VIETNAM'S PLANS FOR BAUXITE EXPLOITATION

UNCLAS SECTION 01 OF 04 HANOI 000417

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SUBJECT: VIETNAM'S PLANS FOR BAUXITE EXPLOITATION

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1. (SBU) Summary: The Government of Vietnam (GVN) has spent several
years developing plans to exploit Vietnam's massive bauxite
reserves, estimated as the world's fourth or fifth largest. Despite
environmental and national security concerns, and popular anxiety
over Chinese participation, the highest levels of the GVN and the
Communist Party have remained committed to an ambitious USD 15
billion initiative to mine bauxite, process aluminum, and transport
the finished product 300 kilometers to a new port. While a Chinese
company has begun construction on two alumina processing facilities
in the Central Highlands, the GVN, though the State-owned Vietnam
National Coal-Mineral Industries Group (Vinacomin),hopes to join
with other international partners, such as Alcoa, to fully develop
its aluminum potential. Unsteady markets for aluminum and the
global financial crisis have not dissuaded the GVN from its goals,
though it has acknowledged possible delays.

Comment:
--------------


2. (SBU) To our modest surprise, GVN officials provided much-greater
detail about their plans for the bauxite sector than we had expected
or that we have received in similar meetings relating to other
natural resource exploitation or environmental issues. Most likely,
this reflects GVN worry that growing public concern over
environmental impacts and Chinese involvement in the project
(septel) might dissuade Alcoa from continued participation. With
BHP Billiton's already-announced postponement, Alcoa's possible
postponement or departure would leave the Chinese as the project's
sole foreign participant and likely market. This would further feed
the public perception that the GVN was ceding economic (and possibly
territorial) control over the project to China and its unpopular and
environmentally unfriendly technologies. End comment

Bauxite Reserves
--------------


3. (SBU) Officials at the Ministry of Industry and Trade (MOIT)
estimate Vietnam's bauxite reserves at about 5.4 billion tons, equal
to about 2.4 billion tons of refined bauxite, and the fourth or
fifth largest reserves in the world. The highest quality (up to
40 percent aluminum oxide) and largest-sized bauxite reserves are
concentrated in the Central Highlands provinces of Dak Nong and Lam
Dong and continue across the border into Cambodia (Note: Laos also
has non-contiguous bauxite reserves across the border from the
central province of Quang Nam). Though the Central Highlands are
rich with coffee, tea and rubber production, GVN officials claim
that most bauxite is located in bare, unforested areas, typically
from four to twelve meters below the surface on the crest of hills.


Many Years of Study
--------------


4. (SBU) In the early 1980s, the Soviet Union and Hungary explored
the possibility of bauxite mining but concluded that the
environmental damage would be too great and instead urged an
emphasis on cash crops, such as pepper, rubber and coffee.
Subsequent Chinese plans to develop the bauxite mining sector did
not receive GVN approval, most likely due to Vietnam's concerns that
China, not Vietnam, would receive the added value from aluminum
processing. However, as Vietnam continued to develop, the GVN,
possibly prompted by its Chinese counterpart, revisited the
possibilities of bauxite and by the early part of this decade was
looking to create a large-scale mining and refining project.

High-Level GVN and Communist Party Commitment
--------------


5. (SBU) The GVN and the Communist Party repeatedly have identified
bauxite/alumina development as important for economic development in
the Central Highlands. The 10th Communist Party Congress in 2006
highlighted bauxite as an area for state investment, and in 2005
MOIT initiated plans to develop the sector through 2015. Most
recently, in November 2008, Prime Minister Nguyen Tan Dung issued
Decision 167/2007/QD-TTg approving the exploration, exploitation,
processing and use of bauxite through 2015. Bauxite development has
frequently been raised in high-level government-to-government and
party-to-party talks with China, including the joint statement made
during the November 2006 visit to Vietnam by Chinese President Hu
Jintao, which noted the countries' desire to "immediately discuss
and carry out large projects such as the Bauxite one in Dac Nong..."
and the joint statement issued during Vietnamese Communist Party
Secretary Nong Duc Manh's June 2008 visit to China, which noted that
the two sides would "enhance cooperation in projects such as bauxite
in Dac Nong." Outside groups monitoring the project note that this
is a top-down effort with relevant decisions made by the Prime
Minister, Ministry of Industry and Trade and Vinacomin.


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Ambitious Bauxite Sector Plans
--------------


6. (SBU) The GVN has initiated construction of two moderate sized
projects in Dak Nong and Lam Dong provinces as the first steps in a
hoped-for USD 15.6 billion initiative that will include several
bauxite mines and aluminum refineries, linked by a 300-kilometer
transportation link from the Central Highlands to a new deepwater
seaport built specifically to handle bauxite at Khe Ga cape in
coastal Binh Thuan province, about 200 kilometers north of Ho Chi
Minh City. (Comment: These roads and ports are part of a broader
Central Coast development program that has some port people
wondering why Vietnam needs half a dozen ports on the Central Coast
when barely one has enough cargo to be considered functional now.
End comment.) According to Nguyen Khac Tho, Deputy Director of
Heavy Industry at MOIT, the GVN's bauxite development plan assigned
Vinacoin the lead in bauxite, alumina, and aluminum planning and
focuses on capacity, financing, and technology. Under the plan,
production would reach 13-15 million tons of alumina and 0.4-0.8
million tons of aluminum annually by 2025. However, MOIT, MONRE and
Vinacomin contacts noted that aluminum production hinges on the
ability to obtain enough power for energy-demanding aluminum
refining, which will require heavy investment in new power
projects.

China's Chinalco to Build First Two Facilities
-------------- --


7. (SBU) According to MOIT's Tho, China's Chinalco won a bid to
construct the Lam Dong and Dak Nong bauxite/alumina facilities as
part of an Engineering, Procurement and Construction (EPC) contract.
Each have a capacity of 600,000 tons of alumina per year, though
initial capacity will be set at 300,000 tons at each facility
annually. Vinacomin will be responsible for facility operations and
will perform the exploitation and bauxite separation. According to
Lien, Chinalco will provide 4,000 Chinese workers (2,000 per
project) at peak periods; higher numbers reported in Vietnamese
blogs were exaggerated. Chinalco would provide training and
technology transfer to Vinacomin, though approximately 100 Chinese
professionals will continue to work in the alumina production
facilities after construction.

Potential Joint Ventures with
U.S., Chinese, and Australian/UK Companies
--------------


8. (SBU) Beyond the initial two projects, Vinacomin has ambitious
plans for aluminum production joint ventures following the
completion of transportation links to Binh Thuan. While the global
economic downturn has caused GVN to re-evaluate projects and push
targets out from 2015 to 2020, it does not plan to down-size its
projections. According to Tho, Vinacomin is looking at three
primary facilities in which Vinacomin will hold 60 percent shares
and foreign partners up to 40 percent (alternately, additional local
partners, including the private sector, may take up to 9 percent,
leaving Vinacomin with a 51 percent stake). Lien from Vinacomin
added that the GVN was considering allowing foreign partners have
100 percent control of any future aluminum processing. China's
Chalco will develop alumina production of 1.9 tons from Quang Son in
Dak Nong; Alcoa will develop alumina production of 1.5 to 2 million
tons (eventually up to 4 million tons) at Gia Nghia in Dak Nong; and
BHP Billiton (Australian/UK) to develop alumina production of 1.5 to
2 million tons (eventually up to 4 million tons) in Dak Nong.


9. (SBU) Vinacomin looked most positively on the Alcoa project, as
MOIT believed that Alcoa had agreed to participate in transportation
infrastructure construction -- a prerequisite to a final agreement.
In June 2008, during Prime Minister Nguyen Tan Dung's visit to
Washington, Alcoa and Vinacomin signed a Cooperation Agreement to
study the feasibility of developing a bauxite mine and alumina
refinery. By contrast, though Vinacomin and BHP Billiton had an MOU
and the PM visited London to review, due to economic downturn, BHP
Billiton had postponed its joint venture. However, international
aluminum experts cited poor world economic conditions, plunging
global commodity prices and the ongoing backlash in Vietnam against
bauxite mining as reasons why Alcoa could face a long delay in its
plans for Gia Nghia.

Transportation Infrastructure
--------------


10. (SBU) The GVN will choose from a new railway, a rebuilt and
expanded road system, or a pipeline to transport bauxite-related
products to the coast for shipment to export markets. MOIT has
initiated a pre-feasibility study for the rail project from Central
Highlands to coastal Binh Thuan province, which would also provide
passenger and other cargo service. The proposed railway will be
constructed in two phases, each costing USD 1.5 billion, which will

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be funded from the GVN budget and contributions from partners (Note:
According to Liem, Alcoa balked at this cost estimate and the GVN
has asked an Australian consulting firm to recalculate. Alcoa's
Walkmeyer made similar comments in his meeting with the Ambassador
and recommended building an above-ground pipeline, converting the
raw bauxite into "slurry," and moving it via pipeline from the
central highlands to the coast for refining and eventual shipping).
The seaport will be able to initially handle 3 million tons of
alumina per year, with future expansion to handle larger volumes.
Vinacomin's Lien stated that once Vinacomin locates financing, the
first phase of the seaport project will cost USD 250 million.
Expansion plans may cost up to USD 1 billion and the GVN is looking
to cooperate with foreign partners.

Financing and Markets
--------------


11. (SBU) Financing for the initial two projects, budgeted at USD
1.5 billion, is coming from the Vinacomin budget and commercial
loans, while larger, future plans will depend upon commercial loans
and contributions from partners. GVN contacts did not discuss
turning to multilateral development banks or donors, such as JICA,
for assistance, and the World Bank and Asian Development Bank
confirmed that they had not been approached for loans and that they
did not contemplate entering this sector. According to Lien,
Vinacomin initially will focus on alumina production, as prohibitive
energy costs make aluminum exports unlikely for several years.
According to Tho at MOIT, initial alumina production will flow to
China, though Vietnam would look at exports to other countries, such
as Australia or the United States, depending on transportation
costs. However, according to Lien, Vinacomin recently signed a
contract with Yunnan Metallurgy in China under which Yunnan
Metallurgy has agreed to purchase all alumina from initial projects
in Dak Nong and Lam Dong for 30 years. Larger aluminum projects
will rely on foreign partners to help with aluminum sales. Again,
Vinacomin expects to look at the China market, though it is also
considering the Middle East, Japan and Russia.

The Environment
--------------


12. (SBU) MONRE, MOIT and Vinacomin officials stated that the Prime
Minister and Deputy Prime Minister had tasked project developers
with finding ways to best protect the environment. To that end,
MONRE and Vinacomin officials have been studying how other bauxite
and alumina producers manage environmental concerns. Recently,
Vinacomin sent engineers to Australia and China to learn the best
production and pollution management technologies, while MONRE sent a
team to Guangzhi to study how China manages red mud wastes produced
during bauxite exploitation. Vinacomin will adopt technologies and
techniques from its international partners. For initial projects,
Chalieco will transfer Chinese technology, but will follow
international standards. MONRE and Vinacomin also noted agreements
with Alcoa and Russia's RusAl to develop better bauxite
technologies. Vinacomin planned to use minimal land surface to mine
and would recover all mined areas, would reuse water supplies
several times in the bauxite cleaning and separation process to
limit wastewater, limit hazardous wastes, and follow Alcoa practices
on handling red mud to ensure the smallest environmental impacts.

Environmental Impact Assessments
--------------


13. (SBU) In accordance with Vietnamese law, Vinacomin must prepare
Environmental Impact Assessments (EIAs) prior to construction of
each element of the overall project, including mining, processing,
infrastructure construction and transportation. However, Vinacomin
was unsure whether it would prepare a Strategic Environmental
Assessment (SEA) looking at the environmental impacts of the project
as a whole, as GVN law did not require such an undertaking when the
project was approved (though it does so now). Nor, is it clear
whether EIAs for individual components will look at cumulative
environmental impacts of these components together with other
related initiatives. Vinacomin prepared EIAs for the initial phase
of bauxite/alumina projects in Lam Dong and Dak Nong and will
prepare supplements when those two facilities are expanded to full
capacity of 600,000 tons per year. Vinacomin stated that it hired
expert consultants to make sure that the EIAs relied upon
international standards and that it provided training to local
residents (including many poor, ethnic minorities) to ensure they
could participate in the EIA process. According to MONRE, which has
approved these documents, the EIAs cover all aspects of
bauxite/alumina mining and production, though they do not cover
aluminum processing (not likely to happen at the two facilities) or
transportation. The EIAs covered four main areas: soil topography
after bauxite removal, water (surface water used in bauxite
production, not groundwater, as GVN believes layers of clay and
basalt prevent bauxite-related contaminants from leaching into

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groundwater),red mud created during bauxite production, and
population resettlement issues.


14. (U) This cable was coordinated with ConGen HCMC.

MICHALAK