CHINESE BEAT OUT BRAZILIANS; GABONESE LOSE

C O N F I D E N T I A L LIBREVILLE 000382 SIPDIS SIPDIS PARIS FOR AFRICA WATCHER E.O. 12958: DECL: 06/08/2016 TAGS: EMIN EINV ECON PREL CH GB SUBJECT: CHINESE BEAT OUT BRAZILIANS; GABONESE LOSE REF: A. 05 LIBREVILLE 911 ¶B. LIBREVILLE 20 ¶C. LIBREVILLE 127 ¶D. LIBREVILLE 301 ¶E. LIBREVILLE 337 Classified By: Michael Garcia, Economic Officer, for reasons 1.4B and D ¶1. (C) Summary: After a nearly six-month battle over the rights to one of the largest untapped iron deposits in the world between Brazilian mining company CVRD and the Chinese engineering company CMEC, the GoG awarded the project to the Chinese. Although most observers believed investment by CVRD would provide more benefits for Gabonese development, the Chinese victory was widely anticipated because Gabon finds it strangely difficult to say no to China. This case provides additional evidence of a deteriorating investment climate in Gabon, at a time when the country should be preparing for a post-oil economy. -------------- The Project -------------- ¶2. (C) The Belinga iron deposit is thought to hold as much as 1 billion tons of reserves, and could provide 20 million tons of iron per year for 20-25 years. Although this is one of the largest untapped iron deposits in the world, the site is so remote (some 300 miles east of Libreville in the Gabonese rainforest) that infrastructure costs have inhibited development. Establishment of a mine at Belinga requires construction of a railway line, a new deep water port north of Libreville, and a hydro-electric dam to power the mine. Total development costs have been estimated anywhere from $600 million to $3 billion. ¶3. (C) Growing demand for commodities, particularly from China, has changed the cost benefit analysis in favor of development of Belinga. In April 2005, the Gabonese government awarded rights to develop Belinga to a consortium of companies, including Brazil's Vale de Rio Doce (CVRD) and China's National Machinery and Equipment Import and Export Company (CMEC). CVRD (one of the leading iron producers in the world) was given exploration and production rights, while CMEC (an engineering contractor with no apparent mining experience) was awarded responsibility for infrastructure construction. -------------- The Competitors -------------- ¶4. (C) The consortium deal, however, did not satisfy the Chinese. In late 2005 CMEC went back to the GoG with a proposal to solely manage the Belinga project. CVRD's Gabonese manager Paul Antaki told Econoff that the GoG requested a counter offer from the Brazilians, who then matched the Chinese proposal in every respect, including offering the GoG a 5% share in the project. Both President Lula of Brazil and President Hu of China are thought to have actively lobbied Gabonese President Bongo on behalf of their companies. ¶5. (C) The strongest selling point for the Brazilian proposal was CVRD's track record, which included responsible environmental stewardship as well as proven mining competency. In addition, most outside observers believed Brazilian investment would better stimulate Gabonese economic growth, since CMEC was expected to import thousands of Chinese laborers and use few local suppliers. Despite these arguments in favor of the Brazilians, however, China was widely considered the favorite to win, because it seems the Gabonese find it very difficult to say no to China. Political ties between China and Gabon are strong; President Bongo has met every Chinese leader since Mao Zedong. Although Gabonese Minister of Natural Resources Richard Onouviet was widely thought to favor CVRD, Minister of Foreign Affairs Jean Ping was generally thought to support the Chinese. As the GoG procrastinated over its decision, it was thought unlikely that CVRD's technical superiority could defeat China's political strength. ¶6. (C) Although France's commercial attache in Libreville claimed to support the CVRD bid (Ref D),some press reports indicate France acted otherwise. These accounts suggest that French interest in selling Airbus planes and high speed trains to China led it to quietly support the Chinese bid. CVRD manager Antaki shared this view. Antaki said Minister of Finance Paul Toungui (considered close to the French) favored CMEC for this reason. According to Antaki, when asked about the implications of imported Chinese labor, Toungui replied, "who cares, Gabonese don't want to work anyway." -------------- ...and the Winner Is -------------- ¶7. (C) Finally in May, the GoG asked each side when they would begin infrastructure construction. CVRD's Antaki told Econoff his company pledged to begin work in the third or fourth quarter of 2007, after completing further geological studies. The Chinese committed to start construction before the end of 2006. Antaki said he is curious about how the Chinese will accomplish this, since it is unclear how work can begin on the transportation infrastructure when the quantity and quality of the product is not yet known. ¶8. (C) On June 1, 2006, Gabon's Council of Ministers awarded the Belinga mining project to the Chinese. Antaki reports that CVRD is deciding how to proceed. Since it was awarded the mining permit for Belinga in 2005, CVRD could pursue its claim to the mine through Gabon's legal system. However, Ataki thinks it more likely the company will acquiesce and return the permit in exchange for other mining permits and more favorable financial terms on CVRD's existing manganese project in southwest Gabon. -------------- Another Negative Signal -------------- ¶9. (C) Comment: In the face of falling oil production, the GoG has stated it seeks to diversify its economy and attract foreign investment. Its recent record will make this difficult. Three times in just the last nine months, the GoG's treatment of existing foreign investors has sent negative messages to potential new investors. In November 2005, cellular telephone companies were forced to renegotiate their contracts just before the presidential elections (Ref A). In April 2006, Canadian aviation investors were forced out by alleged corruption and cronyism (Ref E). Now CVRD is expected to give up the mining permit it was issued in 2005. With the exception of the Chinese and perhaps the French, investors who doubt that the GoG will keep its word will stay away from Gabon unless projects offer truly exceptional returns. -------------- How Do the Chinese Do It? -------------- ¶10. (C)Comment continued: It is not readily apparent why Gabon grants China so much power. Bongo, who has survived almost 40 years in power by building coalitions and avoiding confrontation, undoubtedly urged the Chinese to share the project with CVRD. That CMEC insisted on an all-or-nothing decision suggests the Chinese were supremely confident they would win. China offers Gabon the symbols of respect with high level visits and provides the GoG cheap financial credit for public works projects constructed by Chinese companies. This hardly seems enough to convince the GoG to entrust a critically important project for Gabon's future development to a company with no apparent mining experience. WALKLEY