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Cablegate: Drc/Zambia Copper Belt - Equinox's Giant Lumwana

VZCZCXRO3826
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHLS #0666/01 1720543
ZNR UUUUU ZZH
R 200543Z JUN 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 5983
RUEHKI/AMEMBASSY KINSHASA 0508
RUEHSA/AMEMBASSY PRETORIA 4915
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DOE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEHBJ/AMEMBASSY BEIJING 0123
RUEHBY/AMEMBASSY CANBERRA 0034
RUEHLO/AMEMBASSY LONDON 0341
RUEHMO/AMEMBASSY MOSCOW 0276
RUEHFR/AMEMBASSY PARIS 0143
RUEHOT/AMEMBASSY OTTAWA 0082
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 06 LUSAKA 000666

SIPDIS
SENSITIVE

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DEPT FOR AF/S, EEB/ESC AND CBA
DOE FOR SPERL AND PERSON

E.O. 12958: N/A
TAGS: EMIN ENRG EINV EIND ETRD ELAB CG ZA SF
SUBJECT: DRC/ZAMBIA COPPER BELT - EQUINOX'S GIANT LUMWANA
COPPER/URANIUM PROJECT

REF: A) LUSAKA 344
B) LUSAKA 349
C) LUSAKA 376

1. (U) This cable represents one of a series of DRC/Zambian
copperbelt mine-specific reports emanating from a ground-breaking
resource-reporting and commercial advocacy collaboration between
Embassies Pretoria, Kinshasa, and Lusaka.

2. (SBU) SUMMARY: North-western Zambia's Lumwana Mine is noteworthy
because of its remoteness from the "traditional" Copperbelt with its
high grade copper and cobalt ores, and for its very large but
low-grade copper reserves and resource base. Discrete younger
deposits of uranium are intimately associated with the copper and
will be selectively mined and stockpiled until the uranium plant is
completed in mid-2010. This mineral association is fairly unique
and comparable with Shinkolobwe in the DRC (source of the "Manhattan
Project") and Olympic Dam in Australia. The mine is currently in
the final stages of development and first production of first copper
concentrate is targeted for September 2008. This schedule has not
been significantly affected by the power cut-offs and shortages
plaguing Zambia. When in full production next year, Lumwana will be
the biggest surface operation and copper-producer in Africa,
twentieth largest copper producer in the world, and will add 35
percent to Zambia's copper output. Total estimated capital cost of
the project is about $800 million, which is the largest investment
ever made in Zambia. Mine life is estimated to be 37 years, but
known mineralization is extensive and production could continue far
beyond that time. Lumwana is wholly owned and operated by Equinox
Minerals of Australia, which is listed on both the Australian and
Toronto stock exchanges.

3. (SBU) The remoteness of the mine and its potential long life have
necessitated that management take a long-term view of its need for
skills, social amenities, and the provision of infrastructure and
utilities. As such, a wholly new town is being constructed with
recreation and shopping facilities, housing, schooling, and
extensive training opportunities for local employees, most of whom
have no mining or industrial experience. Five-year off-take
contracts are in place with two local smelters for the mine's total
output of copper concentrate. In April the Zambian government
unilaterally imposed a new tax regime that could have negative
repercussions on new investment decisions. Lumwana management is
confident that the project will continue as planned and that the GRZ
will take cognizance of the unintended consequences of the new tax
and concerns expressed by the mining industry. End Summary.

4. (SBU) Embassy Pretoria Mining/Energy Officer and Specialist
visited mines on both sides of the DRC/Zambia copper belt May 12-23
to assess developments in the sector, covering six mines in the DRC
and four in Zambia. Septel provides an executive summary of
developments on both sides of the border of the copper-cobalt belt.
Supplementary septels on other mines and issues will follow.
Companies were helpful in supporting the well-received visits.
Embassy Pretoria Mining/Energy Officer and Specialist and Lusaka
Commercial Specialist visited Equinox's Lumwana Mine in north-west
Zambia on May 19. Managing Director Harry Michael hosted the team
and took great pride in showing off his $165-million mining fleet of
gigantic trucks, excavators, and shovels. Most of the facilities
visited are still under construction, but the team was shown the
$408-million processing plant that will include the largest grinding
mills in the world, the new village to house 1,200 employees, the
school for 2,000 children, and the shopping center that will
normalize family life. The remoteness of the mine requires that
Lumwana town provide most amenities in order to attract experienced
people and families.

--------------------------------------------- ----

LUSAKA 00000666 002 OF 006


The Central African Copperbelt - a Treasure Trove
--------------------------------------------- ----

5. (SBU) The Zambian/DRC copperbelt and extensions (known as the
Central African Copperbelt) is the richest copper-cobalt mineral
province in the world, comparable with South Africa's Witwatersrand
gold field and platinum-bearing Bushveld Complex. Deposits occur in
a geological feature known as the Lufilian Arc that stretches some
500 kilometers from east to west and is about 150 kilometers wide.
The Lumwana copper/uranium deposits lie in the middle of the arc and
are 220 kilometers from the mines in Chingola and about 100
kilometers south of those in Kolwezi in the DRC. On the map Lumwana
appears remote from "traditional" copperbelt geology. However,
researchers have correlated Lumwana's geology with that of the
copperbelt, despite the rocks being highly deformed and altered.
During Lufilian geological times, minerals were remobilized and new
minerals introduced, giving rise to significant mineralization of
copper, cobalt, uranium, gold, silver, and minor metals. The
geology of the Lufilian Arc has been extensively reviewed and new
interpretations have significantly increased the potential for new
discoveries.

--------------------------------------
Lumwana Mine - a Long Life Superlative
--------------------------------------

6. (SBU) Two substantial deposits on the Lumwana lease are being
developed for surface mining. The Malundwe and Chimiwungo pits have
a combined proved and probable sulfide ore reserve of 321 million
tons at 0.73 percent copper and an inferred resource of 417 million
tons at 0.60 percent copper. These test the low end of economic
grades, but Lumwana's economics are based on the massive scale of
the reserves and project. The pits also contain a limited quantity
of oxide ore that is being stockpiled for future processing.
Sulfide and oxide ores require different metallurgical processes and
are stored and treated separately. Mine feasibility was determined
at a copper price of $1.20-$1.50 per pound (copper is currently
$3.50 to $4.00 per pound). In total, Lumwana hosts an in-situ
resource of 14 billion pounds or 6.4 million tons of copper, as well
as the uranium. Because of the low grades of mineralization, there
has been no artisanal mining in the area.

---------------------------------------
Mining Operations at the Starting Block
---------------------------------------

7. (SBU) Mining operations started in April 2007 at the smaller
Malundwe pit and reached primary sulfide ore at a depth of 20
meters. Current plans are to mine two pits over a 37-year life of
mine at a rate of 20 million tons of ore per year, starting in
September 2008. The first six years will yield 500,000 tons of
concentrate equal to 170,000 tons of copper metal. All mining
equipment is on site and the team was able to climb into the driver
cabin of one of the 240-ton ore-load trucks. These Hitachi/Euclid
trucks are massive and each weighs 200 tons, costs $4 million and
requires 2 megawatts of power. The giant tires have an external
diameter of some three meters and cost $65,000 each. Trucks are
powered by diesel-electric motors, which allow for driving in the
pit on diesel and for connecting to overhead electric trolley cables
(trolley assist) when hauling ore out of the pit. Ore from the pit
will be hauled to a primary crusher at the top of the ramp, reduced
to minus 400 mm size in the crusher, and transported to the milling
circuit on a 4.5-kilometer overland conveyor belt.

---------------------------------------
Processing - the Heart of the Operation
---------------------------------------


LUSAKA 00000666 003 OF 006


8. (SBU) Lumwana will produce a final copper concentrate product
containing 30 percent to 40 percent copper metal. The plant employs
conventional processes that entail the reduction of mine ore to a
size that will expose sulfide minerals to recovery agents. Lumwana
has a five-year take-and-pay off-take agreement with the Chinese
Chambishi smelter (55 percent) and the Glencore Mopani smelter (45
percent), both located in the traditional Zambian cCpperbelt. Both
the smelters are currently under construction but the contract
allows Lumwana to deliver and be paid as soon as production starts
and concentrate is delivered to the smelters. Forty trucks per day
will carry 1,200-1,400 tons of concentrate containing 32-40 percent
metal to the smelters for conversion to metal. (Comment. Industry
sources say that Mopani may have slowed/stopped construction on the
smelter pending clarification of the impact of the new tax regime.
End Comment.).

9. (SBU) Lumwana's process plant should be commissioned at the end
of June, with first concentrate in September 2008. The estimated
cost of the plant is $408 million and it boasts a number of
superlatives, namely the world's biggest semi-autonomous grinding
mill (SAG mill) and a similarly rated ball mill. Both are driven by
concentric gearless electric motors (similar to an electric
generator), which draw 18 and 16 megawatts of power, respectively.
Each drive unit weighs in at more than 300 tons and the fully loaded
SAG mill weighs 6,000 tons and rests on a base comprising 60,000
tons of concrete.

------------------
Uranium Adds Value
------------------

10. (SBU) Equinox has completed feasibility and environmental
assessment studies for the on-site treatment of discrete high-grade
uranium orebodies. These occur in the footwall and hanging wall of
the copper formation partially within the copper deposit pit limits.
The study confirmed the viability of producing 2-million pounds of
U3O8 concentrate or "yellow cake" per year for eight years at a
plant cost of $200 million and operating cost of $16 per pound.
Once the GRZ -- which has yet to implement a new national uranium
mining policy --approves the license to process and export uranium,
and negotiations are completed for uranium off-take consistent with
IAEA and NPT guidelines, Board approval for the project is expected
by the end of September and production for mid-2010. The uranium
process will also produce 15,000 tons per year of copper concentrate
containing 50 percent metal. Credits from the sale of the copper
should reduce uranium costs to $11 per pound. The current price of
U3O8 is $59 a pound. (Comment. Harry Michael compared the Lumwana
copper-uranium deposit to Shinkolobwe in the DRC and Olympic Dam in
Australia. Shinkolobwe provided the material for the Manhattan
project that produced the first atomic bomb. End Comment.).

------------------------------------
Skills Training - a Local Imperative
------------------------------------

11. (SBU) Zambia suffers from a chronic shortage of skilled and
experienced mining personnel. The long life projected for Lumwana
convinced management of the need to employ and train people from
local communities in order to sustain a stable and productive work
force. This was a difficult task because of the general lack of
skills in nearby villages. Despite this, Michael stated that they
now have a team of ten trainers, three each from Zambia and
Tanzania, two from Ghana, and only two expatriates. He also said
that the major percentage of future operators and artisans would be
local hires and be trained locally and overseas. Trainee drivers
from the villages are given three months intensive training,
including 40-50 hours in the truck simulator. Michael said that
with on-going experience, his drivers would equal operators anywhere

LUSAKA 00000666 004 OF 006


in the world.

-----------------------------------
Social Programs - a License to Mine
-----------------------------------

12. (SBU) Most new mining ventures in Africa are expected to provide
needed services and facilities to communities surrounding the
operation. Generally these include direct and indirect involvement
in and funding of projects such as the rehabilitation and building
of roads, rail lines, power lines and plants, schools, clinics,
community centers and sports fields. Mines are also required to
provide and/or subsidize the services of doctors, nurses and
teachers. These activities provide community (and government)
acceptance and the so-called "social license to mine". Lumwana mine
is building a whole new town with all expected facilities and
amenities for employees and their families, and will also provide
services to neighboring communities that source labor.

--------------------------------------------- ------
Government and Policy - Nationalization by Taxation
--------------------------------------------- ------

13. (SBU) The 1996 mining code and subsequent Development Agreements
(DA) signed between the mines and the GRZ made Zambia a good country
for exploration and investment. In view of booming copper-cobalt
prices the government naturally wished to increase their share of
these "windfall" earnings and notified industry of their intention
to renegotiate fiscal conditions. Despite this, the government
unilaterally and without consulting industry (management claims)
introduced two changes this year: a new tax regime for mining
activities that supersede the terms in the DAs, and a new mining and
minerals act that effectively nullifies the existing DAs. Mining
sources have said they are "waiting to see" what the statutory
instruments that implement the new law look like as they have not
yet been introduced. The launch of the new mining taxation code on
April 1 was based on bad advice from the World Bank and the EU
(companies claim), without industry consultation.

14. (SBU) The move is anticipated to earn the country a further $415
to $650 million in 2008 and more if the copper price continues
upward. The new tax regime has imposed increases in royalties, new
windfall, profits, and export levies, and prolonged the amortization
of capital. One common comment by all Zambian mine management
visited was that the legislation had created "unintended
consequences", including the increase in mine taxes to over 60
percent of profits, compared to the 47 percent allegedly targeted by
government. The severity of the new taxes and levies is dependent
on the circumstances of each mine. Michael said that the poorly
thought out structure of the system penalizes less profitable mines
and that the new taxes could decrease Lumwana's life from 37 to 22
years and put a constraint on future investment.

--------------------------------------------- -------
Plans/Ideas for the Future - Pending Taxation Review
--------------------------------------------- -------

15. (SBU) Equinox and other mining companies have expressed concern
about the implications of the new fiscal regime on future mine
investment and expansion plans. Mine management is talking to
government and Michael believes that the GRZ will adopt a pragmatic
approach and modify the more severe aspects of the legislation.
Lumwana's plans remain in place for the present. These include
expanding exploration around the Lumwana lease area and elsewhere on
the Copperbelt, implementing opportunities to increase mine output,
improving transport logistics, and in the longer term considering
on-site production of refined copper metal and U3O8 concentrate.
Proposals include:

LUSAKA 00000666 005 OF 006


-- constructing a hydro-metallurgical plant to recover copper metal
(add value and eliminate the need for a smelter)
-- increasing mine production from the planned 20 million tons of
ore per year (170,000 tons metal) to 35 million tons ore (300,000
tons metal) in five years
-- evaluating a slurry pipeline versus a rail line to transport
concentrate to Chambishi and Mopani smelters
-- considering contributing to the construction of a rail line from
Kitwe/Ndola via Kansanshi and Lumwana to the DRC and link with the
Angola rail system.

-------
Comment
-------

16. (SBU) The significance of the Lumwana copper deposit is its
location in a remote under-developed and under-explored region of
Zambia close to the Angolan border. This successful green-field
project proves the extent of mineralization in the Lufilian Arc and
should serve to attract and open up this previously neglected area
to further high-tech exploration and investment in infrastructure
and services. Sixty-five kilometers to the east is First Quantum's
Kansanshi mine, which also occurs in the Arc and hosts a
substantial, relatively low-grade and complex copper/gold orebody.
The two mines are gearing up to annually produce 240,000 tons of
copper between them by mid-2009, and nearly 500,000 tons in the next
five years. Their combined activity could serve as a hub for
economic growth and transport in the region.

--------
Appendix
--------

17. (SBU) APPENDIX - Lumwana Resources

Copper Ore Reserves and Resources:

Sulfide Ore:
Mining Pits Million Tons percent Copper
Malundwe Reserves 121 0.89
Resource 4.2 0.77
Chimiwunga Reserves 200 0.62
Resource 413 0.60
Total Reserves 321 0.73
Resource 417 0.60

Oxide Ore:
Reserves 9.6 0.69
Resource 3.6 0.42

In total, Lumwana hosts an in-situ resource of 14 billion pounds or
6.4 million tons of copper.

Major Mining Fleet Items:

-- 27 X 200-ton hybrid diesel-electric Hitachi Euclid trucks each
capable of carrying a 240-ton payload
-- 7 X 518-ton Hitachi excavators/shovels with 27 cubic meter
buckets capable of loading 4,000 tons of ore per hour
-- 1 X 400 ton crane, which Michael said is the biggest in Africa
-- 1 X truck simulator for driver training.

Final Pit Dimensions:

-- Malundwe 4.5 X 1.2 km to a depth of 250 meters and a stripping
ratio of 7/1 (ratio of waste to ore mined)
-- Chimiwango 6.0 X 4.5 km to a depth of 650 meters and a stripping
ratio of 5/1.

LUSAKA 00000666 006 OF 006

Uranium Resources and Reserves:

Ore(Mt) U3O8 percent U3O8(Mlbs) Cu percent Cu(Mt)
Total Lumwana 11.4 0.07 16.5 - -
In pit 5.7 0.10 12.5 0.9 55.1


Lumwana Major Capital Items ($millions)

Mining fleet $165
Copper plant $408
Uranium plant $200
Total $773

Martinez

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