FROM ROCKS TO RICHES: MINERAL WEALTH IN ERITREA

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