VZCZCXRO8795
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHAN #0431/01 1661132
ZNR UUUUU ZZH
P 151132Z JUN 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC PRIORITY 2532
INFO RUEHZO/AFRICAN UNION COLLECTIVE PRIORITY
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE PRIORITY
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0017
RUEHUL/AMEMBASSY SEOUL PRIORITY 0004
RUEHKO/AMEMBASSY TOKYO PRIORITY 0009
RUEHON/AMCONSUL TORONTO PRIORITY 0001
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ANTANANARIVO 000431 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/EPS AND AF/E - MBEYZEROV 
USDOC FOR BECKY ERKUL - DESK OFFICER 
TREASURY FOR FBOYE 
 
E.O. 12958: N/A 
TAGS: ECON EMIN MA
SUBJECT: MADAGASCAR: AMBATOVY MINING PROJECT UPDATE 
 
¶1. (SBU) Summary: Despite dual financial and political 
crises, the USD 4.5 billion Ambatovy nickel mining project in 
eastern Madagascar is moving forward, with production 
scheduled to begin in early 2011.  Ambatovy managers are able 
to work with the transition government (HAT), notwithstanding 
the HAT's occasional harassment of the company, but the 
project has suffered administrative delays due to mid-level 
staffing gaps at key ministries.  The loss of technical 
capacity in the HAT is likely to worsen by year-end when 
World Bank funds for environmental assessments will be 
exhausted.  A joint venture with Canadian, Korean, and 
Japanese partners, Ambatovy intends to forge ahead as quickly 
as possible so that it may begin repaying its several billion 
dollar debt.  Despite an increasingly lawless Malagasy 
business climate, Ambatovy never experienced security 
problems through the recent crisis, only evacuated one 
employee among 10,000 (who returned in April), and is 
managing its day-to-day operations without particular 
difficulty.  End summary. 
 
Ambatovy Chugs Along Despite Financial Crisis 
-------------------- 
¶2. (SBU) The Ambatovy joint venture, 40 percent held by 
Canadian firm Sherritt, 27.5 percent each by Japanese 
Sumitomo and Korea Resources Corporation (Kores), and 5 
percent by Canadian SNC Lavalin, is the largest foreign 
investment in Madagascar's history.  Ambatovy's Environmental 
Director Pierre Berner told Emboff June 12 that the nickel 
and cobalt mine, pipeline, and refinery will amount to a USD 
4.5 billion investment by the time production begins in early 
¶2011.  The companies have invested USD 3.8 billion to date 
and have borrowed over USD 2.5 billion.  Ambatovy has been 
hard hit by the international credit crunch, and its stock, 
valued at USD 17 per share in early 2008 is currently only 
selling for USD 5.5.  Sherritt, which is owed money by the 
Cuban government on its mining operations there, is "broke", 
Berner said. Sherritt, however, struck a deal with Kores and 
Sumitomo, in which those two companies, mainly Kores, agreed 
to pony up the additional funds needed to continue the 
project, while Sherritt maintains its 40 percent ownership. 
Berner suspected that Sherritt would have to pay them back in 
the future.  Although the project has had to slow down and 
cut its budget wherever possible, Berner said that he thought 
they would be able to make it through these lean times. 
 
. . . And Despite Malagasy Crisis 
-------------------------- 
¶3. (SBU) Although the transition authority (HAT) has been 
saber-rattling about renegotiating mining contracts, Berner 
does not think that the HAT will actually take concrete steps 
against Ambatovy, which is providing the government much 
needed tax revenue. Furthermore, the Ambatovy investment is 
based on the terms of Madagascar's mining law and a 
government decree implementing the law, rather than a 
contract between the company and the government.  (Note:  We 
and other embassies, as well as the World Bank and IMF, have 
stressed the importance of the HAT respecting contracts and 
commitments made previously by the government of Madagascar. 
End note.)  The new Minister of Environment Mariot Jean 
Florent Rakotovao was formerly a Sherritt employee; Berner 
explained that he had wasted about USD 30,000 of company 
money on nepotistic hiring and a shady housing loan program 
for his cronies and finally tried to force Sherritt to fire 
him and pay severance by taking six weeks leave after 
claiming to slip in his shower.  He was, however, forced to 
resign himself after being offered the post of HAT 
environment minister.  Despite these events (not the first 
time Rakotovao has been fired from a job for corruption or 
incompetence), Berner maintains a good working relationship 
with him, but is unable to get needed permits for operations 
such as laying pipe under a national road due to the lack of 
mid-level staff at the ministry.  The quasi-independent 
environment office (ONE), which oversees environmental 
requirements for mining and oil companies, continues to 
function under pre-existing leadership, but will run out of 
World Bank funds by year-end.  The environment ministry made 
a grab for ONE, whose consulting positions are better paid 
than those of the ministry, but was deterred for the time 
being.  The HAT has yet to name a minister of mines, but 
working-level staff are in place at the office of mines. 
 
ANTANANARI 00000431  002 OF 002 
 
 
 
¶4. (SBU) Given the prevailing lawlessness of the business 
atmosphere inspired by the coup and weak government, Ambatovy 
has been facing more employee strikes. Currently its contract 
workers from the French-owned Colas road construction firm 
are on strike due to the firing of one of their workers, who 
had been caught driving drunk.  Ambatovy has not been 
affected significantly by the recent strike at the Tamatave 
container port, as it has its own bulk loading area that has 
continued to operate. It also has its own thermal electricity 
generation capacity, so its operations should not be impacted 
by the ongoing demise of the state electricity company 
(JIRAMA). 
 
¶5. (SBU) Overall, Ambatovy operations have been more affected 
by the international financial crisis than local problems. 
Out of the company's approximately 10,000 contracted and 
direct hire employees, only one contract employee was 
evacuated during the crisis, and has subsequently returned. 
Family members were given the option to leave, but returned 
in April. The lack of tourists near the mine site actually 
was viewed by Sherritt as a positive impact as it alleviated 
traffic concerns near the site, and spared it complaints that 
may have arisen due to the actions (molesting women and 
violating traffic agreements) of a renegade Libyan 
contractor, which Sherritt has since fired. 
 
Future Concerns 
--------------- 
¶6. (SBU) Ambatovy is concerned about the negative 
repercussions that may come from laying off 8,000 (mostly 
construction) workers to downsize to a permanent workforce of 
approximately 2,000 after operations begin in early 2011.  It 
will be difficult for the local economy to absorb or place 
these displaced workers.  Berner also expressed concern about 
the multiple parts of the operation (pipeline, mine, 
refinery, delivery trucks, etc.) all working seamlessly 
together, particularly if the threat of strikes becomes more 
common.  With the price of nickel at only around USD 7 per 
pound, the project's directors and creditors keep pushing 
managers to tighten their belts.  With over USD 2.5 billion 
of debt, each day of delay repaying lenders equals a 
significant sum in interest payments.  Along with these 
financial pressures, Ambatovy is also worried about the 
possibility of the HAT changing the mining law implementing 
decree, however unlikely that may be. 
 
Comment 
------- 
¶7. (SBU) The Central Bank has been intervening on the foreign 
exchange market to prop up the Malagasy currency for several 
months.  The Bank has been promoting a strong ariary in order 
to keep import prices, and inflation, low.  This policy 
favors urban consumers at the expense of exporters and 
farmers.  The additional USD 700 million investment inflow 
for the Ambatovy project expected over the next 18 months 
could put new upward pressure on the Malagasy currency, 
alleviating the Bank's perceived need for intervention.  End 
comment. 
MARQUARDT