GOLD INDUSTRY LURES INVESTORS GOOD AND BAD

UNCLAS SECTION 01 OF 03 BAMAKO 000225

SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND ETRD EINT EAGR ML
SUBJECT: GOLD INDUSTRY LURES INVESTORS GOOD AND BAD

REF: 08 BAMAKO 00199


1. Summary: Comprising an estimated 70 percent of Mali's
exports, gold is frequently cited as the country's most
important financial resource and a key engine for its
economic growth and development. In light of this, Mali held
its third annual mining and petroleum conference in Bamako
from March 30 to April 2. The conference assembled current
and potential investors and public officials involved in
these sectors. The theme of this year's conference, "Mines
and Community Development", also evoked what some view as the
gold mining industry's insufficient contribution toward
economic development in Mali. While the revenues Mali
receives from gold are a significant share of the country's
exports, critics argue that this has not benefited average
Malians. In addition to increased debate about gold mining's
link to development, the ever expanding spotlight on Mali's
legitimate gold industry is also attracting more and
increasingly creative illicit gold export scams. End Summary.

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Mali's Gold Mining Industry
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2. Mali is Africa's third largest gold producer after South
Africa and Ghana. Since ramping up production in 2000, gold
extraction has accounted for the largest share of the value
of Mali's exports, reaching 70 percent in 2008. While the
total volume of gold production in Mali is significant, its
gold industry is all the more attractive because the
operating costs of its open pit mines are less than half the
world average. For the past several years, the Malian
government has touted investment opportunities in the sector,
hoping to leverage rising gold prices to increase production
and fuel economic growth. To this end, Mali held its third
annual mining and petroleum conference in Bamako on March 30
through April 2. Opened by Prime Minister Modibo Sidibe, the
conference featured dozens of current and prospective private
sector investors, public sector officials, and
representatives of the international donor community.


3. Mali has six industrial gold mines, two of which, Sadiola
and Morila, have accounted for most of the country's
production. Analysts suggest that Mali's gold mining
industry is in permanent decline, however, with industrial
gold production having peaked in 2002 at 62 tons. Since
then, production has ebbed and flowed, falling to 45 tons in
2004 and rising to 61 tons in 2006, subsequently falling to
50.8 tons in 2008. The decline in output has so far been
offset by rising international gold prices, which reached a
high of USD 1,000/troy oz in mid-2008. As a result,
government revenue from gold operations in 2008 was higher
than the CFA 34.4 billion (USD 71 million) earned in 2007.


4. While the decline in production has not affected GOM
revenues, it has increased costs for operators. One company,
Anglogold Ashanti, reported an operating loss on two mines
for the third quarter of 2008. To mitigate these losses,
Anglogold invested in new technologies to extract high-grade
sulfide ores at Sadiola. The decline in output has also
placed renewed importance on efforts to develop new mines,
such as Randgold's Yalea and Gara mines. Some investors,
however, have had difficulty raising the funds they need from
international capital markets due to global financial
turbulence. Australia's Resolute Mining, for example, was
able to raise only USD 55 million of the required USD 73
million to develop Mali's Syama pit. Junior mining companies
have also had to turn to new partners to finance their
projects.

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GOM Revenue from Gold Mining
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5. Malian government revenue from the gold industry is made
up of the dividends it receives as a shareholder in the mines
and of the taxes, customs, and royalties paid by the mining
firms. Mali's 1999 mining code, implemented in 2003, imposed
on mining firms a 35 percent income tax and a dividend tax of
between 12.5 and 18 percent. The GOM retains a 20 percent
equity in each mine. Operators receive investment incentives
such as the duty free import of heavy machinery used in
production and refining, as well as the duty free import of
fuel used to power generators at mining sites.


6. Between 1994 and 2004, the Malian government derived a
total of USD 624.5 million in royalties, taxes, customs and
dividends from the gold mines, an average of USD 57 million
per year. In 2007, following the boom in production of the
previous year, revenues reached CFA 130 billion (USD 260
million). All told, the mining sector, in which gold is the
primary commodity, comprises between five and fifteen percent

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of Mali's GDP. Mali's 2009 budget estimated that revenues
from gold would reach CFA 120 billion (USD 240 million).
This will be offset, however, by the GOM's value-added tax
(VAT) refund to companies for the years 2006-2007, estimated
at CFA 60 billion (USD 122 million),1.5 percent of Mali's
GDP.

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"Gold Doesn't Shine for All Malians"
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7. The promise of gold's contribution toward Mali's economic
diversification and growth has drawn skepticism from some
observers, who claim that the average Malian has been
conspicuously absent from this supposed development panacea.
A 2006 study on the socioeconomic effects of gold mining in
Mali, which was commissioned by the World Bank and undertaken
by Norway's Chr. Michelsen Institute, argued that communities
in the vicinity of the Sadiola and Morila mines have seen
little benefit from the industry. An article in the Malian
press on the eve of the mining conference declared that,"gold
doesn't shine for all Malians", despite the fact that
government revenue from the industry totaled CFA 130 billion
(USD 260 million) in 2007. In response to such criticism,
the Malian government indicated it would establish
public-private partnerships using mining revenue to build
much needed infrastructure around the mines as well as
contribute to community development. An article in the
government's official news outlet on March 31 stated the GOM
would give renewed attention to residents in the vicinity of
the mines, providing services such as potable water and
health clinics. One such model for development has been the
ongoing partnership between the Morila mine, USAID, and the
Commune of Sanso to strengthen local government capacity to
more effectively use mining revenue toward community
development.

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Artisanal Gold Mining Unearths Scams
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8. In contrast to its industrial mining industry, Mali's
artisanal gold mines, which produce an average of 2 tons each
year, are poorly regulated and thus provide fertile ground
for scams. The Embassy frequently receives requests from
prospective U.S. investors seeking to export gold from Mali.
Most of these scenarios involve the export of gold dust,
which is illegal in Mali (reftel). In one recent instance,
the Embassy was contacted by the U.S. based attorney of a
potential investor, allegedly negotiating the purchase of one
ton of gold dust from a Malian artisanal mining cooperative.
We informed the American attorney that the export of gold
dust was illegal in Mali. After conducting some brief
background research, we also determined that the Malian
attorney the U.S. investor had hired to oversee the
transaction was not, in fact, a registered attorney and had
provided his American partners with fabricated court
documents designed to mimic Malian legal rulings.


9. The latest gold scam reported in the Malian press involved
a group of Russian nationals who reportedly lost CFA 6
billion (USD 12 million). As reported by one Malian
newspaper on April 1, the complex scheme involved a motley
crew of nationalities, diplomats and private citizens. The
Russians were allegedly introduced to two Malian businessmen,
owners of a nightclub and travel agency, via the defense
attache of the Embassy of Guinea-Bissau in Moscow. The
Russians traveled to Mali to meet their contacts, from whom
they purchased 30kg of gold (the articles did not specify
whether this was in the form of dust or bars). The Malians
then put the Russians into contact with a member of the
National Assembly of Benin and a Togolese businessman, who
offered to sell the Russians an additional 80kg of gold.
After having received their payments, the sellers reportedly
absconded, having given the Russians none of the gold for
which they had paid. The article quoted the Guinea-Bissau
defense attache as claiming he used his cut of the deal - CFA
376,250,000 (USD 752,500) - to charter an airplane. The
Malians involved in the scheme were reportedly arrested on
March 27 and are awaiting trial.

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Comment: Gold May Not Prove the Nest Egg that Mali Hoped
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10. The high price of gold on the global market, and Mali's
ranking as the third largest producer in Africa, has placed
Mali on the center stage for investment in the sector. The
countercyclical nature of the gold industry vis a vis other
commodities, such as cotton, has buffered Mali from the
global financial crisis and compensated for falling revenue
from cotton exports. The Malian government has duly

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attempted to take advantage of this in order to diversify its
economy and fuel economic growth. Declining output and
rising operational costs may, however, stymie these efforts
and leave Mali even further exposed to the volatility of
commodity prices on the world market.
MILOVANOVIC