GSE STYMIES MINERS

C O N F I D E N T I A L SECTION 01 OF 03 ASMARA 000467

SIPDIS

SIPDIS

LONDON FOR AFRICA WATCHER
PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 05/22/2017
TAGS: EMIN ETRD ECON ER
SUBJECT: GSE STYMIES MINERS

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

REFTEL: 06 ASMARA 250


1. (C) SUMMARY: While some in the mining industry continue
to express optimism, the cracks are starting to show as the
Government of Eritrea expresses interest in expanding its
control over mining in Eritrea. In December 2006, the GSE
established the National Mining Corporation as a means to
hold the GSE percentage allowed under the mining laws. As
many of the mining companies announce discovery of larger
and more profitable deposits, Nevsun, the Canadian company
closest to being ready for extraction, faces numerous, and
costly, delays in obtaining the mining agreement. Combined
with allegations of increased Chinese interest in mining in
Eritrea, these events paint a picture of faults and
pitfalls in the nascent Eritrean mining industry. END
SUMMARY.

A NATIONAL MINING CORPORATION ESTABLISHED
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2. (C) In December 2006, the GSE released Proclamation
157/2006 announcing the establishment of the Eritrean
National Mining Corporation. The GSE capitalized the
Corporation with 450 million nakfa and divided ownership
into 1000 shares, all held by the Ministry of Finance. The
company has a five member board of directors appointed by
President Isaias Afwerki. The only known corporate officer
is the chairperson, Berhane Habtemariam, who will serve
dually as the chairperson and continue his role as
Eritrea?s Auditor General. In typical Eritrean fashion,
none of the other members of the Board of Directors or the
General Manager have been named publicly. Reporting
directly to the Ministry of Finance, the corporation is the
entity through which the GSE is able to enter into joint
investments with foreign companies, provide equipment to
mining companies and essentially ?perform and implement
whatever necessary and legitimate investments or
undertakings are related to mining activities.?

EXTRACTIONS RAPIDLY BECOMING A DISTANT HOPE
--------------


3. (C) In December 2006, Nevsun, a Canadian company with
the largest known deposits in Eritrea, (known as the Bisha
project) submitted its version of a mining agreement with
the GSE. Simultaneously they provided the final results of
a socio-economic impact study, an environmental impact
study and a feasibility study. Now, at a cost of nearly
10,000 USD per day and with a declining stock price, Nevsun
continues to wait. While Nevsun Country Director Stan
Rogers told Poloff that Nevsun is not concerned with this
nearly five month delay, he also admitted to the high cost
to Nevsun as each day passes. According to Mr. Rogers, the
agreement is concluded but the GSE is waiting for the
Eritrean National Mining Corporation to become an operating
entity before they can move forward.


4. (C) Mr. Rogers told Poloff that with the delays, the
initial timeline that called for extraction to begin in
2008 (reftel) seems at this time overly optimistic, with
mid to late 2009 a more realistic date. Yet, the pressure
on Nevsun is clear as Mr. Rogers noted that the mining plan
might have to be adapted to increase the volume of ore
extracted and raise the initial profits of the mine.
(Note: This change would also increase the strain on local
resources, such as water. End note.)


5. (C) What remains to be settled is the percent of the
mine (and the profits) that will belong to the GSE. The
mining law calls for the GSE to have access to 10% of the
mine at no cost and an option for up to 20% additional
shares that they can buy, for a total of 30% hold in the
company. However, Mr. Rogers alluded to GSE plans to
increase their shareholding to a total of 40%, not
including taxes and royalties.

A PRECEDENT SET BY NEVSUN
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6. (C) Other exploration companies, such as Sanu Resources,
are looking to Nevsun?s challenges and potential agreement
with great interest. While Mr. Rogers denies that the
Nevsun agreement can set a precedent because Nevsun?s Bisha
site is unique, others in the industry disagree. Unlike
Nevsun, an exploration company that plans to establish its
own mining company, the other companies are focused purely
on exploration with plans to sell the mining rights at some
point prior to extraction. For these companies, such as
Sanu Resources, Sub-Saharan Resources and Sunridge Gold
Corporation, the mining agreement received by Nevsun has a
direct impact on their ability to get the highest price for
the mining rights and recoup their costs. Demetrius Pohl,
the director of Sanu Resources, confirmed this to Poloff,
noting that the gold and high grade ore of Bisha combined
with the pressure to extract the minerals may lead the GSE
and Nevsun to agree on higher royalties and taxes, which
would hurt the mining agreements for the lower grade
deposits.

AND IN COME THE CHINESE
--------------


7. (C) While Mr. Rogers denied that Nevsun was concerned
about the Chinese presence in Eritrea, other exploration
companies are starting to sweat. According to Mr. Pohl of
Sanu, this spring the Ministry of Mines stopped issuing
licenses to existing companies in Eritrea, claiming the
need to diversify venture capital. Apparently a Chinese
company applied for a license but was initially refused by
the Ministry of Mines despite rumored pressure from
President Isaias. Later, according to a local Eritrean
businessman, a Chinese company was given the nod to pursue
exploration and thus prevented an existing company from
expanding its current license. However, with no
transparency in the process, the situation still remains
murky over who has a license. Moreover, Mr. Pohl shared
with Poloff that they are considering a ?nightmare
scenario? of the exploration companies doing all the work
and the GSE taking away the licenses and expelling the
foreign companies, only to then turn all of the licenses
(and data) over to the Chinese. Of course, he explained,
if this happened they would challenge the GSE in the World
Court; but even he realizes that they would spend the rest
of their days fighting the battle.

YET THE SEARCH GOES ON
--------------

8. (C) Despite concerns and increasingly raw nerves, mining
exploration companies continue to seek new deposits each
day. In December, Sunridge Corp. and Sub-Saharan resources
confirmed the potential of the Emba Derho prospect.
Amanuel Arafaine of Sunridge told Poloff that following
extensive drilling, they learned the prospect was
significantly more profitable than they initially
anticipated. When combined with others in the area, called
collectively the ?Asmara Project? the potential rivals the
significant profitability of Nevsun, as infrastructure
problems are minimal given the prospect?s proximity to the
capital city. Demetrius Pohl also shared with Poloff that
Sanu was on the verge of announcing another significant
copper and zinc discovery that will match Bisha in size.
Sanu appears extremely excited about the new site, because
although the quality may not be as high a grade as Bisha
the geology lends to an easier, and less expensive,
extraction process.

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


9. (C) The GSE appears to still be hoping that mining will
be the salvation of the economy; however the delays in
moving forward may be an indication that the GSE is
changing its course. The fear of the GSE taking over and
possibly handing the process to the Chinese is real, and
may become a reality despite Chinese dismissals. The GSE
desperately needs the hard currency the mining will bring
in. However, it does not have the hard currency at the
moment to buy in to the mining company, thus the Chinese
and their ever deep pockets may be the knight in shining
armor the GSE seeks. End Comment.


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DeLisi