Nevsun

Next year, Canada's Nevsun Resources will open Eritrea's first gold mine in decades at its one million ounce gold-copper-zinc deposit at Bisha, 150 kilometers west of the national capital of Asmara.

The miners' entry marks a departure from their recent drive into western and southern Africa and could create a major new gold-mining region. Already, northeast Africa is home to a few gold deposits of a million troy ounces—a threshold size for bigger miners—that hint at its potential. "The region is pretty much under-explored compared to West Africa and Tanzania," said geologist Michael Robertson, a consultant at Johannesburg-based MSA Geoservices. "From a prospectivity point of view, it's a good place to be."

For governments, a thriving gold industry would bring revenue and a better investment profile, as it has in West Africa, where the gold boom has transformed countries such as Mali and Burkina Faso into popular investment destinations for miners. The region's gold output doubled in the ten years to 2008 and discoveries of deposits of one million troy ounces have become an annual occurrence, says U.K. investment bank Ambrian Capital.

But mining in West Africa is moving out of an early-stage exploration phase into a period of consolidation as companies merge or buy out miners that have already made discoveries. Miners such as Randgold Resources Ltd., Severstal JSC and Endeavour Financial Corp. are taking a bigger share of the region's output. In comparison, northeast Africa remains under-explored and competition limited to small miners. Border wars between Ethiopia and Eritrea, autocratic governments and onerous mining regulations kept miners from venturing into the region in recent decades.

Those fears have not vanished, but calmer relations between Eritrea and Ethiopia, a new mining code in Eritrea and a handful of gold discoveries by smaller miners such as Centamin Egypt Ltd. have enticed those looking to find big deposits at little cost.

Centamin Egypt's seven million troy-ounce Sukari gold deposit is in Egypt, on the Arabian-Nubian shield that ancient Egyptians mined for gold. The shield encircles the Red Sea and runs along the coastal sides of countries bordering it: Egypt, Sudan, Eritrea, Ethiopia, Saudi Arabia, Yemen, Jordan and Israel. "I think the success of Centamin Egypt peaked a lot of interest in the region," said Leon Esterhuizen, a mining analyst at RBC Capital Markets.

AngloGold's exploration efforts, guided by the company's airborne electromagnetic imaging system Spectrum, are targeting Egypt, Eritrea and Saudi Arabia. The miner established a joint venture last year with the privately-held Saudi Arabian company Thani Investments. AngloGold Chief Executive Mark Cutifani told an audience at the miner's second-quarter earnings results last month that the joint venture has found an exciting early-stage discovery in North Africa, and will deliver news on its exploration in Eritrea and Saudi Arabia next quarter.

Newmont stepped into Eritrea in July in a joint venture with Australian gold miner Chalice Gold Mines Ltd, though Chalice said Monday it wouldn't proceed in the project.

Both AngloGold and Newmont declined to comment for this story, with Newmont citing the confidentiality of its exploration efforts.

The majors would be joining over a dozen small miners that are developing or exploring for gold. Next year, Canada's Nevsun Resources Ltd. will open Eritrea's first gold mine in decades at its one million ounce gold-copper-zinc deposit at Bisha, 150 kilometers (93 miles) west of the national capital of Asmara.

Despite the attractive geology, miners still face some prohibitive requirements and the possibility that governments will revise mining laws. Egypt and Sudan require that the state holds at least a 50% stake in any mine, which miners may try to renegotiate if they make a discovery. Ethiopia is considering raising royalties on gold mining to between 5% and 8%, from 2% to 4%.

"It's been voiced by mining companies that this is very negative for mining," said Bob Foster, CEO of Stratex InternationalPLC, a London-listed miner that is buying up property in Ethiopia near hot springs rich with gold mineralization.

Some observers worry that a mining boom won't benefit local populaces and revenues will be diverted by the region's governments to military budgets or to elites. For nearly two decades, Eritrea has been run by an unelected former independence fighter and ranks among the most repressive states in the world, according to the U.S.-based group Freedom House. In Ethiopia, the ruling government has grown increasingly dictatorial and combative with opposition parties and the media. The U.S.-government funded organization United States Commission on International Religious Freedom this year urged the government to prohibit any foreign companies mining in Eritrea from raising capital or listing its equities in the U.S.

To miners, these are substantive issues. After the U.N. sanctioned Eritrea last December for instigating insurgents in Somalia, banks declined to lend to Nevsun, forcing it to issue shares to finance the Bisha mine. A Nevsun employee was killed by rebels in 2003, and tensions between rebels and autocratic governments continue to simmer across the region. Border clashes with militants in Sudan and Somalia remain common in both Eritrea and Ethiopia.

"The market is still skeptical because of the jurisdiction it's in," said Nevsun's Chief Executive Cliff Davis. "But we've mitigated that by making sure they [the Eritrean government] have a big stake in this."

Eritrea's mining law allows the government a minimum 10% free-carry stake in any mine, which means the government doesn't have to pay for the stake up front or fund exploration costs. It also holds an option to add another 20% at market prices for a maximum 30% stake, but it must fund exploration costs, a rare arrangement in any mining jurisdiction. In Nevsun's case, the miner and the government negotiated a 40% stake for the government, above what the law stipulates, at the request of the government, said Mr. Davis. Soft loans from China's Export-Import Bank of China have allowed the government to pay for its share of the exploration costs.

Tim Williams—whose company Andiamo Exploration Ltd. is exploring in Eritrea—praised the government for honoring its obligations, and said miners can't worry about what a government will do with its revenues. "We've got to accept the laws of the country," Mr. Williams said. "As long as the government keeps its word and you can trust it to continue to do so, then the mining industry will invest."

But the region also presents problems of a more technical kind to gold miners. While sand cover is not an issue as it would be in Saudi Arabia, where mineral outcrops are often buried, the grounds hosting gold are typically arid. Gold mines use copious amounts of water to wash gold from the ore, and without a nearby source, pipelines would need to built to carry water, adding to costs. More worrisome, analysts said, would be conflicts with communities over water in regions with scarce water supplies.