GSE OFFERS HOPE TO CANADIAN MINING COMPANY

C O N F I D E N T I A L SECTION 01 OF 02 ASMARA 000907

SIPDIS

SIPDIS

LONDON FOR AFRICA WATCHER
PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 11/28/2017
TAGS: EMIN ETRD ECON ER
SUBJECT: GSE OFFERS HOPE TO CANADIAN MINING COMPANY

REF: ASMARA 000467

Classified By: DCM Jennifer A. McIntyre, for reasons 1.4
(b) and (d).


1. (U) SUMMARY: Canadian company Nevsun publicly announced
on October 29 that it was close to finalizing a mining
agreement with the Government of the State of Eritrea (GSE),
although issues of foreign currency and insurance still
remain to be settled. Under this agreement, the GSE, through
its Eritrean National Mining Corporation (ENMC) will become a
40% owner of the Nevsun-owned Bisha Mining Corporation.
Lacking the foreign capital to purchase the company shares,
the GSE received a USD sixty million loan from the Chinese to
make this purchase. The GSE's decision to take direct
ownership in a mining enterprise is unusual for Africa -- as
most other governments opt to profit solely from taxes and
customs generated from the industry -- but not surprising as
the GSE appears to be placing its hopes on the mining
industry to provide in the future a reliable source of
critically needed hard currency. END SUMMARY.

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THE GSE AGREES TO BUY INTO A MINE
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2. (U) Canadian mining company Nevsun announced on October 29
that it was close to completing with the GSE a mining
agreement, an agreement it submitted to the Eritrean
government nearly a year ago. During the final stages of
negotiations, Nevsun accepted the government's offer for the
GSE-owned Eritrean National Mining Corporation (ENMC) to
assume forty percent ownership in the Nevsun-owned Bisha
Mining Corporation (reftel). Eritrean mining law provides
the GSE a ten percent ownership in the Bisha Mining
Corporation at no cost. The law also allows for the GSE to
purchase an additional thirty percent at fair market value.
The GSE, through the ENMC, has agreed to purchase the
additional thirty percent, at a market value that could
exceed USD 130 million. To assist in making an initial
purchase, China's Import-Export Bank has agreed to lend the
GSE 60 million USD.

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NEVSUN: HOPEFUL ABOUT A FINAL AGREEMENT SOON
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3. (C) Nevsun Country Director Stan Rogers told Poloff on
November 20 that the agreement on the 40/60 split ownership
was a significant breakthrough in Nevsun's negotiations with
the GSE. Once this agreement is signed, the ENMC will also
assume responsibility for forty percent of start-up and
operational expenses. Rogers said he had just sent the GSE
their "first bill" for the Bisha Mining Corporation expenses.
To date, Nevsun has received no money from the GSE/ENMC. As
the GSE does not have sufficient funds, even with the Chinese
loan, to purchase outright its 30% additional share of the
mine or pay for operational costs, Rogers anticipates the
GSE/ENMC will make these payments from profits after
extraction begins. The Bisha Mining Company will be revalued
by an independent third party at that time to determine fair
market value for the yet-to-be purchased shares. Rogers
commented that he feels confident the GSE will honor the
agreement and does not anticipate that the GSE would move to
nationalize the company at a later date. However, he
acknowledged that the political risk in Eritrea remains high
and cited an article in Resource Investor, which described
Eritrea as one of the ten worst countries for investment due
to political risks.


4. (C) Rogers expressed optimism that the agreement would
soon be completed and signed. The final two elements of the
agreement under discussion are foreign currency control and
insurance. As it waits for the agreement, Nevsun has begun
work on the designs for the mine and the environmental
assessments and plans. These plans must be approved and
reviewed by a GSE cross-disciplinary committee comprised of
representatives from various GSE ministries, including:
Energy and Mines; Land, Water, and the Environment; Health;
and Labor and Human Welfare. Rogers noted that the

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environmental work had stalled initially; however, the
committee has made great progress since a new GSE staffer at
the Department of Land, Water, and Environment took charge of
the project a few months ago. Rogers anticipates actual
extraction will begin around the end of 2009.

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CHINESE INCREASING INVESTMENT IN ERITREA
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5. (C) The USD 60 million loan to the GSE is the largest
commercial loan to date from the Chinese to Eritrea. Earlier
this year, the Chinese loaned the GSE USD 23 million for
telecommunications upgrades. The Chinese Ambassador told
Poloff in summer 2007 that he anticipated that China would
increase their investment in Eritrea through various
mechanisms. The Ambassador noted that in 2004, Chinese
investment had reached only USD 6 million but had risen to
USD 38 million in 2006. With this loan from the
Import-Export Bank, China will have invested nearly USD 100
million in Eritrea by the end of 2007. Most of these loans
are "soft loans" - carrying interest rates as low as 2.5
percent - although they may come with other (unknown) strings
attached.

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COMMENT
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6. (C) The GSE's desire for a sizeable minority capital state
in the mining ventures is not surprising, as the GSE
continues to see mining as its financial savior. Thanks to
the GSE's heavy-handed restrictions over the economy, mining
remains the only growing industry in Eritrea's private
sector. The Chinese may seek access to Eritrea's nascent
mining industry in exchange for this soft loan. END COMMENT.
MCMULLEN