BURMA: IVANHOE TRYING TO DIVEST, SHUTS MINE

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000763 SIPDIS STATE FOR EAP/MLS; INR/EAP; OES FOR JMIOTKE AND ACOVINGTON; EAP FOR JYAMAMOTO; EEB FOR TSAEGER DEPT PLEASE PASS TO DEPARTMENT OF ENERGY PACOM FOR FPA; TREASURY FOR OASIA:SCHUN E.O. 12958: DECL: 09/26/2018 TAGS: ECON EMIN PGOV PREL BM SUBJECT: BURMA: IVANHOE TRYING TO DIVEST, SHUTS MINE RANGOON 00000763 001.2 OF 003 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d). Summary -------------- ¶1. (C) Myanmar Ivanhoe Copper Co., Ltd. (MICCL),a joint venture between Canadian company Ivanhoe Mines Ltd and state-owned Mining Enterprise-1, operates one of Burma's two copper mines. Ivanhoe continues to have financial difficulties with the GOB - including a freeze on its bank account and revenue shares following a dispute over tax payments - and is trying to sell its shares in the company. MICCL is currently negotiating with a consortium of three Chinese companies to purchase Ivanhoe's stake; Ivanhoe management is confident the GOB will approve the sale. MICCL shut its copper mine in April 2008 because it was unable to cover the mine's operational costs, and it has no plans to resume operations until the GOB allows Ivanhoe to divest. End Summary. Status of Ivanhoe Copper Mine -------------- ¶2. (C) Myanmar Ivanhoe Copper Co., Ltd. (MICCL),a 50/50 joint venture between Canadian-owned Ivanhoe Mines Ltd. and state-owned Mining Enterprise-1, began operations in Burma in ¶1994. With a current staff of 1,800 Burmese and two expatriates, MICCL operates the Sabetaung-Kyisintaung (S&K) Mine near Monywa, approximately 100 miles north of Mandalay. The S&K mine is the country's only copper mine operated by a foreign company, and is one of two copper mines in Burma. Per the joint venture contract, revenues are split 65/35 between Mining Enterprise-1 and MICCL. MICCL Acting General Manager Glenn Ford explained that between 1994 and 2005, MICCL used its revenues to pay back a USD 120 million loan from the Japanese, maintain the mine, purchase and import new equipment, and cover permit fees. Mining Enterprise-1 pocketed its share of revenues and did not reinvest any profits into the mine. ¶3. (C) According to Ford, the S&K mine has enough copper deposits to produce more than 120,000 tons annually. Until mid-2006, the mine produced 39,000 tons of copper annually. However, MICCL could not sustain these production levels, due to infrastructure limitations, lack of equipment, and electricity shortages. Ford complained that while the Burmese Government wanted the mine to produce as much copper as possible, the Ministry of Mines has refused since 2007 to give MICCL the necessary permits, such as import licenses for heavy machinery, to maintain or develop the mine. In 2007, S&K mine produced approximately 20,000 tons of copper, of which 90 percent was exported. On paper, MICCL earned more than USD 160 million in 2007; due to ongoing financial disputes between the Burmese Government and Ivanhoe, however, Ivanhoe did not receive its share of revenues. GOB Turning the Screws -------------- ¶4. (C) Ford explained that although MICCL is technically a joint venture, Mining Enterprise-1 calls all the shots and controls the company's finances. Ivanhoe has had problems with the GOB since the late 1990s, and the Canadian company has been looking to divest its shares since 2006. According to Ford, MICCL paid off its debt to the Japanese in 2005, enabling it to earn more than USD 150 million in revenues as RANGOON 00000763 002.2 OF 003 the price of copper rose by 70 percent. Per its contract, MICCL paid the government four percent in royalty fees and 30 percent income tax annually until 2007. However, Ford noted that the GOB in 2005 demanded that MICCL pay an additional 8 percent in commercial tax retroactive to 2002, totaling USD 60 million. When MICCL refused to pay, arguing that its contract exempted the company from commercial taxes, the GOB seized MICCL's dollar-denominated account at the Myanmar Foreign Trade Bank (MFTB). Ford acknowledged that both MICCL and Mining Enterprise-1 were joint owners of the MFTB account; this account held more than USD 150 million. MICCL lodged a formal complaint with the Ministry of Mines, but has yet to receive a response. ¶5. (C) In 2006, Ivanhoe Mines Ltd decided to divest from Burma and began actively to seek a company to buy its partnership in MICCL. Ford told us that South Korean-owned Daewoo made a bid, but the GOB refused to approve the sale in ¶2007. For the past year, Ivanhoe has been negotiating through regime crony Tay Za with a consortium of three Chinese companies -- WanBo Copper, Norinco Copper, and Aluminum Corporation of China (Chalco) -- that want to purchase its contract. Ford informed us that the negotiations are going well and that the Minister of Mines has indicated the GOB will approve the sale. He opined that the consortium's connections to Tay Za play a pivotal role in the negotiations with the GOB. ¶6. (C) With no revenues coming in since 2005, MICCL has struggled to survive. It has not purchased new equipment since 2006, resulting in a drop in production and an overall drop in gross revenues, from USD 312 million in 2006 to USD 160 million in 2007. Ford told us that Ivanhoe has been covering the mine's operating costs since 2006, estimated at more than USD 50 million, but it is no longer willing to do so. In April, MICCL halted all production at S&K mine. According to Ford, MICCL has no plans to resume operations until the GOB allows Ivanhoe to divest. He admitted that by shutting operations, Ivanhoe places its ownership of the mine at risk, since under the contract, the GOB can confiscate the mine if it is not operational for twelve consecutive months. While the GOB, through Mining Enterprise-1, may want to take control of the mine, he observed, it lacks the technical staff, capacity, and experience to run the mine. He opined that the GOB realizes its best bet to keep the mine operational is to allow Ivanhoe to sell its shares to the Chinese. Comment -------------- ¶7. (C) As the price of copper rises on the world market, (currently USD 8,000 per ton, up from USD 3,000 in 2005) the GOB will put pressure on MICCL to resume operations. However, Ford is adamant that Ivanhoe will no longer foot the bill for MICCL if it does not receive its fair share (35 percent) of the profits. Ivanhoe remains committed to divesting, and expects to sell its shares to the Chinese consortium within the next year. However, the longer the mine remains non-operational, the less attractive it will be to potential investors and the greater the risk the GOB will take over control. Nevertheless, Ivanhoe appears so desperate to divest that it is willing to risk its entire investment. ¶8. (C) Embassy Rangoon understands that the Department of the Treasury's Office of Foreign Assets Control (OFAC) is RANGOON 00000763 003.2 OF 003 thinking of imposing financial sanctions on MICCL under the JADE Act. The JADE Act specifies that financial sanctions should be placed on Burmese individuals and entities that provide substantial economic and political support for the regime. Given that MICCL is a joint venture between Mining Industry-1 and Canadian-owned Ivanhoe Mines, a question arises whether the JADE act is intended to apply to joint ventures that include substantial foreign shares. To the best of our knowledge, U.S. financial sanctions in the past have not targeted foreign companies, with the exception of Steven Law's solely-owned Singapore-registered companies. Obviously, bringing foreign-Burmese joint ventures under JADE Act sanctions could create concerns in a number of countries, including particularly the U.S. (Chevron) and France (TOTAL) regarding their production sharing contracts with MOGE. DINGER