Following the declaration of the formation of an independent state of Azawad by Tuareg and Islamic rebels in Mali, Jonathan Guy, Analyst, RBC Capital Markets summarise recent events in the Sahel region of West Africa and evaluates the potential impact on the mining and exploration companies operating in the region. Four significant events have impacted the region since the beginning of 2012 leading to increased instability.The Tuareg have lead a successful insurgency in northern Mali, a region they refer to as Azawad. There was a coup in Mali in March in which the president was toppled by the military. The military have now stepped down in favour of an interim administration lead by the former speaker of the Malian parliament.

There is an Islamic Insurgency in northern Mali – Islamic insurgents from the Ansar Dine group have become involved in the northern rebellion and are now apparently allied with the Tuareg. Following the discovery of a large arms cache in the city of Gao both rebel groups are reportedly well armed.

Sadly there is regional famine across the Sahel – The region bordering the south of the Sahara desert, referred to as the Sahel, has been severely impacted by a drought, which has in places lead to a lack of food.

Most companies are continuing to operate normally – Whilst some contractors have pulled out of Mali or scaled back their activities the miners and most explorers have continued to operate. The miners in Mali are not located near to the conflict region and as long as the country’s southern borders remain open then they should be able to maintain their supply lines.

Ecowas should attempt to contain the situation – The West African regional group of countries, known as Ecowas, has indicated that it is prepared to “take all necessary measures to keep Mali intact”, according to The Telegraph. The open presence of Al Qaeda in the conflict makes broader co-ordinated international action more likely. A failure to contain the situation could lead to refugees entering surrounding countries, principally Burkina Faso, Mauritania and Niger.

Further pressures on royalties likely – RBC Capital Markets expects to see further upward pressure on royalty rates. The interim administration in Mali has recently suggested that royalties be raised from 6% to 8% (although tax has been reduced from 35% to 30%) and the government in Senegal has suggested that royalty rates could be raised from 3% to 8%.

Raising new equity for greenfield projects is challenging. The combination of volatile gold prices, cash cost pressures and the increase in political risk has seen African gold equities share prices decline by an average of 25% year-to-date. RBC believes that in the current geopolitical environment attracting new capital, especially for greenfield projects, is likely to be challenging.