MALAWI URANIUM: ALMOST READY FOR PRIME TIME

C O N F I D E N T I A L SECTION 01 OF 02 LILONGWE 000108

SENSITIVE
SIPDIS

LONDON FOR AF WATCHER PETER LORD

E.O. 12958: DECL: 02/28/2010
TAGS: EMIN EINV ECON ELTN MI
SUBJECT: MALAWI URANIUM: ALMOST READY FOR PRIME TIME

REF: A. 07 LILONGWE 928

B. LILONGWE 77

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Classified By: Economic Officer Daniel Daley pursuant to 1.4 (c) and (d
).


1. (C) SUMMARY: Paladin (Africa) Managing Director Neville
Huxham told Ambassador that he expects the company's uranium
mine to be fully operational by April. Initial processing of
the ore has already begun, and Huxham said the first
yellow-cake outputs should be available by the April opening.
Plans for getting the yellow-cake to market have not yet
been finalized. At full production the mine will produce an
estimated 3.3 million pounds of uranium yellow-cake per year.
At USD 40 to 70 dollars per pound, Paladin expects to break
even on its USD 200 million investment in three years. There
are proven reserves at the site to sustain the mine for ten
years. Paladin plans to ship through Walvis Bay in Namibia,
but negotiations with Zambia for transit have yet to take
place. End summary.

COUNTDOWN TO COMPLETION
--------------


2. (C) Paladin (Africa) Limited Managing Director Neville
Huxham met with the Ambassador February 17 to provide an
update on the construction of the company's uranium mine at
Kayelekera. Huxham reported that some elements of the mine
and the processing plant had been commissioned in late 2008,
and that commissioning of the remaining facilities was
ongoing. He said that the mine was on track to be fully
operational by April. Initial processing of the ore has
already begun and Huxham expected the first outputs of
processed yellow-cake to be available by the mine's opening.
Huxham said that planning was underway for President Bingu wa
Mutharika to formally open the mine with an official ceremony
on April 17.

SIGNIFICANT ECONOMIC IMPACT
--------------


3. (U) With the mine operational, Paladin plans to ramp up to
full production by the end of 2009. At full production the
mine will produce an estimated 3.3 million pounds of uranium
yellow-cake per year. At USD 40 to 70 dollars per pound this
translates to at least USD 132 million per year. With
Malawi's exports in 2007 (latest available data) equal to USD
693 million, this represents an increase of roughly 20
percent in total value. Paladin expects to break even on its
USD 200 million investment in three years. The GOM stands to
generate nearly USD 4 million per year in royalties alone,
plus corporate taxes and revenue from its 15 percent stake in
Paladin (Africa) (ref. A). There are proven reserves at the
site to sustain the mine for ten years.


4. (U) In response to a comment from the Ambassador about the
need for Malawi to develop a mechanism to manage its
extracted mineral wealth, perhaps using a model like the
Norwegian North Sea oil trust fund, Huxham mentioned that
Paladin has agreed to provide training to the GOM to increase
its human capacity to handle the additional revenue.
Approximately 2000 mostly local people have been employed in
the construction of the mine. Once construction is
completed, mine operations will employ about 300 Malawian and
40 expatriate staff. Paladin plans to train Malawians to
replace expatriate staff during the life of the mine.

FROM MINE TO MARKET NOT AN EASY ROAD
--------------


5. (U) From the mine site the yellow-cake must be trucked out
using one of Malawi's most notoriously bad roads (the
Karonga-Chitipa road). The completion of the upgrade of this
road from dirt to tarmac is one of the projects that China
committed to provide Malawi upon the establishment of
diplomatic relations (ref. B). Huxham reports that the
Chinese had initially made good progress before the onset of
the rainy season set back work. Work on the initial stretch
of road is expected to be completed by mid 2009. After that
several miles of difficult, hilly terrain will need to be
upgraded before the (Paladin-built) Kayelekera access road is
reached. The poor state of the road creates periodic delays
in moving supplies and equipment to the mine site, although
Paladin estimates that 20 trucks per day make the trip, and
all of the heavy equipment for the plant has already traveled
on the same road.


6. (SBU) Because of stringent IAEA shipping protocols,

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Paladin plans to truck the uranium across Zambia and ship it
out from the Namibian port of Walvis Bay, which already has
experience shipping uranium from the company's mine in
Namibia. This will mean a trip of roughly 1800 miles by
road. Although existing international agreements
theoretically provide for transit of goods across southern
Africa, and despite the benign character of yellow-cake, the
sensitive nature of uranium could create difficulties.
Paladin has not yet discussed its transit plans with Zambia.
Company representatives are scheduled to meet with Zambian
officials in March at which time it hopes to finalize an
agreement.

COMMENT
--------------


7. (U) Although Paladin's Kayelekera mine is relatively
small, it is set to have a major impact on Malawi's economy,
and in particular its chronic balance of payments challenges.
We will be working with the GOM to improve its capacity in
managing its increased revenue stream. We believe this is an
opportunity to partner with the Norwegian government to
assist the GOM. We will report on our progress in this
endeavor as we proceed.
BODDE