The Coup In Mali: Looking Ahead

Randgold Resources (GOLD-NASDAQ) -17% since March 21st.

Avion Gold Corp. (AVR-TSX) -27% since March 21st.

Bottom Line

While the current political instability and uncertainty in Mali will persist for some time, we expect that it will not have a significant long-term impact on mining operations. Thus far, the mining sector has suffered no disruptions, although the imposition of sanctions by the Economic Community of West African States (ECOWAS) on April 2nd may lead to temporary fuel shortages.

More importantly, none of the major political players and factions in southern Mali – where mining operations are located - are seeking to assert control over the industry and its assets. While stock prices may continue to reflect the turbulence of Mali’s internal political conflicts for some time, they will likely recover and start reflecting their fundamentals sooner rather than later.

The Tuareg of Mali are a largely nomadic tribe based out of the northern Sahara region, and contain both secular and Islamic fundamentalist elements. The Tuareg have long felt economically and socially marginalized by the Malian government, which is based in the south and controlled by the Bambara ethnicity.

Since Mali gained independence from France in 1960, the Tuareg have launched a number of unsuccessful offensives to gain independence. The current uprising – launched in January 2012 and led by the Azawad National Liberation Movement (MNLA) – is the Tuareg’s latest attempt to gain sovereign control of what they consider their homeland.

While significant, the rebellion does not pose a direct threat to current or future mining operations in Mali. This is mainly because the vast majority of mineral deposits are located in the south and well away from the contested region, as well as the fact the MNLA lacks the military capacity to advance beyond the northern strongholds of Kidal, Gao and Timbuktu. The Tuareg rebellion is even showing early signs of division, with the Islamic fundamentalist faction reportedly forcing the secular MNLA faction out of Timbuktu, captured on April 2nd. Even in the event of a foreign (i.e., ECOWAS) sponsored mission to confront the Tuareg, mining operations based in the south are unlikely to be affected.

What started as a mutiny to protest former president Amadou Toumani Touré’s (aka ATT’s) handling of the Tuareg rebellion rapidly evolved into a full-scale coup on March 21st, led by rank-and-file soldiers and mid-level officers. Since that time, the junta – officially led by Captain Amadou Sanogo – has encountered a number of difficulties that have prevented them from realising their primary goal of ending the Tuareg insurgency and “re-establishing the territorial integrity of the state”. Two weeks later, it is still unclear how tight a grip the junta has on the country as a whole and whether they are supported by the military in its entirety.

What is clear, however, is that the Tuareg have capitalized on the confusion caused by the coup, securing the strategically key northern towns of Kidal and Gao on March 30th and 31st, respectively. The junta’s leaders have been greatly distracted by the demands of rebuilding an effective government from the ground up, in addition to internal unrest. International condemnation of the coup and subsequent suspension of American, French and UN aid flows to the country – on which Mali remains highly dependant – has also constrained their capacity to govern.

The junta has given no indication that it is seeking to nationalize the mining sector or renegotiate existing contracts. Gold accounts for 70% of Mali's merchandise exports and the vast majority of government revenues, and the junta has made specific note of mining’s importance to Mali’s economic future. The junta’s desire and ability to control the country appears to be rapidly fading under the enormous pressures applied by ECOWAS, which was established in 1975 with the aim of making West Africa a “selfsufficient” region of the continent. There are 15 permanent members, although Mali was suspended from the group following the coup.

On Thursday, March 29th, ECOWAS gave a 72-hour ultimatum before they would impose sanctions that would close their borders with Mali, effectively cutting off the country’s food and fuel supplies. They would also suspend Mali's account with the regional bank, cutting off its access to hard currency. The threat is meant to pressure the junta to cede power back to democratic civilian rule immediately, or even harsher sanctions and military intervention may be pursued. ECOWAS then announced on April 2nd it would be imposing these sanctions due to the junta’s lack of cooperation, and has mobilized 2,000 soldiers from their Standby Force.

By imposing such harsh sanctions just days after meeting junta leaders in Bamako, ECOWAS demonstrated the seriousness with which they are taking the coup. They will therefore likely continue to increase their pressure on the junta until their demands – i.e., a return to civilian democracy – are met. ECOWAS has repeatedly stated they are not willing to compromise on their demands, and its members have several reasons for wanting to end the junta’s fractured hold on Mali as quickly as possible.

Not least of these reasons is to discourage their own militaries from launching coup attempts, such as which occurred as recently as last year in regional heavyweights Burkina Faso and Ivory Coast. A united Tuareg in northern Mali also poses risks to several neighbouring states that are also home to Tuareg tribes. A quick end to the coup is therefore necessary if ECOWAS is to ensure the Tuareg rebellion in Mali is suppressed.

President Amadou Toumani Touré had been losing favour with the Malian public well before last week’s coup amidst accusations of corruption, nepotism and a failure to adequately respond to the latest Tuareg rebellion. Mali remains a young democracy and political legitimacy is not gained simply by winning an election, but by actions. For this reason, many Malians now support the junta simply for their taking decisive action against what people had begun to see as an illegitimate government. ATT had in any case already announced he would not be running in the elections originally scheduled for late April.

Based on the size and frequency of both pro and anti-junta protests in Bamako, it is not yet clear how the majority of Malians feel about the coup’s leaders and the country’s current direction. What is clear is that a significant majority are fundamentally opposed to foreign powers intervening in the country – by ECOWAS or otherwise – and the threat of sanctions have only exacerbated these anti-foreign sentiments. At the same time, the harsh nature of the threatened sanctions may cause them to rise against the junta once food and fuel runs low. How the Malian people react to whichever government replaces the junta will therefore weigh on political and socioeconomic stability in the short term, but any unrest that does occur is likely to be short-lived.

Scenarios And Short-Term Risks

Market concerns currently reflect the stalemate between the junta’s leaders on the one hand and ECOWAS on the other. The rapidly advancing Tuareg rebellion in the north only adds to the sense of urgency to resolve tensions and stabilize the country. When push comes to shove, however, the junta will likely collapse under the pressure of ECOWAS and international sanctions, as well as from internal dissent.

The junta has already backtracked by announcing it would reinstate the original constitution it abolished on April 1st, although no specific timetables for elections have yet been given. If the current sanctions do not pressure the junta to bring democracy back to Mali, ECOWAS has the political will and military capacity to overthrow the junta. The rapidly deteriorating situation in the north and the advance of the Tuareg rebels heighten the probability of a military intervention by ECOWAS if the junta does not step aside.

While political instability will remain for some time in Mali and while the timing for a return to “normalcy” is not entirely predictable, the potential downside for affected mining stocks appears limited.