C O N F I D E N T I A L SECTION 01 OF 03 FREETOWN 000400

SIPDIS

SIPDIS

DEPARTMENT FOR AF/W AND AF/EPS
DEPARTMENT ALSO FOR EB

E.O. 12958: DECL: 05/16/2011
TAGS: ECON EMIN ETRD EFIN PREL BEXP SL
SUBJECT: LARGELY U.S.-OWNED SIERRA RUTILE OFF TO GOOD
START: TOP POLITICAL LEADERSHIP FAVORABLE

Classified By: CHARGE D'AFFAIRES JAMES A. STEWART FOR REASONS 1.4 B/D.

Summary
--------------

1. (C) Sierra Rutile (SR) just exported the first shipment of
mined product since 1995. Board members, including Chairman
Walter Kansteiner, witnessed the re-entry of the US.-owned
company into world markets. Up until the mid-1990s when the
mining equipment was destroyed by rebels, SR was the world's
largest rutile operation. SR will export 10,000 tons per
month worth $4.5 million and for three months has been
exporting bauxite mined nearby worth $2.5-3.0 million per
month. High oil prices are hurting the bottom line as the
mines depend on thermally generated electricity. SR is
looking at alternative fuels, including from algae grown in
ponds left by mining operations. SR offered its stock on the
London exchange in 2005 and shows a market value of $325
million. Board members explained that they are seeking $70
million in financing for capital equipment, including
dredges, generators, barges, and port equipment. To that end
they are talking to OPIC and the EX/IM Bank as well as
contemplating a further stock offer. Executives report that
relations with local government and labor are good. They
have 18 months to implement their obligatory land recovery
plan. In a May 8 meeting, President Kabbah vowed to keep the
MOU and its tax concession intact and VP Berewa followed suit
separately. Under the MOU, SR will transfer 30 percent of
its stock to the Government over a 10-year period. A
National Revenue Authority (NRA) official told post that
there is no intention to alter the MOU or tax concessions,
but wants SR to pay up on the 1 percent tax levied in
exchange for all other taxes being waved. Top official

understand, even if mid-level tax and other functionaries do
not always, how SR's success benefits the economy and Sierra
Leone's reputation as a place to do business. End Summary.

Kansteiner and Board Members Witness First Export Shipment
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2. (U) On May 8, Sierra Rutile (SR) shipped its first load of
rutile out of Sierra Leone since 1995. The shipment, bound
for the Netherlands, coincided with a visit to Sierra Leone
of some members of the U.S.-owned company's Board of
Directors, including Chairman (and ex-A/S for African
Affairs) Walter Kansteiner. Local company executives showed
the visitors current operations and recent progress on the
ground at the rutile mine and the nearby allied bauxite
operation. A decade ago, SR was the largest rutile producer
in the world until the mining equipment and plant were
destroyed in the rebel war.

$7 Million in Monthly Exports Large for Sierra Leone
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3. (U) The company is on track to export 10,000 tons of
rutile per month at $450/T for monthly revenues of $4.5
million and is ready in the next year or two to double
output. Company executives said that the market will bear
such an increase as Sierra Leonean rutile is known for its
purity and high quality. The company has been exporting
bauxite for the past three months at the rate of 100,000 tons
per month. Those exports fetch $25-30 per ton, depending on
the customer, implying a monthly gross income stream of
$2.5)3.0 million. Company managers related that current
bauxite exports are going to Alcoa in Texas.


4. (U) Rutile is titanium oxide which is an important
ingredient in paints and welding rods. Rutile sands are
found in deposits along old river beds where they have
collected in geological time. They are dredged up then go
through preliminary centrifuge processing to separate out
rocks and clay and leave heavy dark-colored rutile sands.
The high-concentrate rutile ore, which constitutes the
majority of the sands, is then separated via an electrostatic
process. The lower quality sands also find an export market.
Zirconium is present in limited quantities and there is a
ready world market for that high value metal as well as for
other minerals in low concentrations. Bauxite mining and
processing is less complex. Both products are shipped by
rail to the shallow port of Nitti in southwestern Sierra
Leone where they are barged to a ship waiting in deeper water
offshore.

High Fuel Costs Hurting Balance Sheet
--------------

5. (SBU) The run-up in world oil prices is hurting SR's
bottom line. The mines operate entirely on electricity
generated by an on-site thermal plant. With diesel fuel
prices up 208% in the past year, fuel costs are making the
company run deeper in the red than financial projections

FREETOWN 00000400 002 OF 003


predicted, according to Sierra Rutile management.


6. (U) In order to cope with the problem, SR executives are
considering a number of alternative energy sources. In the
near term, they plan to switch from diesel to less expensive,
but dirtier, liquid heavy fuel, which will require the
purchase of new generators. Over the longer run, they are
considering more innovative solutions, including generating
bio-diesel and cellulosic ethanol from local oil palm
plantations as well as bio-fuel created from algae grown in
pools left by the mining operations.


7. (U) Biological scientists have explained to post that
algae is more proficient energy producer per unit volume than
other bio-fuels. An added advantage is that algae fuel can
be used with straight forward add-ons to existing plant and
does not require radical retro-fitting. Even if algae
development were to take several years, with a predicted mine
life span of 30 years, company managers recognize that such
an alternate energy input to the mines and associated plants
could reduce significantly their energy bill. Non-executive
SR board member Rod Baker told PolOff that in late May he
will bring a University of Arizona scientist to evaluate the
potential for algae-based bio-fuel production.

Seeking Expansion Capital
--------------

8. (SBU) Sierra Rutile offered its stock in an Initial Public
Offering (IPO) on the London exchange in 2005. The stock has
enjoyed solid growth since and shows a company market
capitalization of $325 million. The board of directors and
management are considering returning to the London exchange
for additional capital but they are also talking to OPIC and
the EX/IM Bank about financing capital equipment. They say
they need $70 million for added dredges, new generators, new
barges, and a revamped port facility at Nitti. Kansteiner
and the board are optimistic that EX/IM Bank will look
favorably on new dredges and large generators if they are of
US manufacture.

Good Relations with Local Government and Labor
-------------- -

9. (SBU) The company makes regular payments to local chiefs
and local councils, amounting to $400,000 per annum for the
rutile lands and $100,000 from the bauxite lands. As
management explained, it is the political process that
determines who receives the rents: the company simply writes
the check to whom the Government designates.


10. (SBU) Sierra Rutile recently signed a labor contract with
the mine workers union. Company executives reported good
labor relations and also that they are happy with bargain
they struck with the 2,000 workers in the rutile and bauxite
mines operations, processing plants, and in shipping.


11. (C) Company officials noted that local politics and
chieftancy loyalties are colored by the divide between, on
the one hand, VP Berewa and the ruling SLPP to which he
belongs, and, on the other hand, Charles Margai and his
breakaway PMDC party. They added that they have to be
careful not to be drawn into such political squabbles.

Land Recovery Plan in Place
--------------

12. (U) Company executives said that recovering mined land is
important. At present, some of the ponds created by rutile
mining are being used to grow tilapia fish for local
consumption. The pond water has been tested and reportedly
is clean and potable. Kansteiner told PolOff that local
communities now rely on the fish for protein, and Bird Life
International has indicated interest in researching some of
the exotic bird species attracted to the pools. SR has 18
months to implement their obligation to rehabilitate
mined-out lands. Before doing so, SR plans to work through
the mine tailings left by earlier operations under Bethlehem
Steel. Company managers explained that the land rehab plan
consists of creating more tilapia ponds or returning the land
to agricultural use.

Paying Fees, Getting Some Tax Breaks, Leave MOU As Is
-------------- --------------

13. (SBU) The MOU between SR and the Government specifies
certain tax concessions. Nevertheless, Sierra Rutile pays
fees to the national port authority even though it built and
owns the port of Nitti where it ships rutile and bauxite and
receives necessary equipment and supplies.


14. (U) The MOU also specifies that the company will transfer

FREETOWN 00000400 003 OF 003


to Government ownership one-third of its stock in the first
10 years of operation and company leadership said they are
committed to doing so.


15. (C) Earlier on May 8, President Kabbah expressed pleasure
with the foreign investment in Sierra Leone and applauded the
success of the company to Kansteiner and board members and
company managers. Underscoring that SR is operating in the
red and will continue to show losses for a few years until
production is ramped up and costs are driven down, company
representatives reported making a strong case to Kabbah for
the Government to leave the MOU as is and to continue the
existing tax concessions. Kabbah, they said, accepted that
the MOU should not be changed. Later the same day, Vice
President Berewa gave similar strong support for SR and the
existing MOU.


16. (SBU) Sierra Rutile officials report that some in the
Government and bureaucracy want to change concessionary
elements of the MOU and tax the company much more heavily.
In the local context, some authorities see SR as a large and
rich company and, on that basis alone, should be taxed. A
National Revenue Authority (NRA) official told us, however,
that there was no desire on the Government's part to modify
SR's existing tax concessions, rather the NRA wants SR to pay
up under that agreement. He explained that per Sierra
Leonean regulations, SR owes a 1 percent concessionary tax,
in lieu of other taxes that SR is not required to pay. He
noted, that that rate is below even the normal rate for tax
exempt entities which usually must pay a 1.5 percent service
charge.

Comment
--------------

17. (C) The Government is under pressure from the IMF and
World Bank to increase its own revenue base via taxes and
fees. Under (relatively) new Finance Minister John Benjamin
the National Revenue Authority (NRA) has become much more
aggressive in recent months. At a reception for Sierra
Rutile, Benjamin called on the NRA to get after Sierra Rutile
) he was only half joking. The FinMin has upped an array of
taxes, including fuel taxes and a &service charge8 applied
also to diplomatic missions for port clearance that violates
international conventions. After their conversations with
President Kabbah and VP Berewa who evinced understanding of
the environment international investors need in order to
succeed, Sierra Rutile's leadership is confident that the
concessions articulated in the MOU are safe while the company
amortizes large machinery expenditures and other front-loaded
expenditures typical of such a capital intensive undertaking.
By and large, Sierra Leone's political leadership recognizes
the positive contribution in job creation and multiplier
effects in the economy that Sierra Rutile brings. The top
people also recognize, if the mid-level functionaries do not
always, that a successful Sierra Rutile makes a substantial
contribution to the country's business reputation and by its
example helps to attract further investors. End Comment.
STEWART