Guinea's Revenues Hard Hit

UNCLAS SECTION 01 OF 02 CONAKRY 000246

SIPDIS

SIPDIS

TREASURY FOR OFFICE OF AFRICAN NATIONS

E.O. 12598: N/A
TAGS: ECON EFIN PGOV ELAB SOCI GV
SUBJECT: Guinea's Revenues Hard Hit

Ref: Conakry 84

SENSITIVE BUT UNCLASSIFIED. PROPRIETARY INFORMATION. NOT FOR POSTING
ON INTERNET.


1. (SBU) SUMMARY. Battered by more than six weeks of strike and a
state of siege, Guinea's finances will present some of the new Prime
Minister's most difficult challenges. All sectors of the economy
were impacted, but mining, especially Guinea's cash cow bauxite,
posted some of the most severe losses. In a blow to another revenue
source, customs operations remained closed during most of the period
January 10-February 27. Ships previously scheduled to arrive in
port were allowed to dock and unload, but goods sat uncleared and in
storage. In the meantime, commitments to the unions included some
troubling economic measures that will further reduce revenues. End
Summary.

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Mining Operations Stifled
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2. (SBU) Guinea's economy relies heavily on mining operations,
which account for 32 percent of GDP. All the major mining
operations in Guinea -- bauxite, gold, and diamonds -- managed to
operate at least part-time during the January-February troubles, but
were forced to tap stockpiles and reserves. Little new extraction
took place.

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Bauxite Operations Draw Down Reserves
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3. (SBU) Bauxite, the government's largest source of income,
remains Guinea's most consistently profitable export. Almost all
large scale mining activity ceased, but companies tapped their
reserves to post near normal output. Nonetheless, the effects of
the civil unrest here reverberated worldwide. The price of raw
bauxite, source material for aluminum, soared from 225 USD per
metric ton in December, to nearly 375 USD per metric ton February

26.


4. (SBU) To combat possible incidences of theft and violent
demonstrations, all major mining operations paid for the services of
military guards. Fuel deliveries -- always vulnerable to pilferage
but especially so during the state of siege -- were made in convoys
with paid military escorts.


5. (SBU) Global Alumina (GAPCO) posted losses of about 25,000 USD
per day. Construction of their multi-billion dollar alumina
refinery ceased completely. The company evacuated many of its
expatriate staff and focused on smaller scale environmental projects
while its core staff of construction workers was unable to work.


6. (SBU) RUSAL, the world's largest alumina producer, nearly
depleted its stockpiles of mined bauxite in order to produce and
refine alumina during the state of siege. To supplement its
reserves, RUSAL began mining one of its secondary bauxite
concessions near Kindia, a mine southwest of its primary mine and
refinery site in Fria. It did not have significant security
incidents in Kindia and Fria during this period, but its two
railways to the port of Conakry were vandalized, and few trains were
able to operate.


7. (SBU) The Bauxite Company of Guinea (CBG) posted the most
significant profit losses. (Note: US and Canadian companies Alcoa
and Alcan share a 51 percent interest in CBG, and the government of
Guinea holds the remaining 49 percent.) Alcoa representatives told
EconOff that each day of lost production by CBG amounts
approximately 900,000 to 1,000,000 USD in lost revenue. That figure
includes wages and benefits, fees associated with port and rail
usage, and actual bauxite exports lost because of suspended mining.
The government of Guinea's losses averaged 90,000 to 100,000 USD per
day in profits and lost tax revenue. CBG did manage to continue
minimal mining operations, functoning at about 20 percent
capacity.

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Gold - Struggling to Mee Targets
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8. (SBU) The gold companies were generally able to continue work
during the strike, but not during thestate of siege. Production at
AngloGold Ashantiwas about 70 percent of their normal 25,000
ouncs-per-month output Febuary 12-23. With current reerve
stockpiles that can meet their full production needs for 3 to 4
months, the company drew fromtheir reserves during the political
unrest. AngoGold Ashanti expects to meet profit projections fr
this quarter even if there is further unrest i Guinea.


9. (SBU) Societe Miniere de Dinguiraye (SMD),ceased production

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completely on February 17 because of mechanical problems with their
sole crusher. To meet profit targets for this quarter, SMD
officials told us they have to return to at least strike-level
production (45 to 50 percent normal production or 4200-4500 ounces
of gold per month) by March 9. The company told us that they expect
they will be able to do so if they are able to repair their
crusher.

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No Diamonds, No Kimberley Process
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10. (SBU) According to one of Guinea's leading diamond exporters
Hadja Balde, diamond production in the interior halted completely
during the strike and state of siege. Balde said transport was
difficult because of fuel shortages, and the Central Bank, which
administers the Kimberley process to certify non-conflict diamonds,
was not functioning. Balde estimates her diamond export business
lost 60,000 USD during the state of siege. During the upheaval,
diamonds undoubtedly left Guinea, but without undergoing any
certifying process.

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Port Activity Halted
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11. (SBU) Representative of shipping company Maersk told EconOff
that the port functioned at minimal capacity during the general
strike and the state of siege. Ships scheduled to arrive in Conakry
were permitted to dock and unload. However, customs did not clear
incoming shipments, so goods were simply left in their containers.


12. (SBU) There are now hundreds of containers filling every
available storage space, making it difficult to maneuver within the
area. Embassy GSO and Maersk representatives confirm the port is
nearing its full storage capacity and that it will take weeks for
operations to return to normal.


13. (SBU) Although customs was not technically open during the
strike and state of siege, Guinea's major rice importer Amadou
Diallo told EconOff he paid customs officials to have an eight-ton
shipment of rice "cleared" through the port. (Note: That is to say
he bribed the officials to gain access to his goods.). Diallo's own
trucks loaded and transported the rice to his storehouses.


14. (SBU) The industrial port at Kamsar is used exclusively by
mining companies and is functioning, but shipping markedly less
product volume.

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COMMENT
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15. (SBU) The mining sector is pretty resilient and has weathered
storms before. The global demand for bauxite and alumina is at no
risk of diminishing. The import-export merchants have undoubtedly
taken a hit, but most spread their risk and will recover once
shipping is up and working again. It is the national coffers that
are most damaged by more than six weeks of starvation. Moreover,
the new government will inherit fundamentally flawed policies that
will continue to decimate revenue: subsidies on petroleum products
and a prohibition on the export of agricultural goods for the
remainder of the calendar year. Both these policies are commitments
included in the January 27 tripartite agreement that eventually led
(after a side trip or two) to seeming resolution of Guinea's crisis.
As new Prime Minister Lansana Kouyate takes stock, he will have to
make some tough decisions on how to increase revenues and limit
expenditures.

MCDONALD