RUTILE AND BAUXITE PRODUCTION: A BOOST FOR ECONOMIC GROWTH

UNCLAS FREETOWN 000607 SIPDIS SIPDIS SENSITIVE DEPARTMENT FOR AF/W, AF/EPS E.O. 12958 TAGS: ECON EMIN BEXP SL SUBJECT: RUTILE AND BAUXITE PRODUCTION: A BOOST FOR ECONOMIC GROWTH OR A THORN IN SIERRA LEONE'S SIDE? ¶1. (U) SUMMARY. Rutile and bauxite production are rapidly growing industries in Sierra Leone, with great potential to quickly become the country's most profitable exports. Since resuming operations in 2005, the Titanium Resource Group (TRG),responsible for the large majority of Sierra Leone's bauxite and rutile production, has expanding rapidly. This continued increase in mineral production has already begun to stimulate the economy by creating jobs, increasing government revenues, and restoring damaged and destroyed infrastructure. However, this potential for economic growth could come with a price - destruction of the environment and the resulting displacement of villages. END SUMMARY. TRG'S POST-WAR RETURN TO SIERRA LEONE ¶2. (U) The production of rutile, mainly used in the pigmentation of paints, plastics, and paper, and bauxite, typically processed into aluminum, ceased completely in 1995 as the civil war took over Sierra Leone. As rebels passed through the mining communities, the equipment was pilfered and the infrastructure was demolished. In 2005, three years after the war was declared over, the Titanium Resource Group (TRG),a joint-venture of both Sierra Minerals Holdings (Bauxite) and Sierra Rutile, resumed production at two mines located in the Southern Provinces. TRG is not an American company but their major stockholder, with 45.7% shares, is an American company called Ospraie Management LLC. TRG began exporting rutile and bauxite in 2006 and have continued to see an increase in production since. While TRG has not yet turned a profit, they have not suffered great financial losses and expect to begin making a profit as early as 2010. SIERRA RUTILE: RUTILE PRODUCTION ¶3. (U) Sierra Rutile currently accounts for 22% of the global natural rutile production. Current production of rutile for 2007 stands at roughly 60,000 metric tons (MT),66% of their yearly production goal of 90,000 MT and a respectable increase on the 2006 production of 73,802 MT. Construction of a second dredge will be completed in November 2007, which could raise the total annual production to an estimated 200,000 MT. This would surpass their annual rate between 1990 and 1994 of 148,360 MT. A third dredge is scheduled for construction in mid-2008. Equipment failures and power problems have reduced production rates at times. However, Sierra Rutile benefits from a relatively high market price, large reserves, and an increasing demand for Sierra Leone's rutile, considered among the highest grade in the world. SIERRA MINERAL HOLDINGS: BAUXITE PRODUCTION ¶4. (U) Sierra Mineral Holdings (SML) is struggling to keep pace with Sierra Rutile due to the fact that bauxite is less profitable than rutile and the reserve base is lower. Although production also often suffers due to old and faulty equipment, progress has been made in repairing the infrastructure. Approximately one million MT of bauxite were produced in 2006. 700,000 MT have been produced so far in 2007 and SML estimates a total of 1.2 million by the end of the year. All of the bauxite produced thus far has gone to select buyers, such as the US-based Alcoa, in long-term off-take agreements. COMMUNITY RELATIONS REMAIN POSITIVE ¶5. (U) TRG enjoys a comfortable business relationship with the southern Province communities of Bo, Bonthe, and Moyamba. They are the largest employer in the area, employing more than 1200 people, and landowners benefit from very generous lease agreements. To ensure the communities continue to support their presence, TRG has a community manager on staff to seek out and address concerns presented by the communities and a foundation has been set up to work on sustainable development projects. Such projects include biofuel and solar power research as well as the construction of schools and libraries. GOVERNMENT RELATIONS MORE PROMISING ¶6. (SBU) The government revenues extracted from the production of these minerals, derived primarily from taxes, royalties, duties, payroll, and local purchases, could soon match pre-war levels. Between 1990 and 1994, Sierra Rutile alone contributed $9 to $10 million each year in revenues, which equaled 50% of overall GoSL export revenues. In 2006, total revenues from TRG were close to $4 million and is estimated to rise to $5 million in 2007. ¶7. (SBU) When TRG resumed business in Sierra Leone in 2005, the previous Sierra Leone People's Party (SLPP)-led GoSL had signed an agreement that allowed for generous tax breaks in the first few years of production to allow TRG time to rebuild their infrastructure and attract investors. Prior to the September 2007 national elections win by the opposition All People's Congress (APC),GoSL authorities had tried to push back on this agreement, motivated by a desire to reap fuller mining revenues immediately. However, under the new administration, TRG is less concerned that GoSL will try to back out of the original tax break agreement. The company estimates revenues could return to, or even surpass, pre-war levels by 2010. ¶8. (SBU) In his October 5 Parliamentary opening address, newly-elected President Ernest Bai Koromoa pledged to support existing mining legislation and particularly noted continuing support for Sierra Rutile and Sierra Bauxite operations, a welcome announcement. The previous government had also refused to renew the annual license granting TRG exclusive rights to all rutile mining in Sierra Leone. (NOTE: TRG speculates that this refusal was a result of the former government's intention to provide mining rights to an outside company for kickbacks.) TRG MUST ADDRESS ENVIRONMENTAL CONCERNS ¶9. (SBU) While rutile and bauxite production provide obvious benefits to the economy of Sierra Leone, there are potential negative environmental effects. Mining activities undertaken by large mining companies, such as TRG, are a major cause of deforestation and land degradation through the loss of forest cover, soil erosion, siltation and contamination of river systems and tidal creeks, all resulting in the ultimate displacement of villages. The Southern Provinces of Bo, Bonthe and Moyamba show signs of deforestation resulting from the increase in mining activities. TRG appears to want to responsibly address these issues and has developed an Environmental and Social Action Plan (ESAP) that offers a road map towards meeting all environmental obligations. TRG has been actively involved in the relocation negotiations of at least three villages and is exploring innovative ways to reintroduce nutrients to the soil that are lost in the mining process. Koroma also promised a "robust, environmental protection policy" within the mining sector. COMMENT ¶10. (SBU) TRG presents a concerned image of corporate social responsibility. However, it is important that the company continue their active involvement in fixing the problems resulting from the environmental degradation and social dislocation caused by the mining activities. TRG can lead by example and demonstrate corporate responsibility to the Sierra Leone communities in which they operate. This is critical in the extractive industries, such as the diamond sector, where communities have suffered from the greed of those who have profited from Sierra Leone's riches. ¶11. (SBU) The previous GoSL's threat to block the renewal of TRG's license after such a significant capital investment highlights the difficulty of conducting business in Sierra Leone, where graft has eroded confidence in private sector growth. Only the most intrepid can survive. Newly-elected President Ernest Bai Koroma brings substantial business experience to his office and has declared "zero tolerance" for corruption. We hope this will translate into a stronger support for private sector investment. END COMMENT. PERRY