BURMA MISSES A COPPER PLATED OPPORTUNITY

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000876

SIPDIS

SIPDIS

STATE FOR EAP/MLS; PACOM FOR FPA; TREASURY FOR OASIA:AJEWELL

E.O. 12958: DECL: 12/08/2015
TAGS: ECON PGOV ETRD BM
SUBJECT: BURMA MISSES A COPPER PLATED OPPORTUNITY

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Classified By: Acting P/E Chief:TLManlowe for Reasons 1.4 (b,d)


1. (C) Summary: Economic mismanagement keeps Burma from
cashing in on the global rise in copper prices. The
experiences of Ivanhoe, the Canadian firm in a joint venture
with the GOB to extract and export copper, illustrate the
difficulties most firms face doing business in Burma. End
summary.


2. (C) Myanmar Ivanhoe Copper Company, Ltd. (MICCL),is a
joint venture with Ivanhoe Mines of Canada and Mining
Enterprise-1 of Burma's Ministry of Mines that operates a
copper mine in Sagaing Division, central Burma. Despite the
high world price for copper, the over 99% purity of the
product coming from the mine, and the desire of Ivanhoe to
boost production from 39,000 to 200,000 tons annually, GOB
inefficiencies resulted in reduced production in 2005-06 and
a short closure of the mine. Ivanhoe management sent Senior
Vice President Mark Whitehead, an American, to sort the
problems out in August 2005 to no avail. Conversations with
Whitehead, Ivanhoe's Commercial Manager Gerry Nugewela, and
the mine's heavy equipment supplier over a six month period
revealed the difficult partnership of a global company and
the Burmese regime.

Mismanagement Leads to Missed Opportunities
--------------

3. (C) Nugewela told us that Ivanhoe wanted to take advantage
of rising copper prices and increase production from the
current 39,000 tons to 200,000 tons annually. The mine holds
adequate supplies of ore, and Ivanhoe management sought to
scale up operations by buying more equipment and training
more workers almost a year ago. However, he reported that
the GOB partners never received approval from senior
officials so no expansion occurred. International copper
prices rose 75% from January to May 2006. With production
costing 50 cents a pound, according to Nugewela, and selling
at $3.76 per pound, MICCL potentially lost over $1 billion it
could have made on the additional tonnage. Other problems
Ivanhoe encountered include inefficient import processes,
power shortages and banking difficulties.


4. (C) Import Confusion: The Caterpillar equipment dealer who
supplies the mining industry in Burma told us it took over
four months for MICCL to receive the requested import permit
for over $2 million of equipment and supplies needed to
maintain and replace aging heavy equipment. Because of the
delays and the high global demand, Caterpillar sent the
equipment intended for Burma to other customers. As a
result, the dealer had to wait months to get the order filled
once he received the import permit. VP Whitehead also
described other problems causing MICCL operations to halt
earlier this year. In one case, the freight forwarder didn't
deliver the imported chemicals necessary to process the ore.
After a few weeks, port personnel found the lost chemicals
sitting on the wharf.


5. (C) According to Whitehead, all decisions must go from the
Mining Enterprise-1 to Industry Enterprise-1, to the Ministry
of Mines, to the Myanmar Investment Council, and finally to
the Trade Policy Council (TC). The Trade Council, a
cabinet-level committee chaired by Vice Senior General Maung
Aye approves each import and export license. The TC meets at
most once a week, and met less frequently from November 2005
to March 2006 as a result of the move of the capital. This
caused a huge backlog of delays that even the Minster of
Mines couldn't break through, according to Ivanhoe sources.
Local press reports earlier in the year aired complaints by
Ministry of Mines personnel that Trade Council delays caused
production declines at other mines.


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6. (C) Power: The lack of power also affected production.
The copper plating process used by MICCL requires a large
amount of electricity. Now the mine uses 16 MW of power, but
needs more to be more efficient. The mines closed down in
March 2006 partially because most imported diesel was used to
transport people and goods from Rangoon to the new capital,
leaving little for other official uses. Although MICCL was
on the list to receive some of the precious diesel, the GOB
did not allocate it, Whitehead said.


7. (C) Banking Woes: Ivanhoe also had to find a bank
interested in its business. HSBC was the trustee of MICCL's
initial loan, and once it was paid off earlier this year,
HSBC decided to stop handling MICCL's business. MICCL could
not pay its bills or employees for a short period until a new
bank was found, which also factored in the closure of the
mine. Whitehead said MICCL conducts its business in "every
currency except dollars."


8. (C) Comment: Ivanhoe's difficulties illustrate why Burma
receives almost no new investment despite its rich potential.
Changing import procedures, erratic power, and reluctant
banks affect all businesses - foreign and domestic, minerals
to retail. Thus Burma not only misses out on opportunities to
grow, but in actuality, steadily declines economically. End
comment.
VILLAROSA