Surge in gold prices, bad news for oil, opportunities for Nigeria

The stunning collapse of oil prices to below zero in April, was the latest shock to an economy roiled by the coronavirus outbreak — and yet another jolt to an energy sector already grappling with a challenging transition from fossil fuels to cleaner power sources. For Nigeria, it was time to bite the bullet and take the difficult decision of diversification. The rising price of gold however created an opportunity to formalise artisanal gold mining and stockpile for reserves. FEMI ADEKOYA writes on the Federal Government’s efforts to jumpstart the gold economy.

The price of West Texas crude fell to negative $37.63 per barrel on April 20, as sellers scrambled to offload their May futures contracts before the next expiration date — even if they had to pay buyers to make the deal. The reason: With the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies have run out of room to store it.

The above scenario was not peculiar to American producers but also Nigeria, as the Federal Government had in a desperate effort to offload and sell stranded barges of oil, offered oil traders huge discounts on Nigerian crude oil grades below the $10 mark for the month of May.

Data from the Nigerian National Petroleum Corporation (NNPC), on the government’s crude oil grades for sale in May, showed prices as low as $1.51 while two of Nigeria’s banner grades — Qua Iboe and Bonny Light — sold at discounts of $3.92 and $3.95, respectively to Dated Brent.

Without refining capacity, Nigeria lacks the space to store unwanted supplies at a time the cost of hiring ships to take its supplies to importers has soared, because many tankers are being used for floating storage.

Indeed, the Group Managing Director of the NNPC, Mele Kyari, had painted a gloomy picture of the Nigerian economy in the months ahead, appealing to industry captains and Nigerians, to be prepared for very lean times.

According to him, the country has been unable to sell some of its cargoes of crude and liquefied natural gas.

On the contrary, Gold’s mega rally took another upturn early this month, as it surpassed another major hurdle at $2,000 per ounce.

Spot gold advanced 1.4% to $2,004.97 per ounce by 3:20 p.m., on August 4, after reaching an intraday high of $2,009.20 earlier. It however retracted yesterday to $1,951.55 around mid-day.

Bullion has surged more than 30% so far this year to a record high, and is one of the best-performing assets in 2020, as a result of increased safe-haven demand during the coronavirus pandemic.

Investors are driven by the belief that the metals will hold its value better than other assets as fallout from Covid-19 ripples through the global economy.

Armed with this reality, the Federal Government sought to reverse the trend and exploit other resources that hitherto were being illegally mined.

Recently, there appeared to be a credible step in that direction when Nigeria, for the first time, refined its own gold and purchased the refined product into a new gold reserve.

The Central Bank of Nigeria (CBN), paid a handsome N268 million for 12.5-kilogramme gold bar, and will now use it as a reserve instrument.

This is considered a step toward the actualisation of economic diversification in Nigeria, as gold futures continue to show potential, notwithstanding the challenges facing mining development.

Indeed, the revitalization of and renewed faith in the gold standard seems to have spread to the energy sector as well. Analysts at Morgan Stanley believe the ratio between two of the most watched commodities on Earth –oil and gold– is “worth highlighting,” remarking that such golden ratio could or should be of interest to those looking for a crystal ball for oil price futures.

Creating a gold economy
The Minister of Mines and Steel Development, Olamilekan Adegbite, while speaking on investment opportunities in the Nigerian mining industry at the 2020 Mining in Indaba, South Africa, said Nigeria has made a headway in de-risking the sector by improving geo-scientific data, and by developing a coherent downstream mineral policy.

When he was appointed the Minister of Mines and Steel Development a year ago, one of his goals was to develop a gold ecosystem in the country that would make it a hub for the precious metals in the West African region.

To achieve this goal, Adegbite designed a framework that would develop the upstream and downstream sectors of the gold industry.

Focusing on the upstream sector that deals with exploration, production and refining of gold, the Minister lent his support to a Canadian company, Thor Exploration, which had been granted licence to mine gold in Nigeria, through the Segilola Gold project.

The project is expected to process 650,000 tonnes of ore, with a target production of approximately 80,000 ounces yearly from next year.

During the block laying ceremony, the Minister noted that the government was willing to give waivers on equipment and taxes to major investors willing to invest in the sector.

Similarly, the Minister is working to ensure that the two companies, Dukia Gold and Kian Smith, which were granted licenses to refine gold in Nigeria to London bullion standard, come on stream.

The two companies would procure gold from the Segilola Gold project by Thor Exploration, and would also procure from artisanal and small-scale miners, refining them to meet international standards. Some of these commodities would be traded on the bullion trading platform, where the CBN and other investors – both local and international, would be the off-takers.

Curbing illegal mining in Nigeria
While presenting the locally-mined gold bars by the Presidential Artisanal Gold Mining Development Initiative (PAGMI), President Muhammadu Buhari disclosed that Nigeria lost about $3billion to the smuggling of gold between 2012 and 2018.

Aside from gold, Nigeria is also endowed with about 43 other minerals now lying untouched in various parts of the country. The mining of these deposits is dominated by artisanal miners, who exploit these deposits without licence, thereby depriving the government of revenue.

Gold deposits are mostly found in Zamfara, Osun, Oyo, Kogi, Jigawa, Plateau, Kwara, and Nasarawa, with active illegal mining going on these sites.

Adegbite described PAGMI as a comprehensive artisanal and small-scale gold mining development programme, launched in 2019 to foster the formalization and integration of artisanal gold mining activities into Nigeria’s legal, economic, and institutional framework.

According to him, PAGMI is designed to integrate social, environmental, health and safety, economic, commercial, and technical considerations into its implementation.

It is also planned as a broader strategy to address the structural and institutional factors such as rural poverty, lack of alternative livelihoods, and difficulties in meeting legal and regulatory requirements that tend to push artisanal gold mining operators deeper into the informal economy.

According to the Nigeria Mining Growth Roadmap, Nigeria’s gold reserve is estimated at 200 million metric tonnes.

Trading Economics placed Nigeria as the sixth largest country with gold deposits in Africa, with an average of 21.46 tonnes from 2000 to 2019, and reaching an all-time high of 21.51 tonnes in July 2019.

According to the 2018 Solid Mineral Audit conducted by the Nigerian Extractive Industries Transparency Initiative (NIETI), the government massively loses revenue through under-reporting black market activities.

It also said the black market activities generally pose a security risk, which is a disincentive to investors. “Therefore, the subsector may not be able to attract sufficient investment to realize full potential,” it said.

It recommended that the government should expedite action on the proposed National Gold Policy, to arrest further revenue losses, and return sanity to the gold mining environment to make it attractive to world-class investors.

Stakeholders weigh in
The Chief Executive Officer and President of Thor exploration Ltd, Segun Lawson, said the Mining Act in Nigeria, has created an enabling environment for investors, adding that the Segilola Gold project further demonstrates to the international mining community that a large scale metal mining project can be successfully developed and implemented in Nigeria.

“The Honourable Minister has been extremely driven and dedicated. We have, as a Company, found the Minister very supportive in helping us successfully navigate through the development process. We believe in his vision, which has been key in creating a gold sector,” he added.

The Director-General, Mining Cadastre Office, Obadiah Nkom, described Adegbite as having made the application for licences easier for stakeholders to attract investments.

“We have streamlined our operation at the mining cadastre office making it easier for investors to apply for mining licenses online. There are also waivers for those who want to bring in equipment into the mining sector. Indeed, the sector has become more business friendly under the tenure of the Minister,” he said.

The Managing Director of Dukia Gold & Precious Metals Refining Company Limited, Bose Owolabi, said by creating the right enabling environment, incentives and protective policies, the Federal Government has done well.

Owolabi however emphasised the need to improve on the production of Gold Doré and other precious metals alloys in Nigeria, adding that the small-scale mining community need to be complemented by attracting major miners to operate in Nigeria.