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Cablegate: Rutile and Bauxite Production: A Boost for Economic Growth

VZCZCXYZ0004
RR RUEHWEB

DE RUEHFN #0607/01 2821027
ZNR UUUUU ZZH
R 091027Z OCT 07
FM AMEMBASSY FREETOWN
TO RUEHC/SECSTATE WASHDC 1436
INFO RUEHZK/ECOWAS COLLECTIVE

UNCLAS FREETOWN 000607

SIPDIS

SIPDIS

SENSITIVE

DEPARTMENT FOR AF/W, AF/EPS

E.O. 12958
TAGS: ECON EMIN BEXP SL
SUBJECT: RUTILE AND BAUXITE PRODUCTION: A BOOST FOR ECONOMIC GROWTH
OR A THORN IN SIERRA LEONE'S SIDE?

1. (U) SUMMARY. Rutile and bauxite production are rapidly growing
industries in Sierra Leone, with great potential to quickly become
the country's most profitable exports. Since resuming operations in
2005, the Titanium Resource Group (TRG), responsible for the large
majority of Sierra Leone's bauxite and rutile production, has
expanding rapidly. This continued increase in mineral production has
already begun to stimulate the economy by creating jobs, increasing
government revenues, and restoring damaged and destroyed
infrastructure. However, this potential for economic growth could
come with a price - destruction of the environment and the resulting
displacement of villages. END SUMMARY.

TRG'S POST-WAR RETURN TO SIERRA LEONE

2. (U) The production of rutile, mainly used in the pigmentation of
paints, plastics, and paper, and bauxite, typically processed into
aluminum, ceased completely in 1995 as the civil war took over
Sierra Leone. As rebels passed through the mining communities, the
equipment was pilfered and the infrastructure was demolished. In
2005, three years after the war was declared over, the Titanium
Resource Group (TRG), a joint-venture of both Sierra Minerals
Holdings (Bauxite) and Sierra Rutile, resumed production at two
mines located in the Southern Provinces. TRG is not an American
company but their major stockholder, with 45.7% shares, is an
American company called Ospraie Management LLC. TRG began exporting
rutile and bauxite in 2006 and have continued to see an increase in
production since. While TRG has not yet turned a profit, they have
not suffered great financial losses and expect to begin making a
profit as early as 2010.

SIERRA RUTILE: RUTILE PRODUCTION

3. (U) Sierra Rutile currently accounts for 22% of the global
natural rutile production. Current production of rutile for 2007
stands at roughly 60,000 metric tons (MT), 66% of their yearly
production goal of 90,000 MT and a respectable increase on the 2006
production of 73,802 MT. Construction of a second dredge will be
completed in November 2007, which could raise the total annual
production to an estimated 200,000 MT. This would surpass their
annual rate between 1990 and 1994 of 148,360 MT. A third dredge is
scheduled for construction in mid-2008. Equipment failures and
power problems have reduced production rates at times. However,
Sierra Rutile benefits from a relatively high market price, large
reserves, and an increasing demand for Sierra Leone's rutile,
considered among the highest grade in the world.

SIERRA MINERAL HOLDINGS: BAUXITE PRODUCTION

4. (U) Sierra Mineral Holdings (SML) is struggling to keep pace with
Sierra Rutile due to the fact that bauxite is less profitable than
rutile and the reserve base is lower. Although production also often
suffers due to old and faulty equipment, progress has been made in
repairing the infrastructure. Approximately one million MT of
bauxite were produced in 2006. 700,000 MT have been produced so far
in 2007 and SML estimates a total of 1.2 million by the end of the
year. All of the bauxite produced thus far has gone to select
buyers, such as the US-based Alcoa, in long-term off-take
agreements.

COMMUNITY RELATIONS REMAIN POSITIVE

5. (U) TRG enjoys a comfortable business relationship with the
southern Province communities of Bo, Bonthe, and Moyamba. They are
the largest employer in the area, employing more than 1200 people,
and landowners benefit from very generous lease agreements. To
ensure the communities continue to support their presence, TRG has a
community manager on staff to seek out and address concerns
presented by the communities and a foundation has been set up to
work on sustainable development projects. Such projects include
biofuel and solar power research as well as the construction of
schools and libraries.

GOVERNMENT RELATIONS MORE PROMISING

6. (SBU) The government revenues extracted from the production of
these minerals, derived primarily from taxes, royalties, duties,
payroll, and local purchases, could soon match pre-war levels.
Between 1990 and 1994, Sierra Rutile alone contributed $9 to $10
million each year in revenues, which equaled 50% of overall GoSL
export revenues. In 2006, total revenues from TRG were close to $4
million and is estimated to rise to $5 million in 2007.

7. (SBU) When TRG resumed business in Sierra Leone in 2005, the
previous Sierra Leone People's Party (SLPP)-led GoSL had signed an
agreement that allowed for generous tax breaks in the first few
years of production to allow TRG time to rebuild their
infrastructure and attract investors. Prior to the September 2007
national elections win by the opposition All People's Congress

(APC), GoSL authorities had tried to push back on this agreement,
motivated by a desire to reap fuller mining revenues immediately.
However, under the new administration, TRG is less concerned that
GoSL will try to back out of the original tax break agreement. The
company estimates revenues could return to, or even surpass, pre-war
levels by 2010.

8. (SBU) In his October 5 Parliamentary opening address,
newly-elected President Ernest Bai Koromoa pledged to support
existing mining legislation and particularly noted continuing
support for Sierra Rutile and Sierra Bauxite operations, a welcome
announcement. The previous government had also refused to renew the
annual license granting TRG exclusive rights to all rutile mining in
Sierra Leone. (NOTE: TRG speculates that this refusal was a result
of the former government's intention to provide mining rights to an
outside company for kickbacks.)

TRG MUST ADDRESS ENVIRONMENTAL CONCERNS

9. (SBU) While rutile and bauxite production provide obvious
benefits to the economy of Sierra Leone, there are potential
negative environmental effects. Mining activities undertaken by
large mining companies, such as TRG, are a major cause of
deforestation and land degradation through the loss of forest cover,
soil erosion, siltation and contamination of river systems and tidal
creeks, all resulting in the ultimate displacement of villages. The
Southern Provinces of Bo, Bonthe and Moyamba show signs of
deforestation resulting from the increase in mining activities. TRG
appears to want to responsibly address these issues and has
developed an Environmental and Social Action Plan (ESAP) that offers
a road map towards meeting all environmental obligations. TRG has
been actively involved in the relocation negotiations of at least
three villages and is exploring innovative ways to reintroduce
nutrients to the soil that are lost in the mining process. Koroma
also promised a "robust, environmental protection policy" within the
mining sector.

COMMENT

10. (SBU) TRG presents a concerned image of corporate social
responsibility. However, it is important that the company continue
their active involvement in fixing the problems resulting from the
environmental degradation and social dislocation caused by the
mining activities. TRG can lead by example and demonstrate
corporate responsibility to the Sierra Leone communities in which
they operate. This is critical in the extractive industries, such as
the diamond sector, where communities have suffered from the greed
of those who have profited from Sierra Leone's riches.

11. (SBU) The previous GoSL's threat to block the renewal of TRG's
license after such a significant capital investment highlights the
difficulty of conducting business in Sierra Leone, where graft has
eroded confidence in private sector growth. Only the most intrepid
can survive. Newly-elected President Ernest Bai Koroma brings
substantial business experience to his office and has declared "zero
tolerance" for corruption. We hope this will translate into a
stronger support for private sector investment. END COMMENT.

PERRY

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