Finding the golden lining

A Canadian mining exploration company ventures beyond our borders to seek riches on hostile ground.

Nuinsco Resources is searching for gold in Sudan and the deserts of Egypt (pictured)

Executives from Nuinsco Resources, a Toronto-based mineral exploration company, recently checked in to the Corinthia Hotel in the Sudanese capital of Khartoum. The oval-shaped structure is known locally as Gadhafi’s Egg; its construction was financed by the notorious Libyan leader. The executives were there to pursue mining opportunities in Sudan, a country with a rough reputation in the Canadian business community and where, until recently, only mad dictators would consider investing in real estate.

For more than two decades, Sudan has been ruled by the Islamist government of Omar Hassan Ahmad al-Bashir, who spent decades locked in a brutal civil war with Christian separatists in the south. Accused of genocide in the country’s Darfur region, al-Bashir is officially listed as a sponsor of terror by the United States and wanted by the International Criminal Court for alleged crimes against humanity. Nevertheless, he earned some credit for allowing the referendum that recently led to an independent South Sudan and effectively ended the country’s war. But Sudan must now confront a severe economic crisis. The country’s annualized rate of inflation was 21% in August, and its division this summer handed the south custody of most oil assets. As a result, the nation is looking to expand its minerals industry. Exploration is being liberalized, which is why Nuinsco executives have been nesting in Gadhafi’s Egg. “It is not like we went looking to do business in Sudan,” says CEO René Galipeau, but a combination of strategy and serendipity led to the company’s African foray.

Formed out of a management takeover of New Insco Mines in 1970, Nuinsco has had considerable success as an exploration outfit. In 1971, it uncovered a million tonne copper-rich deposit in Noranda, Que. During the mid-1990s, company geologists uncovered gold and other minerals in northern Ontario. In 1999, they discovered the Lac Rocher nickel deposit in Quebec, which was eventually spun off into a separate mining operating company eight years later. Over the years, Nuinsco made at least half a dozen significant discoveries. But operations were strictly Canadian until 2005, when new executives with connections to Noranda agreed to a joint venture with the former Canadian mining giant in Turkey—which was liberalizing its mining industry as part of ongoing efforts to join the European Union. Six years later, Turkey accounts for about 25% of the company’s projects.

Nuinsco’s next bout of foreign expansion came through a fortuitous series of near-random connections. A pharmaceutical businessman in Egypt asked a Libyan jeweler to recommend a Canadian exploration company that could help him pursue mining opportunities opening up in his homeland. The Libyan didn’t know anything about mining, so he asked an Italian gold supplier for a contact. The Italian didn’t have any mining connections, but he knew a New York metals guy, who has a relationship with Nuinsco.

Once the Canadian firm was actively bidding on two gold concessions in Egypt, word of mouth brought forth a flood of other overseas opportunities. “We were approached by a group [from the United Arab Emirates] with rights to the Sudanese J. Tobrar gold concession, which is on the same mineral belt we are looking at in Egypt, so it made sense to explore the opportunity,” Galipeau says.

Company officials noted the area for exploration is located in the most stable part of the country. They also saw the riches coming out of the Sudan’s Hassai gold mine, which is run in partnership with Montreal’s La Mancha Resources and expected to produce between 60,000–70,000 ounces of the yellow metal this year. Nuinsco officials talked to people willing to invest in Sudan. And they talked to people who aren’t. Galipeau ultimately decided the project could benefit his company and bolster the country’s stability. “Keep in mind,” he says. “We are talking about an option. We have six months to determine if we are comfortable with it.”

Operating in Sudan has proven distinctly uncomfortable for Canadian companies in the past. Between 1998 and 2003, Calgary-based Talisman Energy held a 25% stake in a Sudanese petroleum exploration and production outfit. By all accounts, the operation was profitable, helping Talisman pump more oil and gas than any other Canadian competitor in 2000. But investors lost money because the company was seen as a financier of al-Bashir. Talisman’s shares were priced at a 10% to 20% discount during the period Talisman was in Sudan, according to a case study by Wharton School management professor Stephen Kobrin.

Compounding the potential PR issues are logistical ones. “There is obviously a learning curve,” admits Paul Jones, Nuinsco’s president. “At this point, we just have an idea of what the lay of the land looks like. We now have to build on that, moving forward in a rational way. We have to figure out everything, ranging from simple stuff, like where to buy a generator and an air conditioner—because you have to have an air conditioner if you want to have any Canadian or European geologists on site—to where to find a backhoe, a backhoe operator and fuel for the backhoe, not to mention a diamond drill.”

Nuinsco will deploy about 10 geologists, along with a supporting cast of drivers, cooks and labourers, housed at a base camp near its targeted belt of rocks. The first act involves producing exposures with backhoes and bulldozers. The next step may or may not include diamond drilling. “If everything goes very well,” Jones says, “we’ll discover some sort of mineral resource and a decision will be made as to whether it is worthwhile to exploit.” Nuinsco executives say entering Turkey was relatively painless because they had support from experienced Canadian partners who had an existing relationship with a local geologist. Egypt was another matter. History, along with recent drill samples, suggest there are significant untapped gold deposits in the Eastern Desert region, where pharaohs dug up gold with shallow and primitive mining operations. And foreign firms are needed to exploit deeper deposits thanks to the poor state of Egypt’s mining industry. “It is like being first on the ground in Canada years ago,” Jones says, adding, “There is no local technical knowledge in Egypt because no one has been exploring for what seems like forever, back to ancient times.”

Still, Nuinsco officials knew they needed help. “It doesn’t really matter if it is Turkey, Egypt or Sudan,” Jones says. “You need local people who know the ropes on the ground. Without them, you simply don’t know what doors to knock on and, of course, there are language and cultural issues.”

Finding someone with connections can be trying, Galipeau adds, because “everyone will claim they can get you in to see officials.” When doing business in the Middle East, he puts claims of influence to the test. “When we first met our partner in Egypt, we said: ‘OK, we want to see the minister of petroleum at 2 p.m. this afternoon.’ It happened. That’s when we knew we had the right contact.”

In Sudan, which is also mineral-rich and under-explored, Nuinsco engaged a regional logistics expert to help get supplies. But even with native assistance, paying for supplies is a risky business because Sudan runs on cash only. On the first visit, company officials traded thousands of American dollars for Sudanese pounds. “They gave us back small denominations; so paying for things was a case of flipping over wads of notes wrapped in elastic bands,” Jones says. “Meals and hotel rooms cost several inches.” Renting more expensive things, like a backhoe, would require a significantly larger pile of cash, so the company is currently trying to find a safer way of paying.

Even with logistical help, Jones notes, Nuinsco’s Sudanese operations will have to learn to live with thick red tape. “There is reasonably decent roadway infrastructure to get to our site,” Jones says. “But you need a travel permit. You get a visa to enter the country, but you still need what is essentially an internal visa if you want to leave Khartoum. So it might take 48 hours to gain permission to travel just a few kilometres.”

Adapting to Sudanese culture, where hierarchy remains paramount, is also a challenge. “It is very true that the Sudanese like talking directly with senior guys,” Jones says. And when deals are struck, don’t assume you have made a new best friend. “The Sudanese will treat you very well,” Galipeau notes, “but that doesn’t mean you are friends or that they even like you.”

Solving logistical and cultural issues, of course, will mean little if the country destabilizes. Three UN peacekeepers were killed in a Sudanese refugee camp in early October, while Sudan’s failure to pull its troops from the disputed oil-rich Abyei region threatened to further escalate tensions. But al-Bashir and South Sudan’s President Salva Kiir are currently planning talks aimed at resolving problems not addressed by the 2005 accord that ended the Sudanese civil war.

Back in Toronto, Nuinsco officials remain optimistic about conducting a spinoff in the Middle East and North Africa, even with ongoing conflicts in both Egypt and Sudan, not to mention a soft market for initial public offerings. Turkey taught them the benefits of being one of the first companies to move when nations liberalize their mining sector. New opportunities beget new opportunities, the lifeblood of any exploration outfit. As for Egypt, the ousting of former Egyptian leader Hosni Mubarak in February has schooled Nuinsco on how to be patient when looking for a return on investment in that part of the world.

“It was clear that things were happening socially in Egypt,” Jones says, “but to say we expected what happened would not be true.” Indeed, as protesters were gathering in Cairo’s Tahrir Square, the company’s Egyptian bids were sailing through government. The state council eventually passed them, leaving Nuinsco in need of what traditionally has been a simple rubber stamp by the local parliament. But when the government collapsed, military authorities dissolved parliament, leaving nobody with the authorization to stamp anything.

When the Egyptian revolution occurred, Galipeau’s initial response as a CEO about to land an attractive deal was equal parts “why us?” and “why now?” But his industry experience simply said: “Welcome to mining.”

Nuinsco’s CEO isn’t naive. Galipeau knows exploration is a high-risk industry. The trick, he says, is to only pursue projects that potentially offer high rewards, like the ones his company hopes to reap by being one of the first exploration companies into Egypt and Sudan. Even then, he says, Nuinsco—which started the year with about $6 million in cash and marketable securities—won’t take on a new project without enough cash on hand to deal with setbacks. After all, when it comes to exploration companies, “there is no obstacle that hasn’t been faced.”