CBG MINING COMPANY PREPARES FOR THE WORST

C O N F I D E N T I A L SECTION 01 OF 02 CONAKRY 000265

SIPDIS

E.O. 12958: DECL: 05/11/2019
TAGS: EMIN PGOV PREL ASEC GV
SUBJECT: CBG MINING COMPANY PREPARES FOR THE WORST

Classified By: POL/ECON CHIEF SHANNON CAZEAU FOR REASON 1.4 B AND D


1. (C) SUMMARY. The Guinean Bauxite Company (CBG) is in
serious trouble with the worst of the effects of the global
economic crisis yet to come. Based on current projections,
the company expects to generate $12 million in revenues for
the Guinean Government in 2010, as opposed to $137 million in

2008. Since CBG provides approximately 80% of the national
budget, these projections point to a looming financial crisis
for the GoG. The company is taking measures to avert the
worst, but the Guinean Government appears to be watching from
a distance with little understanding of what lies ahead. END
SUMMARY.


2. (SBU) On May 6 and 7, Pol/Econ Chief traveled to
Sangaredi and the port of Kamsar to tour CBG's (Guinean
Bauxite Company) mining enterprise and discuss recent
economic developments. In Sangaredi, Pol/Econ Chief met with
Roger Thea, the Director of the Mine. In Kamsar, she met
with Bachir Diallo, the Director of the Port of Kamsar. Both
contacts are Guinean and long-time CBG employees. Thea was
trained in Guinea while Bachir was trained locally as well as
abroad, including university courses and technical training
in the United States. They have apparently been ordered to
switch hats in the next two weeks, with Bachir moving to
Sangaredi to run the mine and Thea moving to Kamsar to take
over port operations.

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BACKGROUND
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3. (SBU) Founded in 1969, CBG is owned by a consortium of
mining companies. The Guinean Government holds a 49% share
while the rest is currently distributed among Rio Tinto,
Alcoa, and DadCorp. Most contacts, including CBG officials,
estimate that the Government of Guinea derives approximately
80% of its annual revenue from CBG. The company mines the
country's largest and richest known bauxite reserve. With
deposits averaging about 60% purity, the bauxite is
considered to be of premium quality, among the best in the
world. The mine is believed to be sustainable for at least
another 25 years at its current purity production, and for
hundreds of years more than that at lower purity rates.

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CBG ANTICIPATES DELAYED IMPACT OF GLOBAL ECONOMIC CRISIS
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4. (C) According to the CBG mine director Thea, 2008 was a
record year for the company with 30.7 million tons in
exports. He said the company usually averages about 13
million tons per year. However, the global economic crisis
has deeply affected CBG's projections, the worst of which
have yet to take effect. Thea said they were initially
shooting for a target of 13.2 million for 2009, but shortly
after the markets began to crash, CBG's partners requested
that the target be dropped down to the contract minimum of
11.3 million tons.


5. (C) Under the terms of the contract, CBG's partners are
obligated to purchase a minimum of 11.3 million tons annually
from the GoG, regardless of whether or not that bauxite is
actually exported. Thea explained that CBG's partners will
pay the GoG for the 11.3 million tons, but likely stockpile
much of it in Guinea until prices begin to climb again.
However, the long-term effect of the reduced demand is that
bigger stockpiles mean that CBG's partners are likely to
continue wanting to adhere to the contract minimum into the
foreseeable future. In addition, when global prices do begin
to rise, the GoG will not benefit immediately because they
will already have collected their revenues from a time when
prices were low.


6. (C) Another consequence of the contract structure is that
CBG and the GoG will not really begin to feel the impact of
the global decline in bauxite prices until 2010. Thea
explained that the GoG's price is based on the previous
year's average price over the first quarter. Therefore,
throughout 2009, the GoG is charging based on early 2008
prices. At the beginning of next year, they will have to
charge based on the very low prices of early 2009. Bachir,
the CBG port director, described the situation in stark
terms. "In 2008, CBG generated $137 million in revenue for
the government...in 2009, we expect that total to drop to $82
million, and then to $12 million in 2010."

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A SINKING SHIP
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CONAKRY 00000265 002 OF 002




7. (C) The financial projections have CBG officials worried.
Thea said he is already working to try and cut costs in
order to cushion the landing when the reality of the economic
crisis sets in six months down the road. He likened CBG's
situation to that of a ship in a storm - "our only option is
to start throwing goods overboard in order to keep ourselves
from sinking." Thea said he is trying to establish a minimum
budget to keep the company afloat.


8. (C) Both CBG officials individually acknowledged that a
major problem is the fact that CBG gave each of its 2400
workers a 100% salary increase towards the end of 2008.
Bachir (Kamsar) told Pol/Econ Chief that the company's
payroll had increased from $21 million to $35 million. When
asked who had authorized the pay increase, Bachir said it was
a high-level company official who has since been fired.
While Bachir was quite negative about the salary issue, Thea
put a positive spin on it, saying that CBG's workers are very
happy and will likely be more willing to work with the
company to weather the crisis. He said they had even
independently suggested a temporary reduction in wages in
order to avoid layoffs.


9. (C) Evidence of the company's budget were visible
throughout the tour of the mines. Just one year ago, CBG was
mining 24 hours a day, seven days of week. Within the last
few months, they have cut out one shift and are now mining 16
hours a day. Production is down by approximately 40%. In
addition, CBG has reduced its supply of electricity and
running water to the surrounding communities. What used to
come every day is now provided only three days a week.

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CBG ON ITS OWN
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10. (C) Despite these efforts to reduce costs, Bachir said
much more needs to be done. He passed a confidential,
impressive powerpoint report he sent to the GoG a few months
ago to advise government officials of the impending crisis.
Pointing to a 60% decline in metal prices over the last six
months, Bachir said CBG needs to drop its operating costs
from its current rate of $22/ton to $14/ton in order to
increase projected government revenues from the anticipated
$12 million in 2010 to a target of $80 million. "I'm moving
to Sangaredi because the government has asked me to cut
operating costs at the mine...good luck."


11. (C) When asked whether the CNDD or other government
officials really understand what lies ahead, Thea (Sangaredi)
said that they did not understand at first, but are now
beginning to get a better sense of how the mining sector
works. He claimed that the GoG is concerned about CBG, but
has not offered any solutions. "They are just reassuring us
that they support our efforts to find a solution," Thea said.
Bachir was much more critical. He said that in the four
months since the coup, neither the prime minister nor the
minister of mines have visited CBG operations. He has had no
response to his report of impending doom and doubts that the
GoG is even considering a strategy to cope with the projected
loss of revenue. Bachir added that he knows CNDD President
Dadis from way back, and that he had met with him a month ago
to explain the situation. "He is useless," Bachir said.

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COMMENT
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12. (C) It is clear from the mine visit that the GoG has not
yet begun to feel the brunt of the global economic crisis.
Revenues are down, but CBG is headed for major challenges in

2010. The fact that neither the prime minister nor the
minister of mines have even traveled the four hours out to
Boke to see the situation for themselves suggests that the
GoG does not have a good grasp of the looming crisis.
Cutting costs is going to be a tough order since most Guinean
workers do not really understand the concept of a "layoff,"
and despite the company's reassurances to the contrary,
salary reductions are never popular. If the global alumina
market recovers today, it could still take CBG years to
recover. Given the GoG's heavy reliance on the mine for the
national budget, the situation points to disaster. END
COMMENT.
RASPOLIC