C O N F I D E N T I A L ASMARA 000250

SIPDIS

SIPDIS

LONDON FOR AFRICA WATCHER
PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 3/14/2016
TAGS: EMIN ETRD ER
SUBJECT: FROM ROCKS TO RICHES: MINERAL WEALTH IN ERITREA


CLASSIFIED BY: AMB Scott H. DeLisi, for reasons 1.4 (b)
and (d).


1. (U) Summary: Biblical tales of wealth from the Pharaohs
of the Fourth Dynasty and stories of old Italian gold mines
shape the dreams and expectations of miners in Eritrea.
Presently, five foreign companies are in various stages of
exploration, some having made significant finds of gold,
silver, zinc and copper and others still hopeful for great
discoveries in the future. With Eritrea's economy barely
limping along, the GSE anticipates that mining will save
the economy, however mining in Eritrea with all the
political and economic uncertainties is a high risk
operation. End Summary.

PROSPECTING, THE OLD FASHIONED WAY
--------------


2. (U) Looking at a topographic map of Eritrea and even
seeing the rust red soil of the Eritrean countryside would
excite most geologists. Five companies, Explorations
Minieres Du Nord Lte (Canada), Sanu Resources (Canada),
Nevsun Resources (Canada), Sunridge Gold Corp (Canada) and
Sub-Saharan Resources (Australia) are in various stages of
exploration and drilling in Eritrea. For those who have
reached the drilling phase, the initial boring samples show
large deposits of gold, silver, copper, zinc and lead.
(Note: Given the geology of the region it is not unusual
for these minerals to be found together, often layered on
top of each other.) Nevsun, which has been operating in
Eritrea since 1996, is the farthest along in exploration.


3. (U) With the initial outcropping discovered by students
in southwest Eritrea in 1995, Nevsun began drilling in

2002. The geophysical mapping, soil samplings and rock
chip sampling progressed well until September 2004. At
that time, the GSE declared a ban on all foreign mining
companies and work came to a halt. For over six months,
foreign companies' stock plummeted and the future of
foreign investment in Eritrean mines was questioned. Then
in Summer 2005, without any coherent explanation of the
reason for the initial ban, the GSE lifted its restrictions
and exploration began again. With the lifting of the ban,

Nevsun was free to move forward with the analysis and
planning for mining over 1 million ounces of gold, also
known as the Bisha project.


4. (C) In conversations with Poloff, Nevsun's Country
Exploration Manager and Chief Geologist, Amanuel Waldu
explained that while the gold is a significant find and one
the GSE is eager to begin mining, he believes it will be
the zinc deposit that makes headlines. Nearly 1/2 a
kilometer underground, the zinc deposit of the Bisha
project is the largest discovery in nearly 30 years. The
GSE Department of Mines asked Nevsun for a full feasibility
study for the extraction. The study will include full
environmental impact analysis, capital and financial
analysis, a mining assessment and an evaluation of
logistics. With the feasibility study underway and
scheduled for completion by summer 2006, Nevsun anticipates
that mining could begin as soon as 2008.

FROM ROCKS TO RICHES
--------------


5. (U) So how do all the rocks add up to riches for
Eritrea? With the current price of gold, the annual income
from the gold alone is estimated at USD 150 to 175 million
per year for at least three years. Following Eritrean
Mining Law, judged by Nevsun's General Manager, Stan Rogers
to be a "pretty good law", the Government of Eritrea will
automatically carry without charge(free carry) a 10%
interest in the mining company. In addition they will
receive 3% in royalties and will be able to receive revenue
from taxes and duties imposed on the company. If the GSE
wants to increase their ownership, up to 30%, they would
need to add capital investment. While the gold discovery
is significant, the real money will be made in the mining
of the zinc and copper.

STAKING THE CLAIM
--------------


6. (C) The GSE is increasingly investing their hopes for
financial riches in the mining sector. While some
investors still run scared after the 2004 ban, an employee
of one of the mining companies shared with PolOff, that
"the GSE realizes they made a big mistake with that step"
and are investing a great deal of time and energy to ensure
the mining industry in Eritrea has the opportunity to
flourish. In further conversations between PolOff and
Economic Advisor to the Ministry of National Development,
Mathewos Woldu, he stated that the development of the
mining industry will be key to Eritrea's economic
development.


7. (C) While most of the government is focused on
demarcation of the disputed border with Ethiopia, the
Ministry of Energy and Mines appears to operate with a
clear mission to get the mining started. Toward this end,
the World Bank in Eritrea has played an active role in the
development of the mining industry, providing technical
assistance and advice to the GSE on how to move forward.
In addition, Nevsun and the GSE sent out initial feelers
for funding, specifically from European development banks,
who may be coming for a visit the end of March along with
bankers from the African Development Bank and possibly
representatives from the IFC.


8. (C) Comment: The development of the mining sector is
critical to Eritrea's economic health. The influx of
resources, revenue, and opportunities, including jobs,
could help support demobilization and stimulate an economy
on the brink of an economic abyss. Keeping politics out of
the mining projects will be the key challenge to the GSE so
they do not lose valuable time. Since rescinding its
inexplicable ban on mining operations in 2005, the GSE has
taken a wiser course seeking support and advice from the
World Bank and from others. However, the risk exists that
the GSE will, in typical Eritrean fashion, allow
ideological considerations to triumph over pragmatism. As
a result, private mining companies continue to tread on
uncertain ground and politically, if not geologically,
mining in Eritrea remains a high risk enterprise. End
Comment.

DeLisi