ERITREA - MAJOR AUSTRALIAN GOLD STRIKE

C O N F I D E N T I A L SECTION 01 OF 02 ASMARA 000248

SIPDIS

LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: DECL: 05/05/2018
TAGS: EMIN ECON PGOV PINS PREL ER
SUBJECT: ERITREA - MAJOR AUSTRALIAN GOLD STRIKE

ASMARA 00000248 001.2 OF 002


Classified By: Ambassador Ronald K. McMullen for reason 1.4 (d).


1. (SBU) Summary: Australia's Sub-Sahara Resources
exploration company reports it has discovered a deposit of
1.04 million ounces of gold in north-central Eritrea worth
one billion dollars at today's prices (about equal to
Eritrea's GDP). This gold deposit is similar in size to the
Vancouver-based Nevsun's reported discovery in Eritrea's
western lowlands. Both companies hope to begin production
within the next two to three years. Revenue accruing to the
government from these two mines will more than replace the
drastic fall in remittances that has hamstrung Eritrea's
economy. End Summary.


2. (SBU) Perth's Sub-Sahara Resources Strikes it Rich
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The country manager of Sub-Sahara Resources, a Perth-based
company traded on the Australia Stock Exchange, provided
emboff May 5 with details of a major gold deposit his company
has discovered in the isolated Zara Valley. The million
ounces of gold are contained in a huge quartz seam that
breaches the surface in some spots, permitting relatively
uncomplicated open-cast extraction. The company plans to
mine the Koka deposit, one of twelve prospects in the Zara
goldfield. "Others may be as rich as Koka, but we haven't
fully explored them yet." His team has sunk 79 diamond drill
holes and estimates Koka contains a very rich 6.3 grams of
gold per ton of ore.


3. (SBU) Sub-Sahara Resources' Owners and Partners
-------------- --------------

The Eritrean Ministry of Energy and Mines has issued
Sub-Sahara and its partners exploration licenses covering 76
square miles of the Zara Valley, located 100 miles northwest
of Asmara. Sub-Sahara Resources owns 69% of Zara Joint
Venture, with the remaining equity held by two other
Australian corporations. Eritrean law requires Zara JV to
give the government 10% ownership when a mining permit is
issued, with an option to buy another 30%. Traded on the
Australian Stock Exchange, Sub-Sahara Resources counts among
its ten largest shareholders Merrill Lynch and Citicorp.
Sub-Sahara Resources has been exploring in Eritrea since 2001
and is active in Tanzania.


4. (C) Artisans and the Army
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Sharing the Zara goldfield with Sub-Sahara's exploration team
are a large number of Eritrean artisanal miners who crush
exposed quartz outcrops with Neolithic stone-tipped
sledgehammers and sift the pulverized ore through handmade
tin sieves. They bag the gold-rich powder and sell it to
nearby Eritrean military units. The Eritrean Defense Force
provides "protectors and minders" for Sub-Sahara Resources
and the artisanal miners, in part due to the murder several
years ago of a Western geologist in this region, allegedly by
the Eritrean Islamic Jihad. The country manager said
Sub-Sahara Resources has unusually good relations with the
artisanal miners, who "often show us where the gold is."


5. (C) Comment
--------------

The Australian company is behind Nevsun in gearing up for
full-scale production, but it will be able to mount a simpler
mining operation because Koka contains only gold, rather than
the complicated mix of base metals and gold found at Nevsun's
Bisha deposit. Sub-Sahara also benefits from Nevsun's
pioneering work with the testy and inexperienced Eritrean
Ministry of Energy and Mines. Sub-Sahara's country manager
said he would not be surprised if Sub-Sahara begins
extraction before Nevsun, based on these advantages. The
Australian-Canadian race to the production stage can only
make cash-strapped Eritrean officials drool at the prospect
of millions in mining revenues within a couple of years. Due
to mismanagement and the drastic drop-off in remittances over
the past two years, Eritrea's "war economy" is creaking
toward a standstill. Gold promises to change this.

ASMARA 00000248 002.2 OF 002


MCMULLEN