VZCZCXRO3036
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0164/01 0610925
ZNR UUUUU ZZH
R 020925Z MAR 07
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 3934
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEHDR/AMEMBASSY DAR ES SALAAM 6695
RUEHBY/AMEMBASSY CANBERRA 0106
RUEHPT/AMCONSUL PERTH 0003

UNCLAS SECTION 01 OF 02 LILONGWE 000164 
 
SIPDIS 
 
STATE FOR AF/S, INR/AA 
STATE FOR EB/ESC/IEC, EB/TPP/BTA 
USAID FOR AFR/SD/EGEA, EGAT/EG/TI 
COMMERCE FOR ITA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID EINV EMIN ETRD PGOV MI
SUBJECT: MALAWI SIGNS URANIUM MINING AGREEMENT 
 
LILONGWE 00000164  001.2 OF 002 
 
 
¶1. (U) Summary: The Government of Malawi has signed an agreement 
with Australian mining firm Paladin Resources to develop a uranium 
mine at Kayelekera, in the far northern region of the country.  The 
agreement envisions a 10-year project that will produce 
approximately 1,000 metric tons of yellowcake uranium (U3O8) per 
year, with an annual value of nearly $200 million at current market 
prices.  The project provides a major boost to Malawi's struggling 
economy, and is an important test case to demonstrate the 
government's openness to foreign investment.  End summary. 
 
Breaking New Ground 
------------------- 
 
¶2. (U) Malawi's mining sector is largely undeveloped, and this 
project with Perth-based Paladin Resources Ltd is the first 
large-scale mining project in the country's history.  Until now, 
mining activity has been limited to a small coal mine, small-scale 
mining of mineral sands, and artisanal extraction of gemstones. 
Malawi has never conducted a formal geological survey, and the 
country's mineral resources are largely unknown.  The limited 
information available on mineral resources comes mainly from surveys 
conducted during the British colonial period.  Given the significant 
proven mineral resources in surrounding countries, it seems logical 
that mining should have great potential in Malawi. 
 
¶3. (U) The uranium deposits at Kayelekera have been known for over 
20 years, and were first explored by the UK Central Electricity 
Generating Board in the early 1980s.  At that time, low market 
prices kept the discovery from being exploited.  Paladin obtained a 
prospecting license in 1998, and commenced feasibility studies in 
¶2000.  With the recent increases in uranium prices on the world 
market, production is now economically feasible, and should prove to 
be a healthy investment, as long as uranium prices maintain the 
average $60/pound that the company projects for the life of the 
mine.  The current world price is about $85/pound, and most experts 
predict it will go to $100 by the end of 2007 and maintain that 
price over the near term. 
 
¶4. (U) Paladin's investment in the Kayelekera project will total up 
to $185 million.  This will be the company's second major project in 
Africa; it also owns the Langer Heinrich uranium mine in western 
central Namibia, a project of similar size that commenced production 
in late 2006. 
 
Hard Digging 
------------ 
 
¶5. (SBU) The development agreement between the GOM and Paladin 
signed on February 22 was the fruit of nearly two years of 
protracted and difficult negotiations.  When company managers began 
formal discussions in early 2005, they had originally hoped to have 
the agreement ratified by an act of parliament.  In the poisonous 
atmosphere of Malawi's politics which prevailed at that time, 
however, the legislature was deadlocked and the company realized 
that parliamentary approval would be impossible.  They elected to 
pursue an agreement solely with the executive, fully aware of the 
increased political risk.  Negotiations with the weak Mutharika 
government moved slowly, and leaders proceeded with great caution. 
At the same time a number of local NGOs launched a campaign to 
oppose the mine.  Senior government leaders were not swayed by their 
pleas to cancel the project, and quietly assured diplomats and the 
business community that they intended to reach an agreement.  By 
late 2006, Paladin was close to a deal that provided sizable tax 
revenue and royalties for the government.  But in November the GOM 
suddenly changed direction and demanded an equity stake in the 
project.  Three more months of intense negotiation finally yielded 
an agreement that gave the GOM the equity it desired, in exchange 
for lower tax revenue and royalty payments. 
 
¶6. (U) According to company press releases, the deal gives the GOM a 
15 percent equity participation, with 27.5 percent corporate tax and 
1.5 percent royalty in the first three years, and 3 percent 
thereafter.  The GOM has also exempted the project from import 
duties and 17.5 percent VAT.  The revenue from Kayelekera will 
increase Malawi's GDP by over 5 percent, and will account for 20 
percent of total exports.  Paladin has also pledged to fund a number 
of social development projects such as schools and clinics in the 
vicinity of the mine.  The company has applied for a mining license, 
which they expect will be granted within 90 days.  Construction of 
the mine and processing plant is expected to take about 18 months, 
 
LILONGWE 00000164  002.2 OF 002 
 
 
and Paladin hopes to begin production in late 2008. 
 
¶7. (SBU) Significant potential difficulties still lie ahead, 
however, if the experience of other foreign investors holds true. 
The Malawi Revenue Authority is notoriously aggressive, and promised 
tax breaks are often given only reluctantly.  Other foreign firms 
that supposedly enjoy tax-free import of capital equipment and raw 
materials have found that MRA forces them to pay import duty up 
front and wait for long periods (sometimes up to a year) before 
refunding the tax.  Other companies have faced great difficulty in 
securing temporary work permits for expatriate employees.  Firms can 
wait months for approval of permits, and expatriate workers are 
sometimes forced to leave the country on short notice.  The 
government has stepped up its empowerment campaign for "indigenous" 
Malawians, and a certain level of anti-foreign sentiment is palpable 
at the moment.  Paladin plans to bring in a large number of foreign 
experts, particularly during the mine's construction phase, and may 
face significant hurdles with Malawian immigration authorities. 
 
Important Test Case 
------------------- 
 
¶8. (SBU) The U.S. Mission, the World Bank and other observers who 
track local economic development issues have followed the Paladin 
case with great interest, because it is the first major foreign 
investment in Malawi in many years, and is a pioneering foray into 
an undeveloped sector of the economy.  Malawi's long history of 
state control has created an atmosphere that is almost hostile to 
private investment, and doing business here is not for the faint of 
heart.  Poor infrastructure, low-skilled workers, endless red tape, 
predatory tax authorities and a general mistrust of private 
enterprise all conspire to create a business environment that is 
among the most difficult in Africa.  But there is money to be made 
for those who are willing to take on the challenges, and many people 
are watching to see if Paladin succeeds.  A second Australian firm, 
Globe Uranium, recently secured prospecting rights to a site in 
central Malawi, and has opened an office in Lilongwe.  The 
government has declared mining to be a priority sector for its 
economic development program, and says it wishes to encourage 
greater investment in mineral exploitation.  If ore prices remain 
high and government plays a constructive role and uses its revenues 
wisely, uranium could well prove to be a big winner for everyone in 
Malawi. 
 
EASTHAM