Identifier
Created
Classification
Origin
06ASMARA517
2006-06-15 14:37:00
CONFIDENTIAL
Embassy Asmara
Cable title:  

FINANCING MINERAL EXTRACTION IN ERITREA: WHO WILL

Tags:  EMIN ETRD ECON ER 
pdf how-to read a cable
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INFO RUEHDS/AMEMBASSY ADDIS ABABA 5911
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RUEHKH/AMEMBASSY KHARTOUM 0102
RUEHLO/AMEMBASSY LONDON 1158
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RUEAIIA/CIA WASHDC
RUEKDIA/DIA WASHDC
RHEHNSC/NSC WASHDC
RHMFISS/CJTF HOA
C O N F I D E N T I A L ASMARA 000517 

SIPDIS

SIPDIS

LONDON FOR AFRICA WATCHER
PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 6/15/2016
TAGS: EMIN ETRD ECON ER
SUBJECT: FINANCING MINERAL EXTRACTION IN ERITREA: WHO WILL
PAY?


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

REFTEL: ASMARA 250

C O N F I D E N T I A L ASMARA 000517

SIPDIS

SIPDIS

LONDON FOR AFRICA WATCHER
PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 6/15/2016
TAGS: EMIN ETRD ECON ER
SUBJECT: FINANCING MINERAL EXTRACTION IN ERITREA: WHO WILL
PAY?


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

REFTEL: ASMARA 250


1. (C) Summary: Despite on-going concerns about the
practicality of foreign investment in Eritrea, private
mining companies continue to actively seek foreign
investors to bankroll the mineral extraction. Since March
several development banks, private banks and private
companies have traveled to Eritrea to further explore the
viability of investment in the Eritrean mining sector. And
as financing is sought, exploration continues with two
companies reporting significant finds. Yet, despite
enthusiasm from some for the possibilities, political
realities combined with burdensome GSE requirements and
restrictions may prevent the GSE from reaping the greatest
of rewards. End Summary.

IMPRESIONABLE INVESTORS COME TO TOWN AND THE GSE IMPRESSES
-------------- --------------


2. (C) Both Nevsun and Sanu Resources supported visits
from potential investors in the past 2 months. The style
and approach differed greatly. For three days Nevsun
together with the GSE entertained export credit agencies
from Canada(EDC) and South Africa(ECIC),Proparco
(investment arm of the French development agency) Standard
Bank, and the European Investment Bank(EIB). The IFC and
the Dutch and German development funds were invited but did
not attend for various reasons. The entire visit was
planned without prior discussion or input from the
development banksQ country missions in Eritrea, many of
whom are skeptical about the wisdom of investment in
Eritrea for reasons ranging from concern over lack of
transparency in terms of mining sector policies to broader
unhappiness with the GSEQs record on economic policy,
governance, and human rights generally. In the end the
German development fund and the IFC did not attend after
last minute discussions with their local missions.


3. (C) According to staff of the European Commission and
the local director of the World Bank, the GSE and Nevsun
gave an Oscar-worthy performance which, in their view,
mislead those who visited. The visitors met with the

Ministers of Mining, National Development, and Finance,
toured sites, and even had an "unexpected" meeting with
President Isaias. A bootleg (not for public discussion)
copy of the EIB report of the visit states "The Bisha
Project itself, which can expect to become a highly
profitable operation does not feature any serious technical
or market difficulties. Environmental and social issues
are being adequately addressed." The report goes on, "The
Government seems to be fully committed to the project and
Nevsun receives all necessary supports." (Note: Nevsun has
established its own subsidiary for the mining and is
seeking investors in this new company. End Note.) The
French Ambassador told us recently that the French
participants in the visit were, like the EIB, very
impressed by the GSEQs seeming openness and enthusiasm for
foreign investment.


4. (C) Even when the EIB in its report later acknowledged
potential problems, its articulation of these challenges
suggests that the EIB views were colored by the GSEQs
salesmanship. The EIB report, for example, acknowledges
that the GSE unapologetically voiced its unwillingness to
adhere to policies of the Extractive Industries
Transparency Initiative (EITI). It went on, however, to
seemingly accept at face value the GSEQs explanation that
in consenting to EITI the GSE would have to accept that the
international community did not trust them, and when
according to the EIB report given EritreaQs history of
abandonment by the international community, it is they, the
GSE, who have reasons to mistrust the international
community. Thus, insistence by development partners to the
conditionalities of the EITI questions the sincerity of
EritreaQs commitment to just and fair development and as
such is unacceptable. Second, efforts to address the

"resource curse" and the risks associated with large
financial windfalls for poor countries insult the GSEQs
capabilities, intelligence and its sovereignty over the use
of its own resources.


5. (C) Contrasted with NevsunQs big show, Sanu Resources
quietly brought in one analyst from a private Canadian firm
the middle of April. According to SanuQs country director,
Estaphanos Ogbasghi, several more potential investors could
visit in the next few weeks, however, it is possible that
their visits could be delayed until the fall. While Nevun
will do its own mining, Sanu anticipates completing all of
the assessments and then selling the mining rights. Thus,
Sanu is looking for potential buyers while Nevsun is
looking for potential investors.

BUT WILL INVESTMENT REALLY FOLLOW?
--------------

6.(C) Yet, even with the hullabaloo around the GSE/Nevsun
engineered presentation for possible investors and despite
the GSEQs assertion that everything is order, concerns and
difficulties lurk in the background. Demetrius Pohl, the
Director of Sanu Resouces shared with Poloff his major
concerns regarding mining operations in Eritrea. First, is
the GSEQs history of taking over profitable businesses.
Second, under the current mining law the GSE could
potentially reap up to 48% of the mining profits;
complicating raising funds or securing buyers for the
mining rights. Third, the potential under the existing law
for the GSE to have nearly 30% ownership in a mining
extraction company is inconsistent with the 10% ownership
that has become the standard in other parts of Africa.

ENVIRONMENTAL IMPACT
--------------


7. (U) Pohl further explained that while the GSE and others
may attempt to minimize the potential environmental impact,
the effect of mining on the local communities will be
significant. Of primary concern will be issues with water.
While different mining techniques may be employed to
minimize the impact, regardless all mining requires a
substantial amount of water. He expects extraction
companies will need to develop dams to collect water for at
least 18 months prior to extraction beginning. While the
pumping of groundwater for mineral extraction is possible,
the long term damage to the already precarious water table
and to the environment offers a strong disincentive for
this practice.

AND STILL MORE DISCOVERIES
--------------


7. (U) As mining companies plan for the future of
extraction and begin looking for financing, the timeline
keeps being extended. While Nevsun planned to have their
environmental assessments and final deposit reviews
completed by June 2006, they are still in process and now
late fall is a more realistic deadline. Meanwhile, the
mining companies continue to invest in new exploration.
Sanu believes they have found another significant deposit
near their initial discovery in Western Eritrea, although
they will know more after the drilling is completed in the
fall. Sunridge Gold Corp announced in May more promising
results from the drilling of the Emba Derho volcanogenic
massive sulphide (VMS) project near Asmara.

COMMENT
--------------


9. (C) Comment: The development of the mining sector
continues to be perceived as critical to EritreaQs economic
health and perhaps even as the cornerstone of economic
recovery. Yet, the GSEQs policies toward foreign
investment and its repeated practice of nationalizing
successful private firms undermine its ability to attract
investment. While they may be able to impress some
visitors, you can not fool all of the people all of the

time. Eventually, investors will dig past the topsoil and
question the GSEQs political unpredictability and its
economic practices. In the interim, mining companies will
continue to do their job, prospecting and encouraging high
risk investment, with the hope that the payoff will be
enormous. End Comment.

DeLisi