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Cablegate: Senegal Counting On Mittal to Jump-Start the Country's

VZCZCXRO7496
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHDK #0227/01 0571545
ZNR UUUUU ZZH
P 261545Z FEB 08
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0099
INFO RUEHNE/AMEMBASSY NEW DELHI PRIORITY 0071
RUCPDOC/USDOC WASHDC PRIORITY
RUEHZO/AFRICAN UNION COLLECTIVE
RUEHLMC/MCC WASHDC

UNCLAS SECTION 01 OF 02 DAKAR 000227

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EB/IFD/OIA, EB/ESC/IECC, AF/EPS AND AF/W

E.O. 12958: N/A
TAGS: EMIN ECON ETRD EINV ELAB SG
SUBJECT: SENEGAL COUNTING ON MITTAL TO JUMP-START THE COUNTRY'S
MINING SECTOR

REF: 07 DAKAR 2268

DAKAR 00000227 001.2 OF 002


1. (U) SUMMARY: In a meeting with Econ Counselor, Mr. Birame
Diouf, Managing Director of Miferso, Senegal's mining sector
parastatal, explained details of Senegal's iron ore mining agreement
with India's ArcelorMittal, as well as the status of a lawsuit
brought by South Africa's Kumba Resources seeking compensation for
that deal. Diouf discussed the local partner requirements in
Senegal's 2007 revision of the mining code, and speculated on the
future of the sector, including the important new investments by
Australia's MDL, and likely changes at Miferso. END SUMMARY.

ARCELORMITTAL'S DEAL
--------------------
2. (SBU) According to Birame Diouf, the Managing Director of
Miferso, Senegal's mining sector counterpart parastatal,
ArcelorMittal plans to invest around USD 2.2 billion into the Faleme
site in southeastern Senegal, making it Senegal's largest ever
industrial project. Miferso projects that Mittal will extract 25
million tons of iron ore per year and create up to 10,000 jobs by
2011 when full-scale production is projected to begin. This is one
of Mittal's largest extraction projects, and the company has
committed to significant improvements in roads from the mining areas
and in the Tambacounda-Dakar rail link. In a recent television
interview with a local station, the Chinese Ambassador to Senegal
stated that Chinese firms tried to secure the rights to the Faleme
iron but had "lost out" to Mittal.

3. (SBU) In its April, 2007 agreement with the GOS, Mittal
reportedly agreed to pay five percent royalties on the extracted
ore, even though Senegal's subsequent update of its mining code
(passed in May 2007 specifically to help close the deal with Mittal)
states that private investors need only pay three percent royalty.
The company has begun detailed geologic surveys and test holes
around the Faleme site. The final assessment of the ore within the
concession will significantly impact the overall size of the
investment. If the conclusion is that the concession holds more
than a benchmark of 750 million MT, Mittal has committed to
renovating the Tambacounda-Dakar rail line to standard gage; if the
deposits are less the company will likely only improve the rail bed
for the existing narrow-gage line.

4. (SBU) Diouf explained that Mittal has also agreed to finance the
construction of a new jetty and bulk port facility at Bargny,
approximately 30 km south of Dakar. According to Diouf, the jetty
would likely extend more than 10km, and the port would have berths
for a range of ships. Mittal would also have to build significant
handling and storage facilities at the port. Diouf confirmed
previous reports that Mittal will also consider building a
steel-rolling factory at the site should the Faleme deposits meet
expectations.

KUMBA VERSUS MIFERSO
--------------------
5. (SBU) According to Diouf, in 1994 Miferso signed an agreement
with the South African mining company Kumba Resources, granting the
firm the pre-feasibility study rights to assess the iron ore
deposits in the Faleme region, with an option for Kumba to acquire
an 80 percent interest in the project. However, according to Diouf,
Kumba failed to meet certain deadlines for moving forward. Diouof
also claimed that Kumba was not willing to make the necessary
investments in infrastructure improvements, and would only agree to
extraction and storage and handling at the port. Kumba's proposal
targeted at least 12 million tons a year over 20 years with an
investment of USD 950 million.

6. (SBU) Therefore, Kumba accused Senegalese officials of violating
its contractual rights when Miferso and the GOS signed its agreement
with Mittal and subsequently ordered Kumba to withdraw its Faleme
activities. After failing to reach a compromise in May 2007 through
the Dakar Court of Arbitration, on December 31, 2007, Kumba opened a
US $667 million lawsuit against the Government of Senegal. Diouf
claimed that his office had originally tried to mediate a joint
venture agreement between Mittal and Kumba, since Mittal does not
have extensive experience in mining operations. Even though that
effort failed, Diouf noted that the government secured all of
Kumba's documentation on exploration studies before the lawsuit.

7. (SBU) Diouf admitted that Kumba "could not win" in Senegalese
courts, but also conceded that the GOS will likely have to pay a
financial settlement to resolve the case.

NEW MINING CODE
---------------
8. (SBU) In May, 2007, the GOS revised its mining code and created
a "special investment law" to attract capital investment into

DAKAR 00000227 002.2 OF 002


Senegal's mining sector. For investments over USD 500 million, the
new code provides exceptional fiscal and customs arrangements,
including lifetime exoneration on customs duties for related
imported goods; exoneration of VAT, fiscal, employer, and corporate
taxes, and taxes on profits. Within the code, however, an investor
must provide a 10 percent stake to the government and also be open
to the participation of a local investor for 10-20 percent of the
project. Diouf explained that in the case of Mittal, no local
investor could raise the funds to become a minority partner. The
GOS, however, was ceded its 10 percent, according to Diouf.

SENEGAL'S MINERAL POTENTIAL
---------------------------
9. (U) Diouf asserted that the mining sector presents considerable
opportunities since the country has additional exploitable resources
in phosphates, attapulgite, iron, gold, copper, peat, marble, gas,
titanium, limestone, and uranium. He highlighted Senegal's success
in attracting Mineral Deposits Ltd. (MDL) an Australian mineral
sands mining company that is currently producing gold and will soon
begin a new USD 190 million venture in zircon, as proof that Senegal
will increasingly benefit from the mining sector.

10. (SBU) Diouf also indicated the GOS' management of the sector
needs to be revised, due largely to uncertainly in Miferso's status.
The parastal, whose official name is the "Societe des Mines de Fer
du Senegal Oriental" (The Eastern Senegal Iron Mines Company), was
established for the sole purpose of attracting a foreign investor to
the Faleme iron deposits. Now that its mission is almost complete,
Diouf cannot yet say if the firm will continue to help the Ministry
of Mines and Industry as the counterpart entity for new potential
investors. Miferso is in actuality a joint venture between the
Government of Senegal (82 percent of shares) and the French Bureau
de Recherches Geologiques et Minieres (BRGM) which holds 18 percent.
Before changing Miferso's status, the GOS may be required to buy
out the BRGM shares. At that point, Miferso may become a more
comprehensive implementing agency for Senegal's mining activity.

COMMENT
-------
11. (SBU) Senegal's mining activity has long been dominated by
phosphates production. Now, the GOS has demonstrated the strategic
importance it places on jump-starting Senegal's minerals sector by
offering huge tax incentives and a willingness to negotiate deals
privately and swiftly. While we have concerns about the opaque and
non-competitive manner that the Mittal agreement was reached and the
precedent it sets (including the GOS' treatment of Kumba), there is
no denying that Mittal's potential investment in infrastructure
improvements could greatly enhance Senegal's rural economy.

SMITH

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