught
with obstacles that can impact and derail
a commodity project, regardless of its size
or planning. Because of this, many new
projects struggle to raise necessary financing,
particularly as the prices of many regional
commodities have fallen.
Aside from the complexities of country-
specific regulatory and legal uncertainties,
broader bribery, infrastructure, political, and
piracy risks remain a significant problem for
any operator looking to finance, partner,
explore, or transport products out of the
region.
Bribery and corruption
West Africa, unfortunately, is all too
frequently associated with bribery and
corruption. And not without good reason
- the highest ranked regional country in
the region on Transparency International’s
Corruption Perceptions Index is Ghana,
which comes in at a moderate 63 (our
out of 177). Equatorial Guinea ranks at
163, and the regional mean is a poor 123,
placing it very much at the lower end of
the governance scale.
While many countries are signatories
to the Extractives Industries Transparency
Initiative (EITI), a global anti-corruption
scheme, notable absentees include Angola
and Equatorial Guinea.
An illuminating ranking provided
by Global Integrity, an NGO linked to
the US Centre for Public Integrity, rates
the legal frameworks in many regional
countries such as Ghana, Sierra Leone,
Nigeria and Liberia as “moderate” or
“strong”. In all instances however, it rates
the implementation of the law as “very
weak”. This highlights one of the major
challenges investors face in the region: an
inconsistent implementation of local legal
systems, and a frequent lack of adherence
to the law. The dangers of not being
aware of governance challenges can be
substantial, particularly if they result in
infringements of the various global anti-
bribery laws such as the Foreign Corrupt
Practises Act (FCPA) in the US, and the
UK Anti-Bribery Act. In 2009, Kellogg,
Brown & Root were handed a record
US$579m fine by the US Department of
Justice (DoJ) for FCPA infringements
in Nigeria.2
Technip in 2010 was fined
US$338m by the DoJ for similar offences.
The challenge of knowing who your
partners are is acutely problematic, and
significant due diligence and anti-money
laundering (AML) background checks
are essential for ensuring compliance,
as is taking the time to understand the
nuances of the local market. US firm
Cobalt Energy Resources for example,
which recently announced a major oil
discovery in the Kwanza basin in Angola,
is currently under DoJ investigation
for alleged links between its partner in
Angola, Nasaki Oil and Gas, and senior
Angolan government ministers.3
The implications of bribery and
corruption are not limited to choosing
partners, but can have far wider
implications for those exploring and
financing commodity opportunities in
West Africa. In Guinea for example, the
government earlier this year stripped Vale
of its mining rights following allegations
that their partner, BSG Resources, won
the rights through bribing officials.4
The knock-on effect has been that Rio
Tinto is now suing Vale. In another
regional country, a client has experienced
significant challenges converting their
exploration licences into production,
suspecting their reluctance to pay
kickbacks is negatively impacting their
commercial operations.
Infrastructure
Infrastructure weaknesses are a major
challenge when operating in West Africa.
Governance shortfalls and a chronic lack
of investment mean that in many parts, the
infrastructure requirements make exploring
new commercial opportunities financially
unviable, as the cost of production becomes
too high. The two primary areas of concern
are transportation and power.
Transportation assets, notably rail,
roads and ports, are painfully undersupplied
in West Africa. The result of this is that
many commercial ventures sit outside the
range of usable roads and railways, forcing
companies to look at ways to finance
their own infrastructure. ArcelorMittal has
rehabilitated a 270km rail line to its Tokadeh
mine in Liberia, Alcoa operates the Boke
Railway in Guinea, and the aforementioned
African Minerals rehabilitated a 74km railway
line and then built a 126km extension to its
Tonkil mine in Sierra Leone.
Alongside transport weaknesses, West
“As piracy has diminished
as a problem in the East
of Africa, it has grown in
the West”
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Africa suffers significant power supply
shortfalls. Liberian president Ellen Johnson-
Sirleaf recently made the remarkable
acknowledgment that on game night, the
Dallas Cowboys stadium in the US uses
more electricity than the total installed
capacity in her country.
Further highlighting the problem,
Nigeria, which accounts for approximately
two thirds of regional demand, produces
10GW of capacity, which is roughly half the
consumption of London.
Despite these shortfalls, recent
investment in regional energy production
projects has seen capacity increase by 8.6%,
a figure far higher than the Sub-Saharan
average. However this increase is not evenly
spread. While Ghana has seen a 10.6%
increase in capacity, providing coverage
to 60% of the country, in Liberia, only
1% of the urban population has access to
electricity, and in rural areas, this number is
far lower.5
Politics and security
Tragically, West Africa has proved itself
highly prone to political instability, and
the region has a long history of security
disruptions. In the last ten years alone,
civil wars have flared in the Ivory Coast,
Liberia, and Sierra Leone, and significant
fighting has occurred in Nigeria, particularly
with militant Islamist groups such as Boko
Haram.
The challenge for those investing in the
region is that instability is often difficult to
predict. In September 2002, the front cover
of a well-regarded Africa-focused news
journal ran the headline “Côte d’Ivoire –
the Jewel of West Africa”. Two weeks later
the country had plunged into a deadly
civil war.
Piracy
As piracy has diminished as a problem
in the East of Africa, it has grown in the
West, where it is reported to have cost the
local economy US$2bn in 2013. Although
most of the attacks occur in Nigeria’s
Niger delta, recent regional incidents have
resulted in the London-based Lloyd’s
Market Association group of maritime
insurers listing Nigeria, Benin and their
nearby waters in the same risk category
as Somalia. The resulting reduction in
maritime activity has seen a 28% loss in
Benin’s government revenue because of a
fall in traffic at the port of Cotonou.
With so many regional commodity
exports reliant on shipping to their final
destination, the rise of piracy as a threat
has become an increasing issue.
Separating the wheat from the chaff
West Africa’s position in the global
commodity trade system, while already
important, is surely likely to grow and
develop. Local demand, an expanding
economy, new mineral finds, and new
technologies to extract those finds
economically, mean that interest in the
region will continue to rise over the
next decade, as businesses expand and
entrepreneurs seek out new fortunes.
This growth in activity will mean a
growth in demand for new financing –
be it in the form of equity, debt, trade
finance or public offerings. Those looking
to support and underwrite such activities
will need to balance the substantial
opportunities on offer with the inevitable
risks of operating in a region that largely
remains a frontier market.
However with open eyes, a robust anti-
bribery policy, an acceptance of risk and
a sense of adventure, West Africa offers
an array of diverse opportunities for those
willing to explore the region and seek out
the many prospects on offer.
References
1. The annual Cocobod financings
demonstrate lender appetite for financing
Ghana’s cocoa:
www.tfreview.com/node/9550
2. www.justice.gov/opa/pr/2009/February/09-
crm-112.html
3. See the ‘current FCPA investigations’ in
Baker & McKenzie’s client update at http://
tinyurl.com/okytr8t
4. See Bloomberg coverage on 18 April 2014
at http://tinyurl.com/kmws9wr
5. See Citac’s article, Wiring west Africa’ at
www.tfreview.com/node/10308
Hugo Williamson is a managing director
at IPSA International Inc, a global risk
advisory firm specialising in advising
corporate, finance and legal clients
operating in challenging new markets.
Figure 2: Piracy and armed robbery incidents reported to the IMB Piracy
Reporting Centre in 2014.
Source: Oil and Gas in Africa, KPMG (www.kpmgafrica.com)
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