ERITREA: GERMAN BANKS BAILING ON BISHA?

C O N F I D E N T I A L ASMARA 000378


E.O. 12958: DECL: 10/27/2019
TAGS: ECON EMIN PREL ER GM
SUBJECT: ERITREA: GERMAN BANKS BAILING ON BISHA?

REF: A. ASMARA 308

B. 20OCT09 PASI/GAYTON-HAMIEL E-MAIL


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


1. (C) WARY OF POLITICAL RISK OF INVESTING IN ERITREA?
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The German government extended a credit guarantee to a
consortium of mostly German banks for a commercial loan of
$146m to Eritrea's Bisha mining project (REF A). The exact
terms of this credit guarantee are not clear, but likely
contained the sort of political risk insurance offered by
OPIC to American investors abroad. Following up on initial
information that the German government has pulled the plug on
this credit guarantee (REF B),Post was told by an
Asmara-based European diplomat that "a German Secretary of
State for Foreign Affairs" has revisited the credit guarantee
and recommended that it be rescinded due to Eritrea's spoiler
role in the Horn of Africa and potential UN or AU sanctions.
When the German ambassador to Eritrea was asked about this
recently, his curt reply was, "That's secret." The European
diplomat said the German ambassador is extremely upset with
Berlin for caving in to what he sees as American pressure and
is considering resigning.


2. (C) IMPLICATIONS FOR THE ERITREAN MINING SECTOR
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The stock of Nevsun, the Vancouver-based Canadian mining
company that owns most of Bisha, has risen by more than 50%
recently, based on promising news from Eritrea. This has
enabled Nevsun to add some $29m in badly needed private
capitalization. A leading industry analyst describes Bisha
as "one of the simplest and most attractive ore deposits in
the world." Even if the German credit guarantee has been
withdrawn (as seems to be the case) Bisha will continue,
although the ambitious schedule of beginning production in
the second half of 2010 may slip. Bisha's gold (worth about
$1b at today's prices) will be extracted within two and a
half years and be refined in Switzerland and Canada, with
most of the gold revenue accruing to Nevsun for cost
recovery. Once Bisha's gold cap is removed, the rich copper
(to be smelted in India and Europe) and zinc deposits will be
exploited for another eight to ten years. This "world-class"
discovery is bound to be developed, but by what combination
of partners and on what schedule?

Key questions:

1) Will the withdrawal of the official German credit
guarantee (if true) cause the consortium of German banks to
pull out or will the banks find another guarantor?

2) If the (mostly) German commercial loans are no longer
available, will the Industrial Development Corporation of
South Africa, which already has opened an $89m debt facility
for Bisha, increase its participation? How about the Chinese
banks that have lent $25m?

3) If Nevsun and the Eritrean government have to refinance
the Bisha project, what sort of additional political risk
costs will they have to pay and how much will it delay the
project?


3. (C) ...AND BEYOND
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Eritrea,s economy is running on fumes. It is heavily
indebted and plunging remittances have nearly dried up its
hard-currency reserves. The stoic Eritrean people are used
to hardship and sacrifice, but the regime's chronic
mismanagement of the economy has caused Isaias' political
capital to fall to the lowest point in years. Private
citizens and the few remaining private companies in Eritrea
are hoping that once Bisha comes on line, more food, fuel,
and jobs will be available. So far the regime has refused to
take the reformist medicine prescribed by the IMF and World
Bank, believing it can limp ahead to the date when Bisha
comes on line. If that date is delayed due to the need for
financial restructuring, Chinese and South African banks may
move into the void, ordinary Eritreans will have to go
without for longer, and the government may have to reconsider
a reformist deal with the international financial institutes
to ease its debt burden and other financial woes.

McMULLEN