NIGER PROFITS FROM URANIUM IN REVITALIZED MARKET

C O N F I D E N T I A L SECTION 01 OF 05 NIAMEY 000641 SIPDIS SIPDIS E.O. 12958: DECL: 05/04/2017 TAGS: EINV EMIN ENRG ETRD PGOV PREL NG BBSR BTIO ECON, EIND, ETTC SUBJECT: NIGER PROFITS FROM URANIUM IN REVITALIZED MARKET REF: A. NIAMEY 610 (NOTAL) ¶B. 06 NIAMEY 303 (NOTAL) ¶C. WINSTEAD-HARKENRIDER E-MAIL OF 4/27/07 ¶D. 06 NIAMEY 1055 (NOTAL) NIAMEY 00000641 001.2 OF 005 Classified By: POLITICAL OFFICER ZACH HARKENRIDER FOR REASONS 1.4 (B&C) -------------- SUMMARY -------------- ¶1. (C) For the first time since 1983, the Government of Niger (GON) will exercise its right to purchase and sell some of the country's uranium production this year. Moreover, it may sell its share (anticipated to be 300 tons this year and as much as 1,045 tons/year from 2008) to an American power generation firm - Excelon - which appears interested in buying as much as the GON has to sell. GON officials anticipate a ten-year contract with Excelon, and continued high market prices for uranium until 2015 or 2017. Thirty-year high prices and Excelon's expressed interest in purchasing ore have led the GON to take on a more active role in the sale of its most valuable export. It has also led it to trade some of the security offered by traditional price floor arrangements for more flexibility - as embodied in the GON's new contract clause that requires mining companies in all fields to sell for "the highest possible price." By seeking higher prices and awarding new exploration permits to Canadian and Chinese companies, the GON has to some extent sidelined the French company Areva, the major shareholder in Niger's uranium mining companies and the largest purchaser of Nigerien uranium. China's CNUC (Chinese National Uranium Corporation) will begin mining uranium in Niger as early as 2009, producing an estimated 700 tons/year. END SUMMARY -------------- WHAT IS WHAT AND WHO IS WHO IN THE NIGER URANIUM SECTOR? -------------- ¶2. (C) ONAREM - the "Office National des Ressources Minieres" - is the division of the Ministry of Mines and Energy responsible for managing the GON's shares in local extractive industries, regulating the mining industry, and negotiating with purchasers on behalf of the government. Its current goal is to ensure that the world's least developed country gets top dollar for its exploitable resources. Its Director General (DG),Illiassou Abdourhamane, is a former mining engineer who has run the office for the last nine years. His immediate superior is the Secretary General (SG) of the Ministry of Mines and Energy, another mining engineer named Amadou Abdoul Razack. Both men are "old uranium hands," and offered a combination of technical expertise and historical knowledge in meetings with Emboffs. Poloff interviewed the SG on April 23 and, (with ECONOFF),the DG on May 3. Both men gave frank, detailed assessments of the structure and future of Niger's uranium mining industry. ¶3. (SBU) Currently, only two companies mine and process uranium in Niger: SOMAIR (Societe des Mines de l'Air) and COMINAK (Compagnie Miniere de l'Acouta). Both have always been joint ventures between the GON and several traditional purchasers of Nigerien uranium, a relationship reflected in their ownership structure: SOMAIR shareholders -------------- ONAREM (GON) - 36.6 percent AREVA (France) - 63.4 percent COMINAK shareholders -------------- ONAREM (GON) - 31 percent AREVA (France) - 34 percent OURD (Japan) - 25 percent ENUSA (Spain) - 10 percent ¶4. (SBU) Each shareholder has the right to purchase a percentage of production equal to its percentage of shares. NIAMEY 00000641 002.2 OF 005 Thus, the GON has always had the right to purchase (and re-sell, as Niger produces no nuclear power) 36.6 percent of SOMAIR's and 31 percent of COMINAK's annual production. The GON did so from the 1970s until 1983, when a combination of low market prices and concerns about its international legal responsibilities prompted it to stop. During that period, the GON's customers included Dutch, Belgian, German, Libyan, Iraqi and Pakistani purchasers. With production declining from 4,000 tons in 1981 to just 700 tons in 1983, even the foreign shareholders failed to exploit their full quotas, although they purchased ore at above-market prices negotiated annually with SOMAIR and COMINAK in order to maintain the mining companies in which they had invested. NOTE: In the case of COMINAK, a more rigid contract compelled the French not only to set a price, but to purchase two-thirds of the company's annual production. END NOTE. ¶5. (C) The security of the negotiated price-floor (which, in 1981, was twenty percent higher than the global market price),kept SOMAIR and COMINAK afloat and the GON satisfied, even as the mining town of Arlit lost the expat community and facilities that made it a "little Paris" in the 1970s (reftel A). The payoff for consortium purchasers like Areva came when prices rose, and the GON agreed to prices below market levels. Today, the GON is on the verge of re-entering the market, and at least temporarily abandoning the security of negotiated price floors for the allure of short-term profit maximization. The days of trading profit on crests for security in troughs are over - at least for now. ¶6. (C) COMINAK and SOMAIR are in the final year of a three-year contract (2005-7) that sets the price per kilo at 27,300 CFA ($56.75),as compared to the current market price of about $275 per kilo. The DG noted that in the 2004 negotiations the mining companies got a ten-percent price hike in exchange for the three year contract. He also told Emboffs that the GON (through ONAREM) would play a direct role in this year's negotiations for the first time since ¶1983. Past practice had consisted of COMINAK and SOMAIR executives negotiating an annual price each December with the purchasers; those executives looked out for the GON/ONAREM's interests as a fiduciary would for a shareholder, and produced results that satisfied the GON during the period of low prices. Given that the GON had not been a purchaser since 1983, it did not assume a large role in the negotiations. ONAREM will now deal directly with the consortium of traditional buyers. DG Abdourhamane, who will be the principal GON negotiator during this summer's contract renewal talks in Paris, is preparing for a tough slog. There is evidence that Areva (which traditionally also negotiates on behalf of Spanish shareholder ENUSA) is upset with Niger's more assertive policy. ¶7. (C) Youssouf Mazou, head of the GON's Office of Geological and Mineral Research, runs the Ministry division that awards exploration permits. In conversations with Econ assistant, Mazou noted that Areva wanted to have at least fifty percent of the new uranium exploration licenses, but the GON refused. Areva was not made aware that the GON had signed the first new exploration license with a Canadian company until the deal was concluded. Mazou also claimed that Areva's resistance to the GON's demands for a higher price contributed to his office's decision to issue exploration permits to new Canadian and Chinese ventures. Thus hedged, Mazou indicated, the GON would be better positioned to negotiate with Areva. ¶8. (C) DG Abdourhamane was unsure whether negotiations will yield a one-year contract or longer arrangement, but seemed indifferent. He stressed that the GON's recent shift from long term security to short term profit maximization was a function of higher prices. In 2004, ONAREM began to insert a profit maximizing clause into its agreements with mining companies, for the first time explicitly requiring them to sell their product at the highest possible price. ¶9. (C) COMMENT: The insertion of the "highest possible price" clause into agreements with gold and uranium mining firms signals Niger's shift, in this era of high prices, from long-term security to short-term profit maximization, but not NIAMEY 00000641 003.2 OF 005 all of the impulses behind this are economic. The shift in emphasis may have much to do with the current political mood in Niamey. Niger President Mamadou Tandja peppers his public remarks with claims that Niger is on the road to better days thanks to rising prices for its ores, and new discoveries thereof. The GON was embarrassed by the food crisis of 2005, and by its dead-last ranking on the UNDP Human Development Index in 2005 and 2006. Vocal optimism about the durability and transformational effect of high metal prices is a response to this, and that political position dictates actions and mood at the working level. While experienced technocrats like the DG and SG know that optimism about high long-term prices may prove ill-founded, the political class (which includes Minister of Mines and Energy Mohamed Abdoulayi, a political appointee thought to have little substantive knowledge of his portfolio (reftel B)) may have set a tone they are compelled to parrot. If so, DG Abdourhamane played the part convincingly. END COMMENT -------------- HOW DOES NIGER PROFIT FROM THE SALE OF URANIUM? -------------- ¶10. (C) Whether viable in the long-term or not, Niger's move toward short-term profit maximization will focus on the principal streams of revenue by which the country profits from the sale of its most marketable commodity. Niger profits from uranium mining in four ways: The GON levies a per-ton tax on the quantity of uranium exported each year. As prices rise, so too will production and thus tax revenue. There appear to be no plans afoot to change this tax rate. The GON also levies a corporate income tax; again, revenue will rise even without a rate increase. Through ONAREM, the GON receives dividend payments on its stock and royalties on mined uranium, which derive from the sale price. After this year's negotiations with the consortium buyers produce a markedly higher sale price, royalties will rise and SOMAIR/COMINAK stock will yield higher dividends. Now, there is the added promise of the direct sale of thirty-some percent of mined ore to a new American buyer. -------------- ENTER EXCELON -------------- ¶11. (C) For the first time since the early 1980s, Niger has a potential buyer outside of the traditional consortium (Areva, OURD, and ENUSA). In a March 26 letter to Emboffs, Excelon President and Chief Nuclear Officer Christopher M. Crane announced his company's "interest in entering into an agreement with the Republic of Niger to meet a portion of our uranium supply needs." Noting that Excelon "is the largest buyer of uranium in the United States," Crane looked forward to "working with our government and the government of Niger to obtain the necessary regulatory approvals and ensure that the agreement is consistent with all relevant domestic and international standards." ¶12. (C) DG Abdourhamane stressed ONAREM's concern with legality and standards in his discussion with Emboffs. ONAREM hasn't sold ore since 1983, and wants to be sure that it does it right. He noted that ONAREM would require documentary proof from purchasers and their governments that uranium purchases will be for civil nuclear power generation only; that the ore will be used by the purchaser and not transferred to a third party; and, that the purchaser's country of origin is party to all relevant international treaties. ¶13. (C) DG Abdourhamane discussed a meeting in Toronto with executives of Excelon and a subsequent phone conversation in which the principles of a purchasing agreement were laid out. According to Abdourhamane, Excelon is interested in entering into a long-term (i.e. 10 year) agreement to purchase "as much ore as Niger can sell" to them. Abdourhamane noted that an Excelon team would be in Niger from May 15 to continue discussions. -------------- NIAMEY 00000641 004.3 OF 005 RISING PRICES, RISING PRODUCTION -------------- ¶14. (C) Poloff asked DG Abdourhamane and SG Amadou about Niger's production. Both anticipated greater quantities for sale, for three reasons: the expiration and re-negotiation of COMINAK's quota system; expanded production at current mines; and, new Areva and Chinese-owned mines coming on line. ¶15. (C) Speaking to aggregate production levels, Abdourhamane anticipated annual production of 4,860 tons by 2011, compared to just 3,750 tons today. Current Production Anticipated 2011 Production -------------- -------------- SOMAIR 1,800 tons 2,200 tons COMINAK 1,950 tons 1,960 tons Chinese none 700 tons ¶16. (C) COMINAK would increase production, though marginally. It is limited by high capital costs for replacing old equipment and maintaining its underground mine, which is yielding less than it used to. In the 1970s, COMINAK could produce up to 2,000 tons per annum; now, 1,950 is considered a more reasonable maximum. SOMAIR's production will rise thanks to a new mine near Imourarene in northern Niger. China's CNUC will open its mine at Teguidda-n-Tessoumt by 2010, adding another 700 tons to Niger's total. Neither DG nor SG mentioned the Canadian mining company Northwest Mineral Venture, which has prospecting rights near Ingal (reftel D). That company too may start to produce in the long term. Other companies with exploration rights in Niger are: SEMAFO, North Atlantic, Trendfield, Ura Mines, and Ira Mines (all apparently Canadian). ¶17. (C) All of this amounts to added flexibility for ONAREM, which has a 30 percent option on the production of the new Imourarene mines. Noting that 2007 was too far along for ONAREM to obtain much more than 300 tons of an estimated 1,800 tons of SOMAIR production, Abdourhamane argued that Niger would claim more of its quota next year, when it would purchase and re-sell 300 to 400 tons of COMINAK ore and 645 tons of SOMAIR ore. He predicted that ONAREM would stick to that level for the near future, enabling it to sell between 945 and 1,045 tons a year to interested buyers such as Excelon. In theory, by 2011, ONAREM would be able to sell another 120 tons - 30 percent of the anticipated Imourarene yield. -------------- POOR COUNTRY, RICH SECTOR: WHAT URANIUM CAN DO FOR NIGER -------------- ¶18. (C) Uranium's promise has always been compelling in the world's least-developed country, and the past informs Nigeriens' reactions to today's rising prices. The uranium boom of 1975-1981 helped Niger to recover from a period of drought and famine (1968-73). GDP growth from 1975 to 1981 averaged 12 percent a year, while per capita GDP rose from $120 in 1974 to $300 in 1980. Judicious use of uranium revenues by the military regime of General Seyni Kountche led to a building boom in Niamey, and road, school, irrigation project, and health clinic construction across the country. Nigeriens look on the Kountche period as one of good-governance, social stability, and uranium-based economic growth -- often contrasting it with today's reality. DG Abdourhamane noted that the Ministry of Mines and Energy, one of Niamey's most striking buildings, was built by ONAREM in 1981 at a cost of over $4 million. The present dilapidated condition of GON office buildings is one visible index of how far the country has fallen since. Abdourhamane expressed hope that uranium revenues would again help Nigeriens reach their development goals. Coming after a food crisis in 2004-5 and two successive years of dead-last rankings on the UNDP Human Development index, today's "boom" inspires hope in many. -------------- COMMENT NIAMEY 00000641 005.4 OF 005 -------------- ¶19. (C) Popular excitement aside, the GON needs to balance the allure of higher short term profits with long term price stability. Unlike in the past, the GON now seeks to do that by diversifying production in the sector. Where "hedging" in the 1970s meant trading profit for price floors with a limited number of traditional buyers, in today's more flexible global market the GON is able to hedge by inviting a diverse array of investors into the sector. ¶20. (C) The GON's profit maximizing behavior, the likelihood of sustained high prices over the next decade, and interest from new Canadian and Chinese investors augers well for the future. Providing revenue is well spent, Niger may again realize significant development gains. There are already ideas on the table. One new plan calls for sharing 15% of mining royalties (for all minerals) with the local communities of the mining zone. This would answer local commune governments' critical need for enhanced revenue, and Tuareg claims of unfair revenue sharing by southern-dominated GON. ONAREM anticipates negotiations yielding new contracts with purchasers by September. It remains to be seen how much more revenue Niger obtains, where, and with what degree of transparency and efficacy it uses it. ¶21. (C) The prospect of purchasing by an American firm is significant. Bi-lateral trade is limited, and no major American companies do business with Niger. The "Nigerien street" would likely react positively to news of an American buyer. For a better informed audience within the GON, the prospect of a deal with Excelon - coming on the heals of new relationships with Canadian and Chinese exploration firms - confirms that Niger will profit from unprecedented flexibility and choice in a reinvigorated global market. END COMMENT ALLEN