EXPANDING MINING OPERATIONS THREATENED BY THE COUP

S E C R E T SECTION 01 OF 06 NOUAKCHOTT 000639

SIPDIS

E.O. 12958: DECL: 11/02/2018
TAGS: ECON EFIN PGOV PTER EMIN MR
SUBJECT: EXPANDING MINING OPERATIONS THREATENED BY THE COUP
AND BY TERRORISTS

Classified By: CDA Dennis Hankins for reasons 1.4 (b) and (d).


1. (C) Summary: EconOff recently visited SNIM's iron ore
mining operations in northern Mauritania. After many years
of low prices for iron ore, higher prices in recent years
have led SNIM to develop new projects to increase production.
SNIM has two projects that it is developing on its own as
well as three projects under development with foreign
partners. SNIM is the largest importer of U.S. goods,
purchasing nearly all of its heavy machinery and train
locomotives from the United States. Because of the harsh
environmental conditions in which SNIM operates, it continues
to rely on old inefficient machines and equipment because
many of the newer technologies are not suited for the
conditions. Security and the threat of AQIM are a growing
concern in Mauritania, but one that SNIM officials are
reticent to talk about. AQIM ambushed Mauritanian soldiers
on patrol just 30 km from SNIM's operations in September.
SNIM officials assert that the company has enough
independence from the government that the August 6 coup has
not changed anything, but local press reports that SNIM's
director general recently purchased a whole wardrobe of new
suits for General Aziz. End Summary.


2. (U) EconOff recently visited the National Mining and
Industrial Company's (SNIM) operations in the northern cities
of Nouadhibou and Zouerate. SNIM was created as the result
of the 1973 nationalization of the French mining company
MIFERMA. SNIM, which is now 78% state-owned, has a monopoly
on all iron ore mining operations in Mauritania. Mining is
the backbone of the Mauritanian economy, and SNIM is the
dominant actor in the sector. The mining sector consists
primarily of iron ore mining carried out by SNIM, but gold,
copper, and uranium mining have all begun recently. SNIM's
earnings account for 12% of GDP, 45% of export earnings, and
8% of the national budget. It is also one of the country's
largest employers.


3. (U) For many years, SNIM's production stagnated at about
seven million tons of iron ore per year. Faced with low iron
ore prices, SNIM was unable to expand production or increase
investment. SNIM saw its fortunes start to improve around
2003 and 2004 when China could no longer produce enough iron
ore domestically and began purchasing iron ore
internationally. Increased demand from China caused global
demand and prices to increase, which in turn improved SNIM's
financial position and led it to increase production. SNIM
currently operates three large mines and two small mines. It
will produce about 12 million tons of iron ore in 2008.
Despite increased production, it is still a relatively small
player in the iron ore market. The market is dominated by
three companies (Vale, BHP Billiton, and Rio Tinto Group),
which combined produce approximately 700 million tons of iron
ore per year. SNIM has traditionally sold all of its
production to European customers, but after signing two new
agreements with Chinese companies in 2007, it will sell 20%
of its production to China in 2008.


4. (U) In 2005 SNIM developed a new strategy to address the
changing economic conditions and greater demand for iron ore.
Due to the long lead time for new mines to come into
production and the long life span of the mines, SNIM's
development plans look at least 20 to 30 years out.
Development for its large mines takes at least 10 years from
the time development begins until iron ore production begins.
Because all of SNIM's investments are for the long-term, it
is taking a cautious approach in the case that the current
high prices are not sustained. After suffering many years of
low prices for iron ore, SNIM officials are well aware of
what the future could bring. The head of mining operations
Mohamed Ould Mohamed Abdallahi told EconOff that recent
global economic problems will not change SNIM's long-term
development plans.


5. (U) In its 2005 development plan, SNIM identified new
projects that it will develop and finance itself as well as
projects that it will realize in conjunction with foreign
partners. Through its self-developed and financed projects,
SNIM intends to increase production to 18 million tons per

NOUAKCHOTT 00000639 002 OF 006


year by 2012. To do so, SNIM has begun adding new equipment
to a deposit that is already being exploited in order to
increase production by two million tons per year by 2010. It
is also planning to build a new concentration factory, which
will produce an additional four million tons per year by

2012. A Canadian company has already completed the
feasibility study for the concentration factory. SNIM is now
looking for financing from development and commercial banks
to fund the 500 million Euro project.


6. (U) SNIM also has three projects that are under
development with foreign partners. This first is a project
that it began with the Australian company Sphere in 2005 to
begin producing iron ore pellets, which have extremely high
iron ore content (71%) and sell for approximately twice the
price of regular iron ore. The project will initially
produce seven million tons of pellets per year, but will have
the capacity to expand to 28 million tons per year. The
project is estimated to cost $2 billion. However, the
project is currently stalled due to a lack of financing.
Saudi Basic Industries Corporation (SABIC) was one of the
original investors but it pulled out in 2007. SABIC was
replaced by Qatar Steel, which subsequently pulled out of the
project in August, citing concerns about the profitability of
the project. In September, SNIM and Sphere appointed USB to
help them identify a strategic partner for the project, which
would hold a 49.9% share in it.


7. (U) ArcelorMittal signed an agreement with SNIM in
December 2007 to jointly develop a new iron ore mining
project. ArcelorMittal is one of SNIM's traditional
partners, but as a buyer, not a developer. The project is
still at the beginning stages and ArcelorMittal must create a
subsidiary for the new joint venture company that it will
form with SNIM before work can actually begin. The project
is still years away from coming into production. A
feasibility study must first be done, which is expected to
take three years. ArcelorMittal currently holds a 30% share
in the project. If the results of the feasibility study are
positive, then the two partners will begin developing the
site and ArcelorMittal will have the option to take a 70%
stake in the project. The project could produce up to 25
million tons per year. The site where they are intending to
develop the project is 30 km away from the existing railway,
meaning that a railway extension will also be necessary.


8. (SBU) The Chinese have been active in developing new
projects in conjunction with SNIM since March. They are
currently exploring the possibility of developing underground
mines at sites that have already closed. Many of these mines
still contain iron ore, but it is underground. Because these
projects are still at the early stages, they have not
released production estimates. It is relatively rare to mine
for iron ore underground. Given that there is not
significant international experience in underground iron ore
mining and the relatively lax safety regulations in
Mauritania, the new underground mining projects could pose a
safety concern.


9. (C) To handle increased production, SNIM will have to
expand its infrastructure. It will extend the current 700 km
railway to several new sites as iron ore production comes on
line. It will also increase the number of trains that run
each day from three to six. In addition, SNIM has plans to
build a new port facility in the northern city of Nouadhibou.
Its current port facility in Nouadhibou is aging and cannot
accommodate many of the new larger ships. According to
plans, the new port which will be adjacent to the current
port should be operational by 2012. Even after the new port
is completed, SNIM plans to maintain the old port as a
back-up and potentially for regular use as production
continues to increase. The most significant hurdle facing
the new port is funding. It is expected to cost 116 million
euros to build. The European Union had agreed to provide 40
million euros for the project, but it has frozen that money
since the August 6 coup. If the coup is overturned, SNIM
will likely receive the money as planned. If the coup is not
overturned and the European Union implements sanctions in
Mauritania, it could present a significant hurdle to

NOUAKCHOTT 00000639 003 OF 006


completing the construction of the new port.


10. (U) SNIM has spoken of the possibility of eventually
expanding into steel production, but it is more of a dream
than a reality at this point. The only way for steel
production to become viable in Mauritania is if coal or gas
to provide sufficient energy is found. Gas could be a viable
possibility in the future as initial surveys indicate that
there could be substantial gas deposits offshore. Further
testing and studies are still needed to determine if gas
production could be commercially viable in Mauritania. If
gas production is proven to be viable, it would still require
significant time and money before steel production could ever
begin in Mauritania.


11. (U) A visit to the SNIM facilities is like a time warp
back to the 1960s. SNIM continues to use and rely on almost
all of the original equipment and facilities that were built
in the 1950s and 1960s by the French company MIFERMA that
originally began mining in Mauritania. Because of the long
period of stagnation in the iron ore market, SNIM did not
have capital for investment and renewing its equipment. In
addition, the extreme heat, sand, dust, and lack of water in
Mauritania makes it a uniquely challenging environment for
iron ore mining. Most of the heavy equipment and machinery
that SNIM uses is specially made or adapted for the
conditions. The equipment and technologies used by other
mining companies simply would not work in the harsh
conditions in Mauritania. Because water is very limited in
northern Mauritania, SNIM uses specially adapted equipment
that uses very little water, but as a result is extremely
energy intensive. Much of the newer equipment is much more
energy efficient, but would not work in the local conditions.
As a result, SNIM continues to use the same old equipment
that was specially developed for it in the 1950s and 1960s
because it has little alternative.


12. (U) SNIM will spend $105 million on new equipment in 2008
and it is the largest Mauritanian buyer of U.S. goods. SNIM
purchases nearly all of its mining equipment (large trucks,
loading machines, electric shovels, digging and drilling
equipment, and bulldozers) from the United States, primarily
from Caterpillar, Bucyrus, and P&H. It also purchases all of
its locomotives from GM's Electro-Motive Division. It
currently has 21 locomotives and recently purchased eight
additional ones. The first two new locomotives will arrive
by 2010 to increase annual production to 14 million tons per
year and the remaining six will arrive by 2011 to increase
production to 18 million tons per year. Director of
Operational Production Mohamed Khalifa Ould Beyah said that
SNIM originally used locomotives produced by a French
company, but they were not able to withstand Mauritania's
harsh environment and constantly broke down. SNIM replaced
all of the French locomotives with GM locomotives specially
adapted for use in Mauritania. He said that the GM
locomotives have performed extremely well and many of the
original locomotives are still in use. In the coming months
SNIM intends to put out a bid for eight additional
locomotives to retire some of its oldest ones. The bid will
be open to all companies, but SNIM intends to purchase them
from GM because of its proven track record and the need for
standardization in the fleet to keep maintenance and
operating costs down. Because Mauritania is so far from its
suppliers, obtaining parts is difficult and time consuming.
There is a six to twelve month delay between the time a part
is ordered and the time it is delivered. This means that
SNIM has to maintain stocks of parts and supplies for at
least seven months. With over 95,000 different parts in use,
keeping new parts to a minimum is important.


13. (S) Security is an increasingly important concern in
Mauritania. After four terrorist attacks in Mauritania in
the past twelve months, there is growing awareness of the
threat posed by AQIM. In September, a group of Mauritanian
soldiers out on patrol were ambushed near the town of
Tourine, just 30 km from SNIM's mining operations in
Zouerate. There is speculation that SNIM was AQIM's intended
target. SNIM officials that EconOff spoke with were quick to
reassure that security was under control to try to establish

NOUAKCHOTT 00000639 004 OF 006


confidence in their operations. Most dismissed the recent
attack in Tourine as an isolated incident. While saying that
they were not concerned, actions taken by SNIM officials
during EconOff's visit clearly indicated that they were
nervous. EconOff traveled on SNIM's iron ore train 700 km
from Nouadhibou to Zouerate. Normally the train takes other
passengers during the trip, but SNIM officials refused to let
any passengers other than Embassy personnel on board. The
train normally makes seven to eight stops along the way, but
the train only made two stops: one to let another train pass
and another to change conductors at the midway point.
EconOff also had armed plain clothes police officers outside
of her hotel room at all times. Local residents of Zouerate
told Embassy FSNs that they had created the equivalent of a
neighborhood watch following the attack in Tourine. Stating
that they did not trust the military and police forces to be
able to provide security, they thought that it was necessary
to take matters into their own hands and were watching anyone
who did not belong.


14. (S) SNIM would present an inviting and ready target for
AQIM. Because revenues from iron ore mining make up such an
important part of the national budget and GDP and because
mining is such an important part of Mauritanian national
identity, an attack on SNIM could cripple the country and the
economy. SNIM could be a relatively easy target. Its
operations are located in northern Mauritania, a vast no
man's land. Operations are spread out over a relatively
large area and have little in the way of lighting, fencing,
or guards. SNIM officials said that they had recently taken
measures to step up security, but if they have, they are not
visible. For example, hundreds of large bags of nitrogen
used for explosives were clearly visible sitting outside
unsecured. The only thing separating them from the main road
100 feet away was a chain link fence with no barbed wire.
The train, which runs along a nearly 700 km track, is largely
unprotected. An attack on the railroad would bring mining
operations to a halt in the short-term until repairs could be
made, but would be much more damaging in the long-term by
creating a climate of fear, leading customers to reconsider
their long-term contracts with SNIM for fear that they would
not be fulfilled and investors to reconsider the feasibility
of making a major investment in the region. In a poor
country without a diversified economy, Mauritania is heavily
reliant on iron ore mining to support the economy and
government operations. A downturn in SNIM's production as a
result of an AQIM attack would devastate Mauritania's
economy, especially in the current context where a lot of
donor money has been frozen since the coup.


15. (C) SNIM officials that EconOff spoke with were quick to
distance the company from the government and the military
junta. All were unanimous in asserting that nothing had
changed in terms of SNIM's operations since the coup.
Although the state holds a 78% share, SNIM operates as an
independent company. SNIM officials explained that there is
a convention governing the relationship between SNIM and the
government, which essentially protects SNIM from government
interference. They also added that the vast majority of
SNIM's accounts are held in Europe, not Mauritania, which
gives them some measure of protection from the junta.
However, if the junta's financial situation continues to
worsen with the freezing of donor aid, it could always look
to SNIM as a source of hundreds of millions of dollars to
buoy its position. Comment: SNIM may certainly have reason
to believe that things will continue for the company
post-coup the same as they were pre-coup given the number of
coups and governments that the company has weathered in its
35 year history. On the other hand, things may be different
this time, especially as the company is an expansionary
phase. The EU has already frozen the money it had promised
for SNIM's new port facility. Foreign investors and banks
may be less inclined to invest in SNIM given the opaque
political situation, especially during the current economic
crisis. End Comment.


16. (C) The Mauritanian press reports that SNIM Director
General Mohamed Ould Sidi Mohamed Deyahi recently purchased a
whole new wardrobe of suits for General Aziz and brought his

NOUAKCHOTT 00000639 005 OF 006


personal tailor down from Morocco. Deyahi reportedly said
that General Aziz looked too much like a "mafioso" in his
usual cheap polyester suits. Post can neither confirm nor
deny this report, but post LES believe the report to be true.
They say that it is a tradition in Mauritania to purchase
gifts for one's boss to garner favor and keep one's job.
Deyahi is reported to be very close to both the military
junta and the businessmen who are actively supporting the
coup -- although he had called Charge in the past to
emphasize he is just a businessman with no connection to the
regime.. Deyahi was originally appointed director general of
SNIM by the last military junta, the CMJD. There is ample
reason to believe that he might have believed that his job
was at risk. The junta has recently replaced the directors
of almost all state owned companies, including the Port of
Nouakchott, the Port of Nouadhibou, SOMELEC (electricity
company),and SONIMEX (national import-export company) among
others. Deyahi likely feared that he would be the next to go
or that the junta would open a potentially embarrassing
corruption investigation into his tenure as the director
general of SNIM. Comment: Deyahi and his son Sidi Mohamed
Mohamed Aly Deyahi both applied for visas to travel to the
United States in the past week. Post has referred their
cases to the Department with the recommendation that they be
denied given Deyahi's apparent active support of the junta.
End Comment.


17. (C) EconOff also met with the mayor of Zouerate Yacoub
Ould Salem Vall. Vall, the first Afro Mauritanian mayor of
Zouerate, is a member of Messaoud Ould Boulkheir's APP party
and is strongly anti-coup. He stated that he has "no need"
for the governor (wali) or prefect (hakem) of the region. He
stated that he did not find them to be helpful and limits
contact with them to the extent possible, only going to seem
them when ordered to do so. Even as a SNIM employee, Vall
was much more open and willing to discuss the impact of the
coup and security on SNIM's operations than were other higher
ranking SNIM employees. He stated that while SNIM was
creating a security strategy and had already taken some
modest measures such as adding barbed wire, much still needs
to be done to change people's mentality about the importance
of security. Vall added that SNIM relies on foreigners to
come in regularly to perform certain maintenance operations,
but many had refused to come since the attack in Tourine
because of security concerns. Vall also said that even many
residents of Zouerate were scared. He said that he routinely
travels overland from Zouerate when he has business to attend
to in Nouakchott. When friends and neighbors heard that he
was intending to drive to Nouakchott just days after the
Tourine ambush, he said that many people approached him and
told him not to do so because it was not safe.


18. (C) Vall lamented that Zouerate has fallen into a virtual
"black hole" of development and that the city has become a
victim of infighting between the central government and SNIM.
The central government contends that it does not have to
provide financial resources to Zouerate because SNIM will
take care of the town. SNIM responds that it is a for-profit
company, not a charitable organization. It already gives
nearly all of its dividends to the central government;
therefore the government should provide money for development
to Zouerate just like it does to other towns. Caught in the
middle, Zouerate receives almost nothing. What work has been
done recently such as the paving of new roads and
refurbishing of schools was paid for primarily by the World
Bank. In addition, as Vall is strongly opposed to the coup,
whatever money that Zouerate was getting from the central
government has now been terminated. Vall also said that
Zouerate is faced with additional difficulties because SNIM
is exonerated from paying local taxes, which has led to a
battle between SNIM, the central government, and the city of
Zouerate. Zouerate says that SNIM owes it 1.5 billion
ouguiya ($5.75 million) in property taxes for the past two
years. The city's annual budget, including money for
development projects, is less than $400,000. SNIM normally
contributes about $17,000 per year. Vall said that the city
of Zouerate had reached an agreement with SNIM where it will
pay a little over $1 million to the city this year. The
agreement is far less than what the city claims SNIM owes it,

NOUAKCHOTT 00000639 006 OF 006


but it is nonetheless a significant increase compared to
previous years.


19. (U) Vall said that environmental problems are plaguing
Zouerate. There are severe water shortages in much of
Mauritania, but particularly in the north. He said that a
lot of research has been done into the water situation, but
there has never been any coordination between the Ministry of
Hydrology, the Ministry of Mines, and SNIM. As a result, the
problem has never been solved. He also said that a Moroccan
firm had conducted a study into the feasibility of recycling
waste water, but the city had never been able to find a donor
to fund a waste water treatment plant. Vall noted with irony
that SNIM had always managed to locate new water resources
for each new mine that it wanted to develop, but that it had
never been able to do so for the city. In addition to the
water shortages plaguing the town, Vall said that he believes
that there are high levels of contaminants and toxins in the
air and water as a result of the mining activities. He said
that he does not have the tools to be able to measure them,
but from anecdotal evidence, he believes that they must
exist. He said that a large proportion of the town's
residents are sick, but their symptoms cannot be explained.


20. (C) Comment: SNIM is at a turning point in its history
and has the opportunity to substantially increase production
and profits. With record demand and prices for iron ore, it
is well poised for the future. However, there are questions
as to whether SNIM will be able to fully execute its
development plans. First and foremost, financing is critical
for several of its new projects, and there is no guarantee
that it will fall into place, especially given the current
economic uncertainty. If current economic conditions
continue, it could drive the price of iron ore back down
again, essentially shutting down new development. The
current political situation in Mauritania is also a potential
problem. In the short term financing for the new port is at
risk. In the longer term buyers and investors could start to
look elsewhere if sanctions are implemented. In addition,
looking for short-term gain, the junta could drain SNIM's
resources, destroying one of the country's most important
resources in the long-term. Finally, security will be an
ongoing challenge. While nobody wants to acknowledge it,
investors are unlikely to invest in Mauritania if there is
not same degree of security. SNIM has weathered many storms
and will likely weather new ones that come its way, but some
may impede its ability to fulfill its potential. End
comment.
HANKINS