VZCZCXYZ0000
RR RUEHWEB

DE RUEHAN #0275/01 1050644
ZNR UUUUU ZZH
R 150644Z APR 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 2331
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ANTANANARIVO 000275 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR AF/EPS AND AF/E - MBEYZEROV 
DOC FOR DESK OFFICER - BECKY ERKUL 
TREASURY FOR FRANCOIS BOYE 
 
E.O. 12958: N/A 
TAGS: PGOV EINV ECON MA
SUBJECT: MADAGASCAR: QMM MINE BEGINS OPERATIONS 
 
¶1. (SBU) Summary: Rio Tinto's billion dollar ilmenite mine in 
southern Madagascar, QMM, began production in December 2008 and 
shipped its first load of ilmenite in April, despite dual Malagasy 
political and global financial crises.  The company has made a 
conscientious effort to hire local workers, limit its negative 
environmental impact, and create positive ties with local 
communities through development programs.  Although local opinion of 
the company is fairly positive as a result, QMM is not immune from 
politicization in the current atmosphere.  Those that have benefited 
from the opportunities offered by the mine tend to have a favorable 
view of former President Ravalomanana, who is credited for promoting 
the investment (which actually was launched under Ratsiraka). 
Meanwhile, transition authority president Rajoelina has vowed to 
review mining contracts with an eye to raising government revenue, 
and military forces recently raided the company to look for 
"mercenaries and arms."  End summary. 
 
¶2. (SBU) The sleepy, coastal town of Fort Dauphin on the southern 
tip of Madagascar is undergoing a transformation brought about by a 
USD 1 billion mining investment of the Australian/British 
corporation Rio Tinto.  As migrants are drawn by economic 
opportunity, the town's population has mushroomed, and while the 
majority remain desperately poor, there is a buzz of hope and energy 
in the air that differentiates Fort Dauphin from most other Malagasy 
cities.  The QMM project, founded in 1986, got off to a slow start 
but completed construction and began producing ilmenite in December 
2008 and shipped its first load of mineral ore directly to Canada 
for processing in April 2009.  Emboff visited the project March 10 
and witnessed the mining of the first shipment of ilmenite, a 
mineral used to make paint white.  QMM will export 750,000 tons of 
ilmenite and 25,000 tons of zirconium per year in two shipments per 
week to Canada.  QMM officials explained that the mine has already 
entered into sales contracts with locked in prices for its product 
for the next five years, so is unaffected by mineral prices 
declining due to the global financial crisis. 
 
¶3. (SBU) Rio Tinto has made a conscientious effort to hire local 
workers, reimburse farmers for their land, limit its negative 
environmental impact, and create positive ties with local 
communities through development programs.  Along with the mine has 
come the construction of roads, greater electricity generation (city 
supply will triple), improved city water supply resulting from the 
construction of a dam to eliminate salt from the inland waterway, a 
400 hectare industrial zone developed in conjunction with the World 
Bank and the GOM, and a modern port, scheduled to open for public 
use in July 2009.  The public port will not only serve QMM, who will 
manage it and use it nine days per month, but will provide a modern 
SPS code-compliant facility that other exporters may use, as well, 
to export local products such as litchi and lobster. Whereas 
exporters from the main existing port of Tamatave in the East must 
ship goods through another code-compliant port such as Durban before 
shipping them to the United States, goods from the Fort Dauphin port 
will be able to ship directly to the U.S.  Local Chamber of Commerce 
representatives are banking on this feature of the port attracting 
export processing businesses to Fort Dauphin in the future. 
 
¶4.  (SBU) Rio Tinto is also working to improve Malagasy governance 
and ensure that the government's use of mining returns is 
transparent.  QMM has agreed to participate in the Extractive 
Industries Transparency Initiative (EITI), and has already had a 
full EITI audit and will ensure full compliance, according to 
Director David Stone.  As a member of the EITI committee, the 
company is also working with other mining companies, including 
Sherritt, to ensure that they comply by the end of 2009.  QMM has 
agreed to a March annual EITI audit, as well as a provisional audit 
every September.  QMM has reviewed and agreed on the tender document 
for a National EITI Auditor to be appointed. 
 
¶5. (SBU) Along with these benefits also come some negative aspects. 
The mining apparatus, which resembles a moving five-story parking 
garage, is slowly cutting a long swath through the coastal forest. 
Although QMM has created nurseries, seed banks, launched 
experimental reforestation programs, created 625 hectares of 
protected areas, saved a few species of trees from extinction, and 
will reforest the areas in the wake of the machine's path, the 
mine's advance will no doubt impact the complex ecosystem of endemic 
plants and animals as it clears the forest.  Although much of the 
native forest near the city has already been cut down by villagers 
to make charcoal, the mine will advance into fairly virgin territory 
through the 30 to 40 year lifespan of the project. 
 
¶6. (SBU) Besides environmental concerns, the mine has also generated 
economic and political worries.  Particularly during the 
construction phase, when several thousand foreign and Malagasy 
workers from other regions flooded the Fort Dauphin market, food and 
housing prices spiked, causing hardships for locals who could no 
longer afford basic commodities.  Now that the mine has entered the 
production stage, it has trimmed down to only 600 employees (60% 
local, 30% Malagasy from other regions, 10% expat), leaving excess 
labor around the city to be absorbed. 
 
¶7. (SBU) The mine has generated resentment and jealousies among 
those that are not partaking in its bounty.  The acting mayor (an 
appointed presidential delegate) complained to Emboff that QMM did 
not pay taxes or royalties to Fort Dauphin, even though the city 
felt the impact of the project.  The taxes and royalties go to other 
communes where the mine is physically located, as well as the 
regional and central governments.  He argued that the QMM contract 
was not available to him or the public, thus he was unfamiliar with 
the specific terms. According to QMM Director David Stone, the 
company's contract is public and was passed by parliament in 1998. 
The company will begin paying royalties of 2 percent per shipment 
value in May 2009.  Of the 2 percent, 70 percent will go to the 
region and communes, while 30 percent will go to the central 
government.  2009 revenue is estimated to reach USD 40 million, 
rising to USD 200 million by 2012. The company is exempt from 
corporate taxes for five years, will pay 10 percent per year from 
year six, and 15 percent after year ten. 
 
¶8. (SBU) The regional governor and the mayor of the commune where 
the mine is centered were complimentary regarding the mine, the 
opportunities and revenue that it is bringing to the area, and the 
Ravalomanana administration that helped it come about.  The mayor 
explained that her commune had implemented a participatory budget so 
the population could decide on what to spend the contributions that 
it had begun receiving from QMM last year.  Last year, they used the 
money to build 3 schools and they will build dams this year.  They 
lauded Ravalomanana's efforts to bring QMM, schools, and roads to 
the region - a region that was forgotten by prior administrations. 
 
 
¶9. (SBU) Opposition leaders (tenuously allied with transition 
authority president Rajoelina and now thus in the mainstream) were 
more critical, complaining that QMM did not hire locals for high 
level positions, and alleged that the good QMM jobs and other 
construction contracts went to people and companies from 
Antananarivo.  They also criticized Ravalomanana for mixing his 
personal and presidential assets by commandeering the land from a 
local gendarme base to build a Magro store, the wholesale arm of his 
private company.  The former president had further roused their ire 
by cancelling mayoral elections and appointing his own delegate to 
avoid a win by the opposition and maintain a close hold on large 
construction projects. 
 
¶10. (SBU) Although Fort Dauphin has been quiet (too quiet, as all of 
the tourists have departed) during the political crisis in 
Madagascar which affected most major cities, QMM has not been immune 
from worry.  After former Antananarivo Mayor Andry Rajoelina seized 
power on March 17, he announced that mining contracts would be 
reviewed with an eye towards increasing state revenue.  On April 1, 
QMM was searched by police and military forces for arms and 
mercenaries, but nothing was found and no further action has been 
taken against the company to date.  A senior QMM official who called 
on the ambassador later that week said he doubted that this action 
was driven from the top.  He suspected, on the contrary, that local 
officials were taking initiatives that they perceived would curry 
favor with the new HAT regime.  The search, he said, was conducted 
with the "utmost courtesy," and no one at the site ever felt 
threatened.  In any case, he said QMM would take such bumps in the 
road in stride, and was not rethinking their investment in any way. 
 
 
¶11. (SBU) Comment:  Mines, like QMM and the USD 4 billion Ambatovy 
project, that plan to operate over several decades are taking a 
long-term view and continuing operations and construction despite 
the current political crisis.  Although mining companies like Rio 
Tinto that have already made significant investments are moving 
forward with their projects, the dual international financial and 
Malagasy political crises have deterred new investors from entering 
the market.  The recently publicized anti-foreign investor rhetoric 
of transition leader Andry Rajoelina, albeit aimed at projects 
associated with former President Ravalomanana perhaps more than 
investment in general, will further tarnish Madagascar's 
international image.  End comment. 
 
MARQUARDT