MALAWI SIGNS URANIUM MINING AGREEMENT

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STATE FOR AF/S, INR/AA
STATE FOR EB/ESC/IEC, EB/TPP/BTA
USAID FOR AFR/SD/EGEA, EGAT/EG/TI
COMMERCE FOR ITA

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E.O. 12958: N/A
TAGS: ECON EAID EINV EMIN ETRD PGOV MI
SUBJECT: MALAWI SIGNS URANIUM MINING AGREEMENT

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1. (U) Summary: The Government of Malawi has signed an agreement
with Australian mining firm Paladin Resources to develop a uranium
mine at Kayelekera, in the far northern region of the country. The
agreement envisions a 10-year project that will produce
approximately 1,000 metric tons of yellowcake uranium (U3O8) per
year, with an annual value of nearly $200 million at current market
prices. The project provides a major boost to Malawi's struggling
economy, and is an important test case to demonstrate the
government's openness to foreign investment. End summary.

Breaking New Ground
--------------


2. (U) Malawi's mining sector is largely undeveloped, and this
project with Perth-based Paladin Resources Ltd is the first
large-scale mining project in the country's history. Until now,
mining activity has been limited to a small coal mine, small-scale
mining of mineral sands, and artisanal extraction of gemstones.
Malawi has never conducted a formal geological survey, and the
country's mineral resources are largely unknown. The limited
information available on mineral resources comes mainly from surveys
conducted during the British colonial period. Given the significant
proven mineral resources in surrounding countries, it seems logical
that mining should have great potential in Malawi.


3. (U) The uranium deposits at Kayelekera have been known for over
20 years, and were first explored by the UK Central Electricity
Generating Board in the early 1980s. At that time, low market
prices kept the discovery from being exploited. Paladin obtained a
prospecting license in 1998, and commenced feasibility studies in

2000. With the recent increases in uranium prices on the world
market, production is now economically feasible, and should prove to
be a healthy investment, as long as uranium prices maintain the
average $60/pound that the company projects for the life of the
mine. The current world price is about $85/pound, and most experts
predict it will go to $100 by the end of 2007 and maintain that
price over the near term.


4. (U) Paladin's investment in the Kayelekera project will total up
to $185 million. This will be the company's second major project in
Africa; it also owns the Langer Heinrich uranium mine in western
central Namibia, a project of similar size that commenced production
in late 2006.

Hard Digging
--------------


5. (SBU) The development agreement between the GOM and Paladin
signed on February 22 was the fruit of nearly two years of
protracted and difficult negotiations. When company managers began
formal discussions in early 2005, they had originally hoped to have
the agreement ratified by an act of parliament. In the poisonous
atmosphere of Malawi's politics which prevailed at that time,
however, the legislature was deadlocked and the company realized
that parliamentary approval would be impossible. They elected to
pursue an agreement solely with the executive, fully aware of the
increased political risk. Negotiations with the weak Mutharika
government moved slowly, and leaders proceeded with great caution.
At the same time a number of local NGOs launched a campaign to
oppose the mine. Senior government leaders were not swayed by their
pleas to cancel the project, and quietly assured diplomats and the
business community that they intended to reach an agreement. By
late 2006, Paladin was close to a deal that provided sizable tax
revenue and royalties for the government. But in November the GOM
suddenly changed direction and demanded an equity stake in the
project. Three more months of intense negotiation finally yielded
an agreement that gave the GOM the equity it desired, in exchange
for lower tax revenue and royalty payments.


6. (U) According to company press releases, the deal gives the GOM a
15 percent equity participation, with 27.5 percent corporate tax and
1.5 percent royalty in the first three years, and 3 percent
thereafter. The GOM has also exempted the project from import
duties and 17.5 percent VAT. The revenue from Kayelekera will
increase Malawi's GDP by over 5 percent, and will account for 20
percent of total exports. Paladin has also pledged to fund a number
of social development projects such as schools and clinics in the
vicinity of the mine. The company has applied for a mining license,
which they expect will be granted within 90 days. Construction of
the mine and processing plant is expected to take about 18 months,

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and Paladin hopes to begin production in late 2008.


7. (SBU) Significant potential difficulties still lie ahead,
however, if the experience of other foreign investors holds true.
The Malawi Revenue Authority is notoriously aggressive, and promised
tax breaks are often given only reluctantly. Other foreign firms
that supposedly enjoy tax-free import of capital equipment and raw
materials have found that MRA forces them to pay import duty up
front and wait for long periods (sometimes up to a year) before
refunding the tax. Other companies have faced great difficulty in
securing temporary work permits for expatriate employees. Firms can
wait months for approval of permits, and expatriate workers are
sometimes forced to leave the country on short notice. The
government has stepped up its empowerment campaign for "indigenous"
Malawians, and a certain level of anti-foreign sentiment is palpable
at the moment. Paladin plans to bring in a large number of foreign
experts, particularly during the mine's construction phase, and may
face significant hurdles with Malawian immigration authorities.

Important Test Case
--------------


8. (SBU) The U.S. Mission, the World Bank and other observers who
track local economic development issues have followed the Paladin
case with great interest, because it is the first major foreign
investment in Malawi in many years, and is a pioneering foray into
an undeveloped sector of the economy. Malawi's long history of
state control has created an atmosphere that is almost hostile to
private investment, and doing business here is not for the faint of
heart. Poor infrastructure, low-skilled workers, endless red tape,
predatory tax authorities and a general mistrust of private
enterprise all conspire to create a business environment that is
among the most difficult in Africa. But there is money to be made
for those who are willing to take on the challenges, and many people
are watching to see if Paladin succeeds. A second Australian firm,
Globe Uranium, recently secured prospecting rights to a site in
central Malawi, and has opened an office in Lilongwe. The
government has declared mining to be a priority sector for its
economic development program, and says it wishes to encourage
greater investment in mineral exploitation. If ore prices remain
high and government plays a constructive role and uses its revenues
wisely, uranium could well prove to be a big winner for everyone in
Malawi.

EASTHAM