African Minerals revises its 2012 production output by 33% – will government reduce its over-optimistic 50% economic growth forecast?

Abdul R Thomas

19 April 2012

Dr. Samura Kamara, Sierra Leone's Finance Minister

Common sense tells us that when GDP growth forecast is based on a predicted rise in exports, such forecast can only be relied upon as long as production and market conditions continue to hold true. And one should rightly expect a responsible government to immediately revise its GDP forecast accordingly, should change in those conditions occur. But Sierra Leone’s finance minister is steadfastly hanging on to his forecast.

When finance minister – Samura Kamara presented the government’s 2012 Finance Bill to parliament at the end of last year, he said reassuringly, that the country’s economy will grow in 2012 by a massive 50%, when every right thinking economist believed that economic growth for 2012 may not exceed 8%.

Minister Samura’s misplaced optimism is based on the report by the country’s largest iron ore producer – African Minerals, that investments and surge in the production of iron ore could generate an estimated – $2 Billion revenue for the government.

African Minerals has now significantly revised its projected production output downwards. Why is the finance minister not revising his figures accordingly?

Although African Minerals is said to have invested $1 Billion in recovering the mines,  building its transportation and shipping infrastructure, and had received a $130 Million loan from Standard Bank to help speed up development of its phase one Tonkolili mining project, new problems have now emerged.

The company is said to be facing some financial difficulty translating offers of capital investments into real cash, needed to fund its cash flows and rising production costs.

As a result, the company last week announced a 30% reduction in its planned production output, amid serious industrial action, which saw the shooting of one miner and many others wounded at the Tonkolili site.

According to the company’s 2011 year end report released last Wednesday, it says that it is “reducing its projected output figures for 2012; from 15 million tonnes to 10 million tonnes” – due to what it refers to as “associated inherent uncertainties”.

Although it is not clear what these “associated inherent uncertainties” are, the Sierra Leone Telegraph had reported early this year that the company’s production forecast for 2012 was far too optimistic.

The Sierra Leone Telegraph reported that “because of the lag between investment and production”, the high production output forecast was unrealistic and politically motivated in a general election year.

The Sierra Leone Telegraph also said that; “Realistically, African Mineral’s production of iron ore in Sierra Leone is not expected to rise significantly until the second quarter of 2013, well after the results of the 2012 presidential and general elections are known.”

Last Wednesday, African Minerals Ltd., confirmed that; “2012 is a commissioning and ramp-up year.” 

“Having been on site last month we were expecting a small downgrade to production of two to three million tonnes, and would view the new guidance as a target to beat,” – analysts confirmed.

The Executive Chairman of African Minerals – Frank Timis told reporters; “It gives me great pleasure to present these results, having successfully re-commenced iron ore shipments from Sierra Leone after a 30 year break, and having also completed our landmark transaction with SISG.”

“In the coming year we look forward to bringing our Phase I Tonkolili project up to its optimum production level, to end the year delivering ore to market at a rate of 20Mtpa with attractive cash costs,” – he said, while noting that the company will not achieve its production forecast for 2012.

While minister Samura is stuck with his politically motivated 50% GDP forecast, questions are being asked as to how long he is prepared to stand by that forecast, upon which government depends for its revenue in the ensuing financial year.

But a much bigger problem now looms for minister Samura, as he contemplates what to do with his politically massaged economic growth figures.

He had already told parliament that GDP is expected to grow by 10% in 2013 and 2014 respectively, marking a huge 40% fall from the 50% predicted for 2012.

While African Minerals are pleased to announce that “it has completed its long awaited USD1.5 Billion shares subscription deal with Shandong Iron and Steel Group (“SISG”),” the industrial dispute which has now degenerated into violence at the company’s Tonkolili mines, will add further uncertainty for investors.

It is reported today that one person has been shot dead and several others injured, as police used live ammunition to disperse striking miners and local residents trying to blockade the mines.

According to local media; “the strike action started peacefully in protest against low-paid salaries, harsh working conditions, poor medical and inadequate housing facilities, and other benefits.”

What is worrying now, is the government’s dependence on an over-optimistic GDP forecast, for its 2012 and 2013 revenue. Will finance minister Samura revise his government’s forecast in the light of African Minerals’ revelation last week?

Perhaps the minister ought to revert to his earlier growth forecast, which was reported in the government’s Poverty Reduction Strategy document, where he said that:

“Real GDP is expected to grow at 5.1 percent in 2011 and continue the expansion to 6 percent in both 2012 and 2013, reflecting the increased investment in basic infrastructure and energy, rise in agricultural productivity and huge investment in the mining sector. The commencement of iron mining in particular, is expected to substantially boost economic growth in the medium term.”

Or will he stick to his pre-election 50% GDP forecast for 2012 – despite the cat being let out of the bag by African Minerals?

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