CONFIDENTIAL Report No.: 12378-BU BURUNDI MINING SECTOR REVIEW November 30, 1993 FILE COPY CCJ\F IDEN T 1AL Heport No: 12378 BU lype: LEC Industry and Mining Division Industry and Energy Operations Division Industry and Energy Department South-Central and Indian Ocean Department Finance and Private Sector Development Africa Region CURRENCY EQUIVALENTS Currency Unit = Burundi Franc (FBu) 1992 US$1 = 213.0 FBu 1993 (Proj.) US$1 = 235.8 FBu WEIGHTS AND MEASURES Metric System 1 tonne = 1 million grams (g) 1 tonne = 32,151 troy ounces (t oz) 1 tonne = 35,274 avoirdupois ounces (oz) ABBREVIATIONS AND ACRONYMS BHP-Utah - BHP-Utah International Minerals BRGM - Bureau de Recherches G6ologiques et BUMINCO - Burundi Mining Company COMEBU - Comptoirs Miniers des Exploitations DGM - Directorate of Geology and Mines FSU - Former Soviet Union Ma - Million years from present time OBK - Kagera Basin Organization PGM - Platinum Group Metals RTZ - RTZ Corporation PLC SOMUKI - Soci6td Minibre de Muhinga-Kigali UNDP - United Nations Development Program This report was drafted by Micheline Mescher (Economist, IENIM) and is based on the findings of a World Bank mission to Burundi in December 1992 consisting of Peter Van Der Veen (Principal Mining Engineer, IENIM), Micheline Mescher and Arnaud Domel (Economist, AF3IE). John E. Strongman (Senior Economist, IENIM) acted as peer reviewer. REPUBLIC OF BURUNDI MINING SECTOR REVIEW Table of Contents Page No. EXECUTIVE SUM M ARY ..................................................... I. INTROD UCTION ......................................................... II. MINING POTENTIAL AND CURRENT SIT U A T IO N ................................................................3 III. ATI'RACTING FOREIGN INVESTMENT.......................... 8 IV. POLICY AND REGULATORY REQUIREMENTS FOR MINING DEVELOPMENT.................................... 12 V. PUBLIC MINING INSTITUTIONS ................................. 20 VI. ISSUES IN ARTISANAL GOLD MINING........................ 23 VII. INFRASTRUCTURE FOR MINING DEVELOPM ENT ....................................................... 27 VIII. MANAGING MINING DEVELOPMENT......................... 31 ANNEX 1: BURUNDI'S GEOLOGY AND EXPLORATIONS RESULTS ANNEX 2: THE WORLD NICKEL MARKET ANNEX 3: ARTISANAL GOLD MINING PARTIAL MECHANIZATION: PRELIMINARY ANALYSIS MAP: IBRD 22907R BURUNDI: MINING SECTOR This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. EXECUTIVE SUMMARY A. Mining Potential i. Mineral production accounts for less than 1% of Burundi's GDP of about $1.1 billion. It is limited to relatively small quantities of gold, cassiterite (tin ore) and colombo-tantalite; kaolin (china clay), limestone for cement, construction stone, sand and gravel; and peat for fuel. The country's mineral potential also includes nickel, platinum-group metals, vanadium, phosphate, and rare earth metals. ii. Artisanal mining of gold and cassiterite accounts for the bulk of mining activities. It is estimated that between 300 kg and 750 kg of gold, 200 tonnes of cassiterite, and 4 tonnes of colombo-tantalite are annually produced by artisanal miners. This represents between US$5 million and US$10 million in export earnings, most of which does not pass through the formal customs system. This is equivalent to approximately 6-13% of Burundi's formally reported export revenues in 1992. iii. The most important mineral potential in Burundi is nickel sulphides. A discovery just across Burundi's border in Tanzania recently led Burundi to sign an investment agreement and assign a nickel concession to a multinational mining company. A second agreement with another investor is being negotiated. Although exploration has not yet begun and it would be premature to assume that commercially viable deposits of nickel sulphides will be found in Burundi, the potential exists for the development of a world class nickel-copper-platinum mine. iv. Under the optimistic scenario regarding the mining sector development, nickel production in Burundi could amount to 50,000 tons per annum, or about 6% of the world production. This, combined with a weak demand outlook, might put further downward pressure on world nickel prices. It would, therefore, be very important for the potential Burundi nickel producer to contract long term supply arrangements with consumers. v. With the exception of nickel and primary (non-alluvial or eluvial) gold, a potentially commercial deposit of which may exist on the BUMINCO concession, all potential mineral development seems to be economically feasible only if exploited on a semi-industrial scale or smaller. B. Mining and Overall Development vi. Substantial benefits can accrue to Burundi from a properly structured and administered mineral industry. In addition to providing foreign exchange earnings, mining activity will produce additional revenue through taxes and royalties; stimulate development of depressed regions; improve the professional and technical skills of nationals; and, provide a nucleus for economic development. However, successful large-scale development of Burundi's mineral potential would require investment in energy production in Burundi, and in the rehabilitation and maintenance of export roads to Dar Es Salaam or Mombasa. vii. While the present structure of mining institutions is adequate, the organization of work and the procedures used to assign skilled personnel to particular tasks need to be reviewed. Definition of responsibilities among the institutions in the mining law and regulations will 2 greatly help in this area. In addition, there is a need to streamline the institutions and to train their officials in mineral economics, legal matters and financial management. C. Policy and Regulatory Requirements viii. The Government's positive attitude toward foreign investment has attracted investors, as has the quality of the staff working in its mining institutions and the institutions' successful promotional work. ix. Burundi has over 100 geologists, mining engineers, geophysicists, cartographers, and other technically qualified professionals working in the mining sector. All but a handful of these professionals are working for government. A large number of these professionals work on donor-financed exploration projects, promoting Burundi's mineral prospects to prospective investors, and are poised to regulate a major mining industry and/or represent the government in a major joint-venture operation should one develop. x. Burundi's mining code should be modified relative to the award of mineral titles and the treatment of artisanal mining. The fiscal regime should also be revised. Treatment of environmental and health and safety regulations can be refined or improved to ease their implementation. In some cases, norms should be set. It is also important that the regulatory framework in Burundi be revised to define the structure and decision-making responsibilities of the mining institutions and to define transparent procedures by which government officials will carry out the law. xi. If a large, commercially-viable nickel deposit were discovered in Burundi and a large mine developed, the mining sector would become a major player in the economy. Macroeconomic and regional effects of mine development would need to be taken into account in planning a major mining project to ensure that the non-mining economy continues to grow, infrastructure is built for the mine continues to be useful after mine closure, and an adequate share of proceeds from exploitation be invested wisely so as to generate permanent income. xii. Artisanal mining is already important to the country. The artisanal sector could make an even larger contribution to the economy if the miners formed semi-industrialized units and invested in improving their operations. The mining code should encourage this by offering the possibility of legally-secured mining rights, freely transferrable and divisible to artisanal and semi-industrialized mining units. Output can also be increased with technical assistance, access to simple equipment, and implementation of a sensible tax policy. This should provide sufficient incentive to bring artisanal production within the formal export channels. 3 I. INTRODUCTION 1. Mining is an important source of tax revenue and foreign exchange earnings for many African countries and can play an essential part in the continent's economic recovery. Burundi has a variety of minerals, of which gold, nickel, tin, and some industrial minerals appear to be the most promising for commercial exploitation. Several international mining companies are negotiating investment agreements with the Government or further investigating the geology. Moreover, artisanal mining accounts for much of existing production of gold and tin. In 1981, the World Bank approved an engineering credit to finance the exploration of a laterite nickel deposit at Musongati, which eventually did not prove commercially viable. The World Bank has since maintained maintained an active dialogue with the government of Burundi, with emphasis on mining policy, institutional strenghening, and regulatory issues. 4. The objectives of this study are: A. To assess the current contribution of mining to Burundi's economy. B. To analyze mining sector's legal, fiscal and institutional frameworks, and to identify and diagnose the deficiencies that constrain investment by the private sector. C. To suggest practicable standards and practices to increase the efficiency of Burundi's artisanal mining. D. To evaluate the appeal of Burundi's mining sector to foreign investors and to recommend steps to enhance this appeal. E. To recommend policy actions to develop the country's mineral industry in an efficient manner consistent with the preservation of environment. 5. This report is sub-divided into nine chapters. Chapter 2 describes the mining potential and current mining situation in Burundi. Chapter 3 discusses the foreign investment attraction potential of Burundi's mining sector. Chapter 4 describes the policy and regulatory requirements for mining development in Burundi. Chapter 5 provides an overview of Burundi's public mining institutions. Chapter 6 treats artisanal mining issues and provides suggestions for increasing the efficiency of the sector. Infrastructure related issues are analyzed in chapter 7. Macroeconomic, local and regional impacts of large scale mining are examined in chapter 8. II. MINING POTENTIAL AND CURRENT SITUATION A. Mining Potential 6. Burundi's mining sector contributes minimally to formal export earnings and to government revenues, although some US$4 - 9 million of gold production is exported unofficially. The mining sector depends on artisanal mining of gold and cassiterite, though the country's mineral potential also includes nickel, vanadium and rare earths, among other minerals. 4 7. Nickel sulphides compose Burundi's most important mineral potential. Recent discoveries of nickel sulphide deposits in Tanzania adjacent to the Burundi border led to the signing of an investment agreement and the assignment of a nickel concession to a multinational mining company. A second agreement with another investor is being negotiated. Although exploration has not yet begun and it would be premature to assume that commercially viable deposits of nickel sulphides exist in Burundi, the potential exists for the development of a world class nickel-copper-platinum mine, possibly one with reserves of 30 million tonnes of nickel sulphide ore. Such a mine would have a major impact on Burundi's economy. 8. So far, the only gold exploited in Burundi derives from alluvial deposits found in the riverbeds of the northwest provinces of Cibitoke and Kayanza. These are of relatively low grade and have been extensively worked by artisanal miners. However, in the northeast, the Government has continued prospection on indices, that have been defined by previous exploratory work, as part of the BUMINCO joint venture in order to attract the interest of private investors. 9. Except for the possible nickel sulphides and primary (non-alluvial or eluvial) gold in eastern Burundi, potential mining development seems to be economically feasible only if exploited on a semi-industrial scale or smaller. This will require development by local investors or smaller foreign investors. It is unlikely, however, that they will be developed in the foreseeable future given the present business climate facing smaller mining operations and lack of adequate transport infrastructure. B. Evolution of the Mining Sector in Burundi 10. The mining sector contributes minimally to Burundi's GDP, formal export revenues and government budgetary resources, but its contribution would be greater if Burundi's potential in gold, nickel, vanadium, rare earths, and other minerals were to be developed. Mining in colonial Burundi began in the 1930's when the Belgian companies, Minetain and Socit6 Miniere de Muhinga-Kigali (Somuki), organized the production of gold, cassiterite and rare earths on a small-scale. These companies produced gold, tin and bastna site until the early 1960's. The first mining code was drafted in 1937. Although the colonial regime did not leave much of its mining experience in the country, it did provide the legal, fiscal and administrative structure that established the rules under which subsequent mining would be managed and taxed. The mining administration in newly independent Burundi had no experience in the application of the mining code and had no tax base on which to apply its mining fiscal regime. This changed only recently as the only mining activity in Burundi from the early 1960's to 1990 was spontaneous, artisanal extraction, which largely escapes the regulatory framework. 11. The sector is now composed of small operations of artisanal gold and cassiterite and operators of quarries, extracting construction materials. Moreover, most of the exploration for minerals is being financed by donor-funded projects. Until very recently, the Government of Burundi did not focus on mining policy, did not organize the sector under the existing legal and fiscal regimes, and did not receive revenues from the sector. 12. In the last few years, much of the donor-funded exploration activity has been reduced and, due to a lack of funds, less mineral exploration is being carried out. To adapt to the new situation, the Government is placing emphasis on promoting private investment, 5 foreign and national, and providing support services for the sector. It is developing a sectoral strategy and reviewing the necessity to improve its mining legislation and regulations. It is promoting Burundi's mineral potential to the international mining community and has invested heavily in the Government's testing and assaying laboratory in the hope that its efforts will attract new exploration capital. As a result of these efforts, the outcome of past exploration programs and recent discoveries in adjacent Tanzania, investors have shown an interest in Burundi. C. Mineral Production and Export 1. Gold and Tin Mining 13. Burundi exports gold and tin produced by artisanal miners. Gold, whose annual production is estimated to be between 300 and 750 kg, represents between US$4 and 9 million in export revenues. It is panned from the riverbeds of the northwest provinces and areas in the northeast of the country by more than 5,000 artisanal miners. Another estimated 5,000 artisanal miners are annually producing more than 200 tonnes of cassiterite (tin ore with 50-60% tin content) and 4 tonnes of colombo-tantalite (a co-product of cassiterite containing 32.95% tantalite oxide). Artisanal mining thus represents approximately US$ 5 - 10 million in export earnings, most of which does not pass through the formal customs system. This is equivalent to approximately 6 - 13% of Burundi's formally reported export revenues in 1992 1/. 14. Gold miners are not organized and the market resembles a competitive free market due to the presence of numerous buyers. With tin, however, a single company organizes the production of artisanal miners and dominate the buyers' market. Comptoirs Miniers des Exploitations du Burundi (COMEBU) is the only private company that has received a mining concession so far. COMEBU is a local company with a 20% shareholding by its foreign partner, the German industrial firm of Klockner. It has organized some 2,000 artisanal miners on two concessions in the north where it produces tin concentrate using the water gravity method of concentrating the mineral, and colombo-tantalite. A second tin company has been organized but it is new and not yet organized for production. Some unorganized cassiterite artisanal miners still exist. However, little information is available as to their numbers and how they market their production, although a market exists across the border in Rwanda. 15. More important than production, in terms of quantities and revenues, is the reexport of gold transiting from ZaIre to Europe. This gold is reexported unofficially by traders who avoid tax payments and take advantage of the difference between the official and parallel market exchange rates thus depriving the Government of Burundi of budgetary contributions. I/ These estimates assume a gold price of US$350/t oz, a tin pnce of US$5,000/tonne, and a tantalite oxide price of US$35/lb. 6 2. Quarries 16. The little-regulated quarry sub-sector produces construction materials and dimension stones for domestic use. Though the Government has granted 72 quarrying exploitation permits, it is not clear whether quarries are paying taxes and how much they contribute to government revenues. The Government has requested assistance from donors in organizing this sub-sector. D. Taxation 17. At present, mining has not brought in much revenues. The Ministry of Mines collected only US$6,396 from the royalty on gold and US$31,320 from the land rents on gold concessions in 1990. In comparison, it collected US$15,147 from the land rents on cassiterite concessions and US$21,677 from the royalty on cassiterite exports in 1992. These small sums are consequence of a mining sector that consists mostly of artisanal miners operating outside the formal economy and not contributing to government revenues. Only one registered company in cassiterite mining and the registered buyers of gold are paying taxes in the mining sector. To increase tax revenues from the sector, the Government will have to attract developers of large mines and define a mining regime that will entice artisanal miners to operate legally and pay taxes. 18. The fiscal regime should be reviewed in its entirety as it may be ineffective in generating tax revenues and in creating the incentive to efficiently mine the ore reserves. The revision of the fiscal regime should take into account not only the mining taxes that are imposed in the mining law but the taxes imposed in the tax code and customs code, and the benefits mining firms can receive from the investment code as well as the tax free zone. It is recommended that the mining tax regime be revised to be easily implemented and to be internationally competitive while remaining in line with economy-wide tax rates. Such a tax regime would be based mainly on income and dividend taxation with a minimum of tax holidays and deductions. E. Perspectives for Future Mineral Development in Burundi 19. The gold and nickel occurrences in eastern Burundi may have the potential to sustain larger mines and have already interested foreign investors. All other potential mineral development except for primary (non-alluvial or eluvial) gold and possible nickel sulphides in eastern Burundi seems to be economically feasible only if exploited on a semi-industrial scale or smaller, which will require development by local investors or smaller foreign investors. It is unlikely, given the lack of appropriate energy and transport infrastructure, that a local or foreign investor would be interested in developing any of the other minerals on a semi- industrial scale in the foreseeable future. 20. Since 1988, the Burundi Mining Company (BUMINCO), a joint venture between the Government (46%) and Mannal Investment Company (54%), has held a 1000 km2 gold exploration concession in the northeast. Some encouraging results have come from the preliminary drilling (See Annex 1); however, due to financial difficulties, the foreign investor is not actively supporting further exploration. The Government is presently looking to fully privatize the company by interesting other foreign investors in purchasing its BUMINCO's shares. 7 21. Although exploration has begun only recently and it would be premature to assume that commercially viable deposits of nickel exist in Burundi, the potential exists for the development of a large nickel-copper-platinum mine. Recent discoveries of nickel sulphide deposits in Tanzania adjacent to the Burundi border attracted the attention of large mining companies to the potential existence of similar deposits in Burundi. The Government has negotiated a large nickel concession with a multinational mining company, Rio Tinto Zinc Corporation PLC (RTZ), and a second concession is in the final stages of negotiations with BHP-Utah International (BHP-Utah), a subsidiary of the Broken Hill Proprietary Company Ltd. The two concessions will cover close to 8000 km2 in southern Burundi, almost one third of the country's territory. The nickel concession agreements should lead to extensive exploration work. 8 IHI. ATTRACTING FOREIGN INVESTMENT A. Determinants of Investor Perceptions 22. Burundi will attract foreign exploration investment if conditions and opportunities are attractive. It is therefore important that the Government know its potential investors, and that it offer a legislative and fiscal package that is competitive by international standards. To this end, Government negotiators need much information. To assist them, the characteristics of the four investors that have expressed interest in Burundi's mining sector and their perceptions have been surveyed and are presented below. 1. Risk, Uncertainty and Profit 23. Attracting foreign investment involves providing an investment opportunity that balances reward and risk. Many countries with viable geological prospects do not attract foreign investment. This is because although the return from such opportunities may be high, these opportunities are perceived to involve too much risk. Uncertainty, that is the lack of knowledge and/or understanding, makes it difficult for investors to properly assess the return, increasing the perceived risk associated with an investment opportunity. Consequently, a host country must minimize the risk and uncertainty associated with the investment opportunities it offers in order to attract investment. 2. Investment Criteria 24. The most important factors that attract foreign investment are those that will minimize the risk/return tradeoff, increasing the expected return that the potential mining project has to offer. The four most important factors affecting the return are: * the attractiveness of the geology; * the cost of energy and transportation; * the legal and fiscal terms of the mining agreement; and * the macroeconomic conditions including the exchange regime. The factors that most affect the perceived risk of a mining project for investors are political security, security of tenure (that is, the assurance that the firm can exploit the deposit once it has found it) and stability of the fiscal regime. 25. An investment opportunity is chosen not only on its own merits but on its fit with the firm's existing portfolio. Mining companies will assess a particular association of risk and return for each investment opportunity. They will chose among investment opportunities available to them by comparing the perceived risk/return tradeoffs to determine the risks that can be internalized by the firm, as well as the acceptable levels of returns that will maximize the value of the firm's portfolio. The factors that determine which tradeoffs they are willing to make are their: * size, hence their budget; * nationality, hence their geographical biases; * worldwide strategy, dependence on markets, facilities, and reserves; 9 portfolio of existing investments; and alternative investment opportunities. B. Characteristics of Interested Investors 26. If one were to group the potential investors interested in Burundi by their strategic likeness, one would define two groups. One group includes three of the largest mining firms of the world, well diversified across minerals and geographical regions. Having made it a strategy to develop properties in sub-Saharan Africa, they are in the process of acquiring properties in and around central Africa. In particular, one firm is exploring a concession in Tanzania whose geology may extend into Burundi. The possibility of substantial cost savings involved in developing two properties so close to one another is an important factor which influenced the company's investment decision. 27. The other group of firms are mining companies specializing in nickel. They do not now have a presence in Africa. Hence their interest is purely in the product and the most important factors affecting their evaluation of the opportunities in Burundi are their portfolios of existing operations (and therefore the technological compatibility of their smelters with the ore in question) and their alternative opportunities. Although prominent and financially strong companies in their own right, the second group of investors consists of smaller, more specialized firms with less experience in investing in sub-Saharan Africa, factors which may influence their perceptions of risk and of the cost of doing business there. C. Investor Perceptions of Mining Opportunities in Burundi 28. All of these potential investors see possible opportunities in Burundi. The geology is overwhelmingly the most important factor for all investors for which no other factor can compensate. However the investors' perception of the geology rests on their reading of the data available to them. While the larger firms feel that Burundi has enough good geological data and are willing to compile and synthesize it, the smaller, more specialized firms would like more and better data. This may reflect the fact that they have not reviewed all of the available data, not having visited Burundi lately for any extensive period. The opportunities in Burundi therefore seem much more elusive to them and they are not prepared to collect and work with the existing data. Attracting them would mean devoting more resources to improving the available geological data and generating new data through more prospecting efforts. 29. Security of tenure is an issue that does not create problems in Burundi as it is provided in the mining code and is guaranteed in investment agreements. With respect to political security, investors feel that they can live with the inevitable political tensions, especially since Burundi-Tanzania relations are good, having been reinforced recently by the signing of a cooperative agreement with respect to mining development. Although the mining code has not yet been revised, the stability of the fiscal regime is assured by signing 25-30 year investment agreements. 30. The lack of infrastructure and the country's landlocked location--in particular the lack of sufficient electrical power and of reliable transportation to port--are major constraints to investment by some firms interested in the nickel prospects. For the company 10 interested in gold, this is not an issue. Burundi's transportation and communications infrastructure was praised by all. 31. Although Burundi's legal and regulatory framework, including the fiscal regime, needs improvement, investors believe that a fair deal can be negotiated in a reasonable amount of time. This assessment is aided by the fact that Burundi officials have shown an open and positive attitude toward foreign investors, and have been careful to provide a hospitable environment to visiting exploration and negotiating teams. In addition, potential investors have been impressed by the level of professionalism and technical expertise of the geologists and engineers, inspiring confidence that open channels of communication can be maintained. This has an important effect in decreasing the perceived risk of doing business in Burundi. 32. With respect to the financial, exchange rate, and repatriation of profits risks, potential investors have proposed keeping offshore accounts for the retention of foreign exchange revenues so as to get around the constraints that the present system may create. Although they have not yet convinced the Government of the validity of the concept or its mechanics, they feel confident that they can reach an agreement on this point. 11 IV. POLICY AND REGULATORY REQUIREMENTS FOR MINING DEVELOPMENT 33. The present private investor interest in the mining sector is forcing the Government to face certain choices: To whom will they award concessions? What will be their role in the new ventures? What kind of incentives should they provide? The Government is eager to establish a new legal and regulatory framework, including a new fiscal regime to guide policy as its present framework needs revision and does not provide guidance on some issues being faced. However it lacks a comprehensive understanding of the benefits and consequences of the policies that should be adopted or of the measures to be used to put them into effect when it negotiated two important investment agreements with multinational companies interested in exploring for nickel, RTZ and BHP-Utah. These negotiations brought to light some shortcomings in the legal, regulatory, fiscal and financial regimes. If satisfactory, the negotiated agreements will likely form the basis for the revision of the mining code and fiscal regime. A. Main Components of an Effective Mining Sector Policy and Legislative Framework 34. In an ideal situation, the Government of Burundi would develop a comprehensive sector policy and strategy with full knowledge of the benefits and consequences of following alternative policies. It would then translate its chosen policy and strategy into a legislative, regulatory, and fiscal framework that defines the rules under which the players in the sector will conduct business, clearly stating the rights and obligations of the Government and the mining firms, and ensuring continuity over the life of the investment. 35. There are some basic principles by which mining sector policy, and the framework which translates it into action, should be guided. In general, the framework should clearly specify the process by which exploration and mineral titles are awarded. It should also clearly state the responsibilities of the firms and of the Government associated with the mineral titles, including the fiscal obligations, protection of the environment and the safeguarding of the health and safety of workers. 1. General Principle 36. The broad objective of a mining sector policy and the associated regulatory framework should be to enable and encourage private sector exploration and mining development to take place in an orderly, competitive and transparent manner. The role of the Government should be one of regulator rather than operator. Unnecessary control or unduly burdensome requirements should be avoided. in order to encourage exploration and production and to maximize the likelihood of compliance with regulations. 37. The framework can best be set out in three documents: the mining law, its attendant regulations and the model investment agreement. The mining law should clearly reflect the broad mining sector policy. It should describe the roles and responsibilities of the Government and of the investor. It should also define the different mineral titles that can be awarded and the rewards and responsibilities that they entail. The regulations ought to spell 12 out the detailed instructions on when, by whom, where and how the law will be carried out. The model mining agreement ought to detail the rules under which the investment agreement is made between the Government and the mining firm, including the details of the fiscal and financial regimes that will apply and its accounting rules if they are not clearly stated elsewhere. The fiscal and financial regimes should be compatible with the general tax code, the investment code and the decree(s) setting the level and accounting of the resource rent tax and other mining-specific taxes such as the land rent. 2. Award of Mineral Titles 38. The granting, renewal and transfer of mineral titles should, as far as possible, be based on specific criteria and procedures rather than simply being at the discretion of the concerned officials. This should provide for prompt and transparent decision-making. Some basic principles to achieve this are: * Local entities, including local entrepreneurs and cooperatives, should be just as eligible to obtain mineral titles as foreign entities; * Mineral titles should provide exclusive rights over a delineated territory, not a specific mineral. This will avoid the situation in which different parties receive rights for different minerals on the same tract of land, a situation which most serious mining investors strongly dislike. * Mineral titles ought to be transferrable. That is, often smaller exploration companies will discover a deposit but do not have the resources to develop it. If they are allowed to transfer the title to a mining company which does, they will more likely attempt to make the initial exploration investment in the hope of reaping the benefits when they interest a mining firm in developing the property. Given that many large mining firms are risk averse, this improves the likelihood of a discovery. * The granting of an exploitation permit ought to be automatic once a company has proven the existence of a deposit provided that the company has complied with the regulatory requirements. * Concession sizes ought to be predetermined using a systematic approach and not left to the discretion of the Minister. These should be delineated in such a way as to maximize the expected return from the development of the territory. * Renewal of exploitation permits ought to be automatic if the work programs and/or minimum investment requirements have been met. Renewal periods ought to be between two and three years, at which point certain relinquishment requirements ought to be imposed so as to free up unexplored territory for other investors. * Provisions ought to be made for license suspension or cancellation when work requirements, minimum investment requirements and/or health and safety or environmental regulations are substantially disregarded or violated. 13 3. Fiscal and Financial Matters 39. Given that the major aim of the Government of Burundi in developing its mining sector is to derive a surplus that can be used to spur economic growth in the rest of the economy, the Government's mining sector policy should be geared to attract investment in exploration while ensuring a maximum future cash flow for the country from the development of mines. Consequently, a good fiscal framework would balance investment incentives to attract mining firms, and the division of mineral rents between the Government and the mining firm, without distorting the engineering and economic characteristics of a project. Some basic principles by which to guide the design of such a system are: The decision on exploitation and use of the proceeds from exploitation of natural resources should take into account the overall natural resource management approach to maximize the long term benefits and to avoid any negative impact on future income and consumption levels (see chapter VIII); * The mining tax regime ought to be simple to administer and consistent with the general tax code and, with the exception of resource rent levies, in line with taxation in the other sectors of the economy; * It ought to allow for the early recovery of initial investment costs through accelerated depreciation. However tax holidays should be avoided since they distort a mining program, possibly inducing a mining company to highgrade and leave viable ore in the ground; * Tax instruments should be chosen to maximize revenues to the Government while minimizing the cost to the mining firm. This involves taking double taxation into consideration, as well as other legislation regarding the legal status of the investor's operating company that affect tax deductibility and creditability in their home countries. Consequently, this will result in a stronger emphasis on income and profit taxes than on input and output taxes; * Accounting rules should be precise and agreement should be reached on specific rules concerning the deductibility of interest payments, overheads and charges, and remittances to parent company, or affiliate; and * The overall tax burden implied by the fiscal regime should be competitive internationally, along with the level of mining costs that these taxes help to determine. That is, the overall tax burden ought to be set so as to place the country's mining costs in a competitive position on the mineral's world cost curve. B. The Existing Framework and Its Revision 1. Legislation and Regulations 40. The existing mining regulatory framework consists of a mining law, initially drafted under Belgian colonial rule in 1937 and revised after Independence in 1962 and again 14 in 1976 (Decret Loi No. 1/138 of July 17, 1976), and a set of regulations (Decret No. 100/130 of December 14, 1982). 41. A few important modifications are in order to adjust the law and regulations according to the basic principles stated above, but a major revision of the law is not necessary. The law includes the necessary specifications for administering the award of mineral land for exploration and exploitation. It sets out the types of mining titles that can be awarded, the manner in which they are to be awarded, and the rights and responsibilities they entail. The structure of the titles for prospection, exploration and exploitation is standard and is easily implementable. The law deals explicitly with the issues concerning the relations between landowners, title holders, and the State. This is extremely important in Burundi, a small and densely populated country. However, the law and regulations do have some limitations that should be modified: * They do not convey a clear policy for the sector, nor do they define the role of the Government vis-k-vis the private sector; * They do not define the mine reclamation responsibilities of the parties concerned during mine closure; * Penalties imposed for infractions of regulations relating to environmental damage or the health and safety of workers are not commensurate with the consequences of the infraction; * The regulation of quarries--an important local activity, now relatively free of regulation and ministerial discretion--ought to be tightened. The treatment of mines--now excessively controlled and discretionary--ought to be less discretionary; * Not enough emphasis is placed on the transparency of transactions or the nature and powers of the institutions that make and carry out the law; * They do not establish relinquishment requirements, an important measure to free up unused but valuable territory for other potential investors; and * They do not facilitate the award of mining titles to smaller entities and artisanal miners 2. Mining Taxation 42. The taxes imposed by the present mining law are burdensome in comparison to other countries. However, the overall fiscal regime combined with the incentives provided by the investment code and the new tax-free zone, which also applies to mining projects under certain conditions, becomes attractive to investors interested in large mines. Unfortunately, little has been done to alleviate the tax burden for small-scale miners who do not fit the prerequisites of these regimes. The fiscal regime is summarized in Table 1. 15 Table 1: The Burundi Mining Fiscal Regime Mining Law Tax Code Investment Tax Free Zone Code Income Tax -- 45%; 35% for rural Maximum 10 yr tax holiday; areas; 50% reduction 8 yrs 15% thereafter for export promotion tax holiday in special cases Dividend -- 15% -- Total exemption Withholding Accelerated -- 25% -- -- Depreciation Loss Carry- - 7 yrs -- -- forward Reinvest-ment 15% of revenues up to -- -- -- Allowance 50% of net income if reinvested within 5 yrs Export Duty Total exemption Total exemption Total exemption Import Duties -- -- Total or partial Total exemption for exemption for listed products equipment; supplies exempt 5 yrs Other, In- direct -- Total exemption Total exemption Taxes Mining Taxes * Royalty 9% cassiterite (% of mine- 7% gold,nickel head value) US$0.02-US$4/ha/yr * Land Rent US$0.02 -US$0.20/ha * Mining with minimum of US$93- Permit 938 depending on the type Fees of permit Note The exchange rate used throughout this Table as the IMF's 1993 official rate of 213 FBu to 1 US dollar 43. An important revision of the fiscal regime is in order as the present tax system is based mostly on the revenue earning capacity of an ad valorem tax (i.e. the royalty), given that income tax liabilities are sheltered by tax holidays, reinvestment allowances and accelerated depreciation, and that import duties are exempted. At present this structure provides the incentive for firms to chose suboptimal cutoff grades, reducing the size of the reserves that will be mined, thereby reducing the tax revenues to the Government. A system based on income taxes with lower royalty rates could provide more tax revenues, since it would create less incentive to highgrade the deposit and would be more attractive to the investors since it would provide them with the possibility of crediting the tax payments against tax liabilities in their home country. 16 44. A suggested regime would involve repealing the eligibility of mining for tax- free zone treatment, disallowing tax holidays and the reinvestment allowance, and reducing the royalty rate to a range of 2-3%, with no change to the income tax or the dividend withholding tax rates presently on the books. It is also suggested that land rents be increased, especially the supplements due when work programs are not being followed in a timely manner or when work requirements specified in exploration agreements are not being reasonably fulfilled. C. Environmental, Health and Safety Issues of Mining in Burundi 45. At present Burundi's mining regulations spell out the precautions that need to be taken with respect to the environment and the health and safety of workers. These regulations need to be reviewed, made more applicable to the type of mining activity that is most likely to occur in Burundi, and standards set and monitored. 46. Standards for new projects should be set in project agreements and environmental considerations such as siting of facilities, protection of ecologically sensitive areas, and human health and safety, should be included at the earliest stage possible in project planning and design. It is important to create awareness of environmental protection issues among the local population as well. Their cooperation and understanding will be vital to the mining projects. 47. Before any new mining project commences, a baseline environmental study should be carried out to provide a picture of the status of vegetation, rivers, streams, air quality, and wildlife. The next stage is the preparation of an environmental impact assessment accompanied by an environmental action plan to mitigate any negative effects. The action plan, which should be based on the baseline study and impact assessment, should be an essential prerequisite for final investment approval. Finally, there needs to be adequate and clearly specified reporting requirements and monitoring procedures, together with appropriate sanctions if agreed environmental, health and safety standards are not met or environmental problems go uncorrected. 48. These requirements are not presently in place and will take some time to be defined, altering the obligations of investors with respect to the environment, and the health and safety of workers. It is therefore necessary to make provisions for changes, subject to agreed-upon criteria. Disputes should be resolved by some acceptable form of arbitration. 49. Finally, limits of risks in the case of catastrophe need to be considered when negotiating environmental provisions. Although there is much dispute on this point, many governments retain powers to suspend operations they consider environmentally damaging. This greatly increases the risks to the investor. However, since both the Government and company would lose revenue through suspension, it is in their mutual interest to ensure that such powers not be used. Most modern agreements require that companies take prompt measures to deal with emergencies and create a financial reserve for such contingencies. 17 V. PUBLIC MINING INSTITUTIONS A. The Importance of Effective Mining Institutions 50. Effective support for and regulation of the mining sector should be the role of public mining institutions. A well-designed legislative and fiscal framework for the mining sector may prove ineffective if the sectoral institutions lack the capabilities to respond to private sector investors in a timely and non-corrupt manner. 51. The structure of mining institutions, the capacity of their officials and the procedures that organize their work must be well adapted to the functions they are to fulfill. These functions are as follows: * design and implementation of mining sector policy and regulation; * mining sector administration, including mining title and land management; * production and diffusion of geological information; * investment promotion and assistance, including negotiations with investors; * monitoring exploration and mining activity, ensuring that work and expenditure requirements are met; and * monitoring and enforcing miners' health, mine safety, and the environmental regulations. 52. This will require a small number of adequately equipped and funded institutions with well defined roles and professional staff trained for their functions, operating under clearly defined decision-making authority, transparent procedures and a good management information system. The skill and capacity of the institutions' officials are important factor in the effective management of the sector. In addition to the technical education in geology and mining engineering which most of the mining officials in Burundi now have, it is important to develop mining-related administrative skills such as mining law, mineral project economics and finance, and geological information systems. B. Issues Concerning the Current Institutional Framework 53. Currently the mining sector in Burundi is administered by the Ministry of Energy and Mines. The Ministry is organized into two major units, the Directorate of Energy and the Directorate of Geology and Mines (DGM). The DGM is administratively divided into three services: the Geology Department, the Mines and Quarries Department and the Laboratory. Total employment in the DGM is 168 persons of whom 90 are professionals, mainly geologists and mining engineers. 54. The principal department of the DGM is the Geology Department which is responsible for mineral prospection and exploration, geological analysis, preparation and publication of maps and geological studies. Its mandate is essentially that of a Geological Survey. The Department is well equipped and has some well-trained staff in all of its functions but is overstaffed: It employs 90 people, of whom 61 are professionals (7 geophysicists, 30 geologists, 6 technicians, 12 drillers and 6 cartographers). Most of the professionals were 18 trained in either Belgium or Burundi when the Musongati laterite nickel deposit looked promising; some also received training in Romania, the FSU, and Algeria. 55. The Mines and Quarries Department has two "offices": the Administration of Mines and Quarries Office and the Assistance and Promotion of Projects Office. On paper, the Administration of Mines and Quarries Office is in charge of sectoral policy and legislation, and the implementation of the mining law and regulations. The latter includes the allocation of mining titles, land management and the monitoring of mining activity. The Assistance and Promotion of Projects Office is in charge of the promotional work, technical assistance to local miners and quarries, and the technical monitoring of feasibility studies. 56. In actuality however, when performing its duties, the Department's and offices' roles differ from this pattern and the responsibilities of the two offices overlap. The Administration of Mines and Quarries Office collects mining taxes and does the technical follow-up of existing projects. The office has four mining engineers who also inspect and monitor the environmental aspects of the mines and quarries, and provide extension services. The Assistance and Promotion of Projects Office in actuality participates in exploration activities and in subcontracting its services. The office handles all relations with donors and monitors mining projects. It also provides extension services and inventories quarry materials. The Mines and Quarries Department is also overstaffed, employing approximately 40 people, of whom 17 are professionals. 57. The Laboratory Department is responsible for the chemical analysis of ore samples. It was well equipped and assisted by the UNDP Mining Exploration and Development Project which ended in 1992. The laboratory has been given relative independence from the Geology Department so that it may freely provide for-fee services to the private sector and eventually become autofinanced. However, while it presently provides paid services to the Geology Department, and to BUMINCO, COMEBU, and an environmental donor-funded project, only 10% of its financing needs were met by paid services in 1992. 90% of its recurrent costs were being supported by the government budget and some foreign aid. The Government has recently invested in housing the laboratory in a new building and is planning to invest another $0.4 million in 1993 and 1994 in the laboratory building. Although its work is not yet computerized, it has sufficient computer equipment to do so. Further investment in the laboratory is unwarranted as its present capacity is underutilized. The Laboratory employs 38 people, of whom 12 are professionals. 58. Although the institutions' structure seems adequate, the organization of work and the procedures used to apply skills to particular tasks need to be reviewed, particularly because the functions and attributes of officials is fluid between and within Departments and between tasks. Most officials prefer working in the field, in large measure because the per diems earned during a two-week field trip (1,500 FBu/day) can represent 50% of the basic monthly salary. This makes it difficult to keep staff on administrative positions. As a corollary, the purely administrative tasks suffer from a lack of competency. In addition, there is a need to streamline the institutions and to train their officials in mineral economics, legal matters and financial management. 59. The procedures that determine the way officials implement the law are also important to the successful functioning of the sector. They determine the amount of 19 bureaucratic red tape and corruption involved in conducting business. In particular, the processes of gaining the appropriate government approvals should be streamlined. 60. One of the causes of functional overlap and vague procedures is the lack of institutional role definition in the mining law and regulations. Neither the mining law nor the regulations set out the decision-making authority beyond that of the Minister in charge of mines. The regulations do not specify the structure of the institutions, their procedures and the organization of their work. The revision of the mining legislative and regulatory framework should therefore include this institutional aspect. 20 VI. ISSUES IN ARTISANAL GOLD MINING A. Background 61. The occurrence of small alluvial gold deposits in Burundi has been known for decades, but not enough geological information is available to determine the existence or whereabouts of the primary ore. Hence it is assumed that the deposits are too small to support large mechanized mining, and would best be suited for artisanal and small-scale mining. Artisanal gold miners are presently working in the northwest around Cibitoke, around the BUMINCO concession in the northeast and further south in the Cankuzo-Ruyigi area. 62. Artisanal mining is of socio-economic importance to rural areas of the Burundi economy as it provides employment and monetary income in areas that are still largely based on subsistence agriculture. It consists mostly of panning alluvial deposits in riverbeds. B. Key Constraints 63. Artisanal gold miners use rudimentary techniques. They recuperate the gold in makeshift sluiceboxes in which the ore is shovelled and through which a stream of water is allowed to wash the heavier particles, including gold, onto the reeds acting as a catchment in the middle. This concentrate is then panned until the gold is separated. The gold particles that remain (in the form of dust, flecks and nuggets) are rolled into balled wax which the miners carry in their pockets. This technique requires little investment. The only cost to the miners is the one-time fee they pay the landowner for digging gold on his property. In a good month a miner can recuperate 6 grams of gold, earning US$54-60, an attractive supplementary income given Burundi's per capita GDP of US$216 in 1991. A miner family can net about US$600 per season, as supplementary income, if more efficient gold recuperation techniques are adopted (See Annex 3). 64. Better organization of the work would also improve efficiency. At present, miners take turns digging, panning and collecting the gold for fear that if they don't pan it themselves they will not receive their fair share of the product. 65. Legally, individual artisanal miners must appear in person at the DGM to register and present the authorities with information on estimated production and market value, for taxation purposes. However unlike concession holders who sign investment agreements with the Government, artisanal miners are not eligible to receive tax exemptions. Neither do they receive mining rights, and thus are obligated to cede their mining sites in the event legal mining title holders present themselves. Since this registration procedure does not provide miners with any benefits while it subjects them to the discretion of the tax authorities, it is not to their advantage to travel to Bujumbura to register themselves. Hence, they do not do so. Nor do they pay the mining taxes that are legally due. 21 C. Health and Safety and Environmental Impacts 66. Artisanal gold mining involves shovelling surface gravels and panning for gold in streams. It is not harmful to the health or to the safety of the miners. Moreover, it does not have negative long term environmental consequences. Although the topsoil in the fertile valleys is being turned over and mixed with sterile, the topsoil would regenerate itself in a matter of a few years, if these areas were left to nature, as topsoil is washed down from the surrounding hillsides to the valleys. No chemicals are being used in the process of mining or separating the gold from the ore. D. Commercialization 67. Between 1985 and 1990, five private licensed gold buyers, comptoirs, tried to organize artisanal gold production; but over the years, unofficial buyers, responding to the gap between the official and parallel exchange rates as well as evading taxes, entered the market and made it impossible to compete on the basis of price, the most important determinant of supply. Though the comptoirs were working with artisans to improve their methods and provided some simple equipment such as shovels and pans, the miners preferred to sell their gold to the highest bidder. Three comptoirs remain in business, operating as simple traders. 68. Gold escapes the payment of taxes because it is traded by unofficial buyers. Unofficial gold trading is further encouraged by the 15%-20% differential between the official and parallel exchange rates and by the desire to export untaxed earnings. A trader in need of dollars will buy local gold; that fetches approximately 2000 FBu per gram in Burundi, and export it unofficially instead of buying dollars on the parallel exchange market. The exporter of gold will earn US$9.40 per gram of gold with 90% metal content (given a market price of US$325/troy ounce), while his 2000 FBu would buy only US$8.16 - $8.53 on the parallel market in Burundi. The three licensed comptoirs officially export over 4 tonnes of gold annually, but little of this originates in Burundi. More than 95% of that gold is transiting from Zaire's artisanal goldfields in the Kivu to Europe. Far more gold is estimated to transit through Burundi unofficially. E. Technical Assistance 69. Technical assistance to train miners in mining and processing methods and in planning and organization functions is essential. Engineers, geologists, and metallurgists within DGM could undertake this task. Individual artisanal miners need to be encouraged to form "co- operatives" to exploit more efficiently resources, benefit from some degree of mechanization, and market their output more efficiently. 70. Using small-scale gold recovery equipment would clearly increase the efficiency of recovery of artisanal operations. However, the cost of such equipment is too high for artisanal miners and the very high risk associated with small-scale mining operations means that finance may not be available at affordable rates. The Government may therefore have to take the lead in providing information about facilities for private sector development which are being put in place with donor assistance. One possible option could be that a businessman or investor --local or foreign-- could provide the seed money with the agreement that he/she will receive a fair share of the production (See Annex 3). 22 71. Probably the most important equipment that the Government--or a third party-- could make available is a small earthmoving implement, such as a backhoe, for digging holes and trenches. The Government could provide one or two such implements to be rotated at several localities. 72. Gold recovery could be partially mechanized by using small gold recovery systems such as sluice concentrators, centrifugal gold concentrators, or "gold misers" with a maximum hourly throughput capacity of about 3 to 5 cubic meters. A quick and dirty cost and benefit analysis shows that an artisanal miner family's income may be increased by $600 per season as a result of partial mechanization of the gold recovery system (See Annex 3). F. Recommendations 73. The licensing procedure for artisanal miners should be made simple and unbureaucratic. It is important that the DGM set up special local (extension) branches to cater to artisanal miners. It is obvious that the system will only work if the agency has a physical presence in the artisanal mining district and is staffed with competent and dedicated personnel. 74. Taxation and fees should be set at levels that would encourage a more optimal level of resource utilization, discourage noncompliance, and collect adequate revenue for the Government. Royalties and production taxes, also referred to as ad-valorem taxes, are generally set as a percentage of the value of the marketable product. A reasonable level, about 3%, is recommended. This should be lower than the tax rate for a mining company as the latter usually benefits from deductions such as depletion and depreciation allowances. In addition, duty-free importation of gold recovery/concentration equipment should be allowed for artisanal miners. Preferential tax treatment is warranted because artisans mine limited mineralizations, not workable by larger units, thus extending national resources. 23 VII. INFRASTRUCTURE FOR MINING DEVELOPMENT A. Providing Infrastructure to Mining Projects 75. Government has three options with respect to the terms on which it could offer to provide infrastructure for prospective mining projects: no provision, provision in return for an equity share equal to the value of the infrastructure, and provision in return for user charges. Circumstances will dictate the choice, but it is desirable that government policy be spelled out clearly for investors. In some situations, the Government may consider contributing to the financing of infrastructure because its discount rate can be lower than that of the private sector, for example, or in cases where construction may lead to the development of other industries or improve the efficiency of existing ones. The potential development of nickel deposits in southern Burundi may involve such a project. 76. In some cases government construction of infrastructure in return for equity or user fees may enable an otherwise marginal mining project to meet the investor's economic criteria. A public contribution may also reduce risk to the private investor, hence reducing the required financial rate of return and attracting the investment. This will have the secondary effect of increasing the tax base in the mining sector. 77. Another alternative is the construction and ownership of infrastructure by enterprises other than the mining company or government. In some countries, public utilities already operate at arms length from the Government or have been privatized. This opens opportunities for the supply of infrastructure by third parties. If such arrangements are possible, the Government should encourage them and interfere as little as possible in the contract terms negotiated. For example, independent power companies could supply electricity. This is a possible alternative for the supply of electricity for any new nickel project in Burundi. In effect the Government is being approached by Hydro-Quebec, a Canadian utility company, for the right to supply electricity if a nickel project is developed. 78. To ensure efficient operation, the management and operation of infrastructure specifically constructed for or dedicated to a mining project should be the mine operator's responsibility. Where existing or improved public facilities are to be shared with mining projects, efficient operation would require that it be written in the operator's contract to continue to provide services to third parties. B. State of Infrastructure Supporting the Mining Sector in Burundi 1. Transport 79. The disparity between the contribution of the mining industry to the national economy and its far larger potential is partly due to Burundi's being landlocked and to the inadequate export infrastructure in surrounding countries. Burundi is bounded by Rwanda, Tanzania and ZaYre. The western border with Zaire is a natural divide formed by Lake Tanganyika and the river Rusizi on the floor of the western rift valley system. The country is largely mountainous. Although there are three main land routes for transporting external trade toward East African sea ports, the most likely and feasible alternative for evacuation of nickel 24 from southern Burundi is the Central Corridor (boat/rail) which involves a 200 kIn boat trip south on Lake Tanganyika to Kigoma, Tanzania from which the Tanzania Railway Corporation rail system can transport the cargo 1250 km to Dar Es Salaam. The Central Corridor (road/rail) involves road transport through northern Burundi to Tanzania directly to the port or connecting to the railroad at Isaka, Tanzania and then on to Dar Es Salaam. Since long stretches of this route are in poor condition, this alternative would be very costly. The Northern Corridor involves truck transport through Rwanda, Uganda and Kenya to Mombasa. This route is longer and more expensive than the other two. 80. Among the issues with the Central Corridor (boat/rail) are the state of the ports of Kigoma and Dar Es Salaam, and the state of Tanzania's railroads. The port of Kigoma, managed by the Tanzania Railway Corporation, has undergone substantial infrastructure improvements in recent years, including rebuilding the storage areas and rehabilitating the wharf to allow the handling of containers. Facilities at the Dar Es Salaam port are being rehabilitated with the help of an IDA project (Port Modernization Project, Cr. #2095-TA). The credit became effective on December 28, 1990 and will make available US$120 million for the expansion and rehabilitation of the port over a seven-year period. The container terminal expansion and the new storage depots are expected to be ready by June 1994. Storage and handling facilities should then be adequate to accommodate the potential nickel exports. 81. The Dar Es Salaam-Kigoma railway is also being rehabilitated with the assistance of an IDA project (Tanzania Railway Restructuring Project, Cr. #2267-TA) to increase capacity from 0.9 million tonnes to 2.5 million tonnes of cargo annually by implementing container technology, repairing existing wagons, locomotives and service engines, and purchasing new ones. The project became effective in April 1992 and makes available US$250 million over a five-year period to execute the rehabilitation; however, to date project implementation has been slow and the railroad's performance has not changed. At present, the railroad carries petroleum and other imports from Dar Es Salaam to Kigoma in transit to Burundi and Rwanda and returns to Dar Es Salaam empty. This trip takes approximately three weeks. 82. Gold exports would require the use of local roads and international air links between Burundi and Europe, both of which are available. Burundi has made a considerable effort to improve its road network. It has more than 1000 km of paved roads and more than 5000 km of non-paved roads that are kept in good condition. A potential investor looking into the possibility of investing in gold exploration has ranked Burundi's road network as the best among the four African countries in which it is considering investing. Burundi is also served daily by international airlines; its airport is equipped with modern handling facilities. 2. Energy 83. Burundi's energy infrastructure rates less well with potential investors than any other aspect of its business climate. The electricity supply for an eventual mine and mill is of major concern to potential investors that are currently negotiating investment agreements to explore the nickel deposits. A nickel operation, producing 50,000 tonnes of nickel concentrate annually, would require at least 100 MW. 25 84. Burundi has a number of hydroelectric stations at Rwegura, Mugere, and Nyemanga with a total installed capacity of 39 MW of power. It is planning on building a new hydroelectric dam at Kagunuzi which could add another 97 MW. 1/ Burundi has participated in the funding of two dams in Zaire on the Rusizi River, from which it can be supplied up to 35 MW. Similarly, the Rusumo Falls project of the Kagera Basin Organization (OBK) would provide Burundi with another 20 MW. Mining development would require the building of new hydroelectric stations, either on the Mulembwe River or on the Kagunuzi River. The energy requirements of the first phase of a potential nickel plant in southern Burundi could be met from the existing 110 Kv power line to Gitega, which could provide 40 MW if and when the Kagunuzi project is completed. 85. As part of the earlier work on the development of the Musongati nickel deposits, studies were undertaken by Outokumpu Oy and Ekono Oy on the feasibility of using local peat as a fuel in order to provide process steam and electric power. In the northern peat- bogs of the Akanyaru valley, the studies found, first, significant reserves of good quality peat, which could satisfy the energy needs for the processing of the lateritic nickel ore of Musongati, and second, that the peat is satisfactory for use as fuel for the production of process steam and for generating electrical power. 86. Coal from Tanzania could be another alternative source of fuel; however, it is of low calorific content and the lack of appropriate infrastructure to transport it to southern Burundi entails clear disadvantages. 3. Water Supply 87. The water requirements for a possible nickel mine in southern Burundi can be fulfilled by tributaries of either the Nyakijanda River or the Lumpunge River, both of which have sufficient water flow. VIII. MANAGING MINING DEVELOPMENT A. Macroeconomic Effects of Large-Scale Mining 88. At present, based on available data, it is unclear whether a large nickel or gold mine will be developed in Burundi. However, the management of the revenues that would be generated if Burundi were to develop one or more large nickel mines and possibly a gold mine is a potentially important issue and would need to be carefully considered in a macroeconomic framework. 89. The decision on exploitation of a depletable natural resource and use of the proceeds from exploitation taking into account future income and consumption levels. To ensure adequate use of the proceeds from the exploitation of natural resources with a view to securing permanent income, the Government should consider setting up an investment fund as a special financing instrument for development purposes. Establishment of such a fund should not be confused with the earmarking of government revenues, since the portion of (net) 1/ A World Bank review of the pre-feasibility of the Kagunuzi hydroelectric project in 1989 questioned the viability of the project and recommended investigation of alternative sites. 26 proceeds to be set aside and invested should not be considered as income in the first place. Instead, the fund should be considered as a special source of financing of a non-permanent nature with a view to convert the proceeds from the sale of an asset (i.e. the depletable mineral resource) into a permanent income strea (i.e. return on investment within or outside the country depending on investment opportunities and macro-economic stabilization) from which future generations also benefit. 91. International mineral commodity prices have been subject to wide fluctuations during the past 10 or more years or so. Many countries have experienced major economic management problems as a result of both precipitous declines and rapid increases in prices. To smooth the process and to insulate the non-mineral economy from the vagaries of the international mineral commodity markets, the Government should also consider adopting a mineral commodity-price determined stabilization policy. If the mineral commodity price exceeds a certain level, the windfall proceeds should be "sterilized" (i.e., invested abroad, or to accelerate the reimbursement of outstanding debt which was equivalent to 90% of GDP with a debt service ratio of 48.5% in 1992) so as not to affect the domestic economy through an appreciation of the real exchange rate (i.e, the relation between prices of traded and non-traded goods). If on the other hand the mineral commodity price were to drop below a certain level, one could tap the reserves that would have been previously built up; however, given the many uncertainties regarding price forecasts, it might be more prudent to adjust the level of economic activity downwards in the case of marked price declines. 1/ 92. It is still much too early to prepare for the eventuality since the mineral deposits have not yet been explored. If successful, however, the nickel and gold mining projects will likely generate substantial export revenue and provide the Government with substantial tax revenue. Two scenarios can be constructed to estimate the size of those revenues. In the optimistic scenario we assume that a nickel mine, producing 50,000 tonnes of nickel concentrates associated with copper and platinum, is opened in the medium term, 5-10 years.1/ It is also assumed that a medium-sized gold mine, producing 2 tonnes of gold dor6, is opened in the medium term. In the less optimistic scenario, only the nickel mine is opened. (See Table 2). 93. Given the two scenarios described above, one can see that, regardless of the nickel price swings, the macroeconomic effect of mine development will be quite substantial should a large nickel mine be developed. The optimistic scenario would generate US$251 million of exports annually; the less optimistic one generates US$178 million. Compared to 1992 export levels, the optimistic scenario would triple export revenue, whereas the less optimistic scenario would more than double it. The same broadly holds true for government 4/ For further discussion of natural resource management, see the World Bank's "Angola- Public Expenditure Issues and Priorities During Transition to a Market Economy", Annex C, June 14, 1993. 5/ Assumptions on a probable future nickel mine are those that were used by qualified consultants for the Government of Burundi during the mining agreement negotiations to construct a financial model. The export and government revenue figures are based on the results of that model. It is not expected that any export revenues or government tax revenues will accrue before at least five years after exploration has begun, assuming that a commercial deposit exists and that the mining company decides to go ahead with the mine. That is, the exploration stage will take at least three years. Mine development will most likely require the building not only of the mine but the mill and the smelter. We cannot expect a development stage of less than two years. Once the mine is open, it would take at least six months before a commercial production is declared. 27 revenues, which would increase by 38% under the optimistic scenario and by 30% in the less optimistic scenario. Table 2: Mining Sector Development Scenarios for the Medium Term Future (5-10 years) Assumption/Result Optimistic Scenario Less Optimistic Scenario Nickel Mine: Developed Developed Nickel price US$3.50/lb US$2.50/lb Annual export revenues at full capacity US$230 million US$178 million Average annual government revenues US$59 million US$46 million Gold Mine: Developed Not developed Gold price US$325/t oz -- Annual export revenues at full capacity US$21 million -- Average annual government revenues US$5 million -- B. Local and Regional Effects of Large Mine Development 94. The construction of one or more large mines and infrastructure to support them would yield many positive local and regional effects on employment, the development of supply industries, and on economic and social lifestyles of surrounding villages and towns. Regional economic growth will inevitably result in southern Burundi if one or more large nickel mines are developed. On the other hand, rapid construction and mining development can have several negative effects on the local population, including: * Disruption of the indigenous society and culture. The introduction of a new and large productive activity into the area results in the rapid development of a market-related economy, including rapid wealth acquisition by members of the community that tends to modify or destroy many existing social and cultural institutions. These changes and their ramifications escape the control of local government authorities and community or traditional leaders. Perhaps the most agonizing cost inflicted on local residents occurs when they realize that the expected benefits from mine development are accruing to others rather than to themselves. 28 Disruption of traditional economic activities. The construction phase of new physical infrastructure, such as roads, power, water, etc., affects the surrounding communities' ability to fish, hunt and farm. During the mining phase, environmental damage due to waste rock and tailings discharges, as well as from air pollution from the processing plant, can affect traditional economic activities. * Increased prevalence of disease. The obvious factors increasing the risk of disease is the importation of disease caused by a sudden increase in population density and the possible unavailability of adequate health care. However, another hidden factor may be the dietary imbalances that can be created as food prices increase with only part of the community benefitting from increased cash wages. * Friction between "outsiders" expatriates and local residents. The abrupt influx of outsiders needed to construct and operate the mine is disturbing and often cannot be assimilated in the natural pattern of life of the surrounding communities. The low education level of the local community in most remote areas limits its ability to understand mining development and its impacts, making the community's contact with the mining enterprise difficult--fraught with misunderstanding and distrust. * Political frictions between local and national authorities are associated with the distribution of decision-making authority over the mine's development and operation. In many cases, low levels of staffing at the provincial and local government levels further decrease the ability of the local community to participate in decision-making and to resolve important issues that may affect it. 95. These negative effects may be more acutely created by medium-scale mine developments because the anticipated mine life is relatively short, hence the benefits to the surrounding communities are short lived: * The project produces less indirect benefits in many cases because duration of the enterprise is shorter; * The mine provides less ancillary support facilities, such as schools, hospitals and housing; * Company officials take less care to avoid social, cultural and environmental disruptions as a result of the shorter time frame and the tighter financial controls; and * Having less interest in the project because it will not receive as much revenue, the national government leaves more of the regulatory and support burden on the local government, that has less resources with which to properly handle these matters. 96. With respect to local and regional effects, it will be essential that social impact studies be undertaken prior to the development of the mine. The issues that are anticipated by the studies should be addressed by the Government, the communities and the company prior to the development of the mine. In addition, established procedures and mechanisms should be 29 organized so that affected people can be adequately represented in decision-making with respect to the mine. Compensation and mitigation methods need to be designed and implemented for local and regional communities. 97. Another major issue to consider will be how to plan for the eventual closure of the mines fifteen to twenty years down the road and how to secure the health of the regional economy after closure. This is an issue that will involve careful consideration of the options for building and maintaining the infrastructure and social investments that will be made by the companies and the Government during the life of the mines. While it is beneficial to build schools and hospitals for the eventual inflow of people, their construction must take into account their maintenance once the mines are closed. For this reason, regional development schemes ought to consider attracting other industries in the region so as to make better use of the new infrastructure and provide a continuum of growth after mine closure. 30 ANNEX I BURUNDI'S GEOLOGY AND EXPLORATION RESULTS A. Geology 1/ 1. Burundi is underlain by three great Precambrian provinces--the Archean Complex, the Malagarazian Formations, and the Burundian Formations. While there are no known economic mineralizations in the Archean Complex and the Malagarazian sediments, the predominant Burundian sequences contain most of the mineralizations known to date. 2. The Mid-Proterozoic Burundian rocks cover the major part of the country and directly overlie the Archean crystalline rocks. They belong to the Kibaran belt, an intracratonic mobile belt with an extensive history of orogenesis from 1350-1100 million years before present time (M a). There is an associated protracted history of granitoid emplacement extending from Shaba to Uganda. A late, major, shear event (1100 M a), the Cene deformation, runs along the center of the country, hosting considerable alkali intrusives. Ultramafic and mafic bodies, found east of the Cene zone, are interpreted as being derived from a deep seated source emplaced along a major intracratonic fracture system. The ultrabasic rocks in Burundi are often represented in outcrop by nickel-bearing laterites with significant nickel concentrations (e.g. the Musongati nickel deposit). It is also expected that these laterites cover high grade nickel-cobalt-copper massive sulphides such as have been found in the ultramafic intrusives in the Kabanga area of Tanzania, adjacent to the Burundi border. 3. Burundian granites are associated with cassiterite and colombo-tantalite mineralizations in the northern and northeastern parts of the country. They have also been associated with gold mineralization known to occur in the northwest, northeast, east and central parts of the country. Gold-bearing quartz veins hosted by quartzites occur as part of the external zone of the Kibaran belt in northeastern Burundi, thought to be produced during the Kibaran thrusting. 4. Late Precambrian alkaline magmatism includes a carbonatite which contains a phosphate (apatite) deposit in Matongo, northern Burundi. In addition, several industrial mineral deposits have been found and evaluated, namely kaolin, feldspars, carbonate rocks and silica. B. Past Exploration Efforts and their Results 6/ The material in this section was compiled from a variety of sources including: "Assessing the Potential of Burundi's Nickel Laterites", Engineenn2 and Mining Journal, July 1986; the Ministry of Energy and Mines, Burundi Mineral Resources, April 1991; Sutton Resources, news and press releases on the Kabanga joint venture in Tanzania, June 9, 1992; R.L. Bedell et al., "Turbidite-hosted Proterozoic Gold Exploration in the Kibaran Belt, Burundi, Central Africa," Proceedings of the International Meeting on Thrust Tectonics, Royal Holloway and Bedford New College, Egham, UK, April 2-5, 1990; and L. Tack et al., "Late Kibaran Magmatism in Burundi," Journal of African Earth Sciences, Vol 10, No. 4, 1990. 31 5. Geological prospection by the Mineral Survey Project of the United Nations Development Programme (UNDP) began in 1962. It has been financing prospection and the collection and mapping of geological data since then until 1992, when its last mining project was terminated. In the interim, several bilateral and multilateral donor aid agencies, and the World Bank, have also financed prospection and exploration works in conjunction with the Directorate of Geology and Mines of the Ministry of Energy and Mines (DGM): * The Bureau de Recherches Geologiques et Minires (BRGM) financed geochemical prospection (1981-1984) on gold anomalies near Butihinda and Muyinga; * The Mus6e Royal d'Afrique Centrale, Tervuren, has financed geological cartography since 1982; * German assistance financed the work of BRG, a German company, on tin and bastnaisite between 1981 and 1985; * Chinese cooperation has financed the evaluation of industrial minerals for the manufacture of ceramic products since 1985; * Austrian assistance financed a drilling program for carbonate materials in 1985 and a prefeasibility study for cement in 1990; * IDA (Nickel Exploration/Engineering Project, Credit #1 154-BU) financed a study to confirm the high-grade ore quality and availability of the Musongati nickel deposit, between 1981 and 1986; and * The African Development Bank is financing the exploration of the phosphate deposit at Matongo, 1990-1993. 6. A good deal of geological data and maps have been developed as a result of these prospection and exploration campaigns: Airborne geophysical surveys (radiometric, magnetometric, electromagnetic, and photogeologic) (see Map), surface investigations (geochemistry and structural geology) and drilling campaigns have been done on much of Burundi's territory. This information is on 52 maps on a scale of 1:50,000. The analog data is with each of the companies that performed the surveys. However, although much information exists on Burundi's mineral geology, the data remains fragmented and there exists no overall geological database to present to prospective investors. 7. This systematic geological research and mineral exploration have led to the delineation of several ore bodies: nickel laterite reserves at Musongati; gold occurrences in Muyinga and Cibitoke; cassiterite in Murehe; vanadium at Mukanda; bastnadsite at Gakara; and phosphates at Matongo. 1. Nickel 8. The geological potential for nickel in Burundi was first recognized by the UNDP in 1968. These works permitted the definition of an ore body that covers approximately 30 km in southeastern Burundi. The preliminary exploration and a pre- feasibility study of the nickel laterite deposit at Musongati, the most promising zone, were very encouraging, showing a 10-11% annual financial rate of return on the integrated project including the mine, the processing plant and the required infrastructure. Further exploration drilling and sampling work in the "high-grade" zone, financed with the assistance of IDA's 32 Burundi Nickel Exploration/Engineering Project (Credit I 154-BU, 1981), yielded disappointing results that failed to interest private investors in the project. 9. It wasn't until 1991 when Sutton Resources, a Canadian exploration company with a concession in the Kabanga area in Tanzania, delineated a large nickel bearing massive sulphide deposit adjacent to the Burundi border (richer than the laterites of Musongati), that investors began to speculate on the presence of a similar geology in Burundi. There had been no exploration for nickel sulphides in Burundi because, although they would occur in the same geographical zone as the nickel laterites previously explored, nickel sulphides require deeper drilling. 2. Gold 10. The discovery of gold goes back to the 1930's, when Minetain exploited placer gold deposits of the Cibitoke province, in northwest Burundi, using artisanal methods. Geochemical gold anomalies are currently being evaluated by the DGM. In addition, under a German cooperation project, alluvial gold exploration is underway in the same area. Since the early discoveries of gold by Minetain, artisanal miners have been working the riverbeds of the region. 11. Some 20 gold occurrences with significant values have been identified on BUMINCO's concession in northeastern Burundi, where many gold mineralized quartz veins and stockworks, encased in quartzite, have been discovered. So far, the preliminary drilling has resulted in probable reserves of 5 tonnes of gold at 2.98 g/tonne made up of a rich zone with a grade of lOg/tonne and a cutoff grade of 4 g/tonne and a less rich zone with 1.2 g/tonne and a cutoff grade of 0.5 g/tonne. A bankable feasibility study of the deposit will require an investment of approximately US$1.5 million to finance more diamond drilling to determine proven reserves. 12. South of Bujumbura, on the Ruzibazi and Dama rivers, gold was discovered by Minetain and Somuki. Various surveys conducted by the DGM followed. Another prospective area for gold mineralization is the Cankuzo-Ruyigi area in eastern Burundi, where alluvial gold was extracted by Somuki in the 1930's. It is presently being worked by artisanal miners. 3. Cassiterite 13. According to the available geological data, cassiterite deposits in Burundi are of relatively low grade. In 1990, with the assistance of German foreign aid, the Government of Burundi evaluated the ancient eluvial and alluvial deposits of cassiterite (tin)/wolframite (tungsten)/colombo-tantalite. In the four zones explored, the probable reserves amounted to 750 tonnes. It was found that these could be economically mined by a semi-industrialized operation. Subsequently, prospection funded by the UNDP in the area of Kabarore led to certain interesting indices, which were to be studied further. However, the work was suspended in 1986 with the fall in the price of tin on the world markets and no further efforts are being taken to collect and synthesize the available geological data to determine the potential for the expansion and development of future cassiterite mining. 33 4. Vanadium 14. Vanadium was discovered in Mukanda, eastern Burundi, by the UNDP in 1978. This work has permitted the definition of a iron-titanium-vanadium lenticular vein deposit with proven reserves of approximately 9.7 million tonnes of mineral at a cutoff grade of 0.6% V. These reserves could sustain a 500,000 tonnes/yr. open pit mine for the first four years and an underground mine thereafter. The prefeasibility study, done in 1985 by Elkem, estimated a rate of return of 10%, a marginal proposition. 5. Rare Earths 15. Rare earths have been known to exist in Burundi since the 1930's when the Belgian companies were mining bastnaesite semi-industrially at Gakara, in western Burundi. Between 1981-1985, with the help of German technical assistance, the DGM evaluated the old exploitations located in the northwestern and western parts of the country. Probable and possible reserves are established at 5000 tonnes. A feasibility study showed that a semi- industrial exploitation, producing 500 tonnes/yr., would be economically viable. 6. Phosphate 16. The Matongo phosphate deposit was discovered in 1974 after airborne radiometric work was executed. Surface investigation and drilling campaigns were later taken up by UNDP. In addition, a study of the market for fertilizer in Burundi and neighboring countries was done by Louis Berger International with IDA financing in 1986. Samples of Matongo phosphates tested in 1988 were found suitable for production of simple superphosphates and partially acidulated phosphates. Prospection drilling and a feasibility study financed by the African Development Bank is being prepared. 7. Other 17. Platinum-group-metals (PGM) were first found in Burundi together with the nickel deposit at Musongati. They were also discovered in other locations, including the Rusizi plain: cuttings from two wells were assayed in 1975 and 1976 at up to 2.92 ppm PGM and 3.52 ppm gold. 18. In a separate effort, a search for diamonds in the Nyanza-Lac region, southern Burundi, resulted in 30 samples being analyzed. They have yielded topaz, gem diamonds, titanium (both rutile and ilmenite), zircon, and monazite. 19. Deposits of carbonate materials of the type needed to produce cement exist in the Rusizi Plain. In 1985, bilateral Austrian assistance financed a drilling program which proved the existence of 2 million tonnes, enough to keep a 60,000 tonnes/yr. cement plant supplied with raw material for more than 20 years. A prefeasibility study was prepared in 1990 and concluded that a cement project would be economically viable with a 21.08% rate of return. A final feasibility study is being prepared with Chinese technical assistance. 34 20. Industrial minerals for the production and finishing of ceramics have been found in northern Burundi and are being explored by the Chinese National Company for Geological Work since 1985. Deposits of kgolin have been found at Vyerwa and Matongo. Feldspars and guartz were found near Ngozi and Kayanza. An economic feasibility study is being undertaken for their production. C. Current Geology Department Activities 21. The Geology Department is currently working on several prospection projects that are being funded in the Ministry of Energy and Mines' 1993-95 public expenditure budget, as shown in Table A-1. Table A-1: Geology Department Activities in 1993-95 (in US $ equivalents) Activity Financing Mechanism Amount Prospection for tin and rare Own budget $200,000 earths Feasibility study for Own budget $40,000 phosphates Prospection for gold Own budget $134,000 Mineral inventory- GTZ (Germany) $178,000 geophysical verification of sulphide anomalies Cartography AGCD (Belgium) $104,000 Study of exploitation of AGCD (Belgium) $125,000 natural stones Training AGCD (Belgium) $79,000 Total $860,000 Note: The exchange rate used is the IMF's projected rate of 235.8 FBu to ) US dollar for the 1993 -95 period. 35 ANNEX 2 THE WORLD NICKEL MARKET A. Current Market Conditions 1. Demand 1. Total world consumption of nickel dropped from 878,000 tonnes in 1991 to 821,000 tonnes in 1992. World consumption of nickel for the first five months of 1993 was 347,600 tonnes. The world demand for nickel is driven by the stainless steel industry, which consumes more than 60% of primary nickel output. The remaining 40% of primary nickel consumption is in nonferrous alloys and electroplating. Ultimate end uses of nickel are: transportation, 28%; chemical industry, 15%; construction, 9%; electrical equipment, 9%; fabricated metal products, 8%; petroleum, 7%; household appliances, 7%; machinery, 7%, and other, 10%. 2. Between 1981 and 1991, demand for nickel in the Western world annually grew at almost 4%. However, demand began to slow in early 1991 as recessionary forces spread from North America to Western Europe and eventually to Japan. Since then, the economic restructuring of Russia and other members of the FSU has allowed stocks of cathode and metal powder originally allocated to the Soviet defense industry to be exported to the West. 2. Supply 3. Total world nickel mine productionl/ dropped to 893,500 tonnes in 1992 from 939,200 tonnes in 1991. Production for the first quarter of 1993 was 200,900 tonnes. Russia and Canada are the largest producers of mined nickel, followed by New Caledonia, Indonesia, and Australia. 4. World primary nickel production fell to 866,100 tonnes in 1992 from 921,700 tonnes in 1991. Primary nickel production for the first quarter of 1993 was 197,500 tonnes. Russia, with more than 30% of primary nickel production, is by far the largest producer, followed by Canada, Japan, Norway, and Australia. 5. In 1992 and 1993, the market remained oversupplied due to continued availability of large supplies of Russian nickel. 3. Trade 6. Russia, Canada, Norway, and Australia were the largest nickel exporters in 1992. It is estimated that Russia exported 100,000-110,000 tonnes of nickel in 1992 (up from 90,500 tonnes in 1991), while Canada, Norway, and Australia exported 111,400 tonnes, 1/ Nickel mine production is the nickel content of concentrate. 36 53,900 tonnes, and 30,700 tonnes, respectively. In 1992, the United States, Germany and Japan were the largest importers of nickel with imports of 98,500 tonnes, 41,000 tonnes, and 33,800 tonnes, respectively. 7. In 1990, the United States signed an agreement with the U.S.S.R. that allowed the Soviets to resume exports of nickel and nickel-containing products, such as stainless steel, to the United States. With the dissolution of the U.S.S.R. and the creation of a market economy in the Republic of Russia, large tonnages of primary nickel were shifted from the Soviet military-industrial complex to markets in Western Europe, Japan, and the United States. This influx of Russian materials accelerated in early 1992, exerting a downward pressure on nickel prices in the second half of 1992. 8. Export controls imposed by the new Russian Government were expected to slow the flow of nickel cathode, but some smuggling will inevitably continue until the ruble stabilizes. Exports of cathode and nickel alloys masquerading as scrap will be especially difficult to control. Russian's push to export is being driven by two forces. First, demand for stainless steel within the FSU has been declining since 1989. Second, a large disparity still exists between internal nickel prices and the London Metal Exchange (LME) cash price. In January 1991, nickel was being sold in the former Soviet Union for about US$100/tonne, at a time when the LME price was about US$8,000/tonne. This gap has narrowed considerably since then. By July 1992, the internal price appeared to have skyrocketed to US$3,000/tonne, but the gap was still huge. 9. On the speculative side, trading by commodity investment funds continues to exert a growing influence on the market, sometimes contributing to substantial price swings. 4. Stocks 10. In 1992, as huge supplies of finished nickel and various nickel scrap products reached the West in the aftermath of the breakup of the former Soviet Union, LME nickel stocks increased by nearly 53,000 tonnes to around 70,000 tonnes. The trend continued in 1993, as LME stocks exceeded 90,000 tonnes in May and were close to 100,000 tonnes in July. 11. In October 1992, the United States Congress passed legislation allowing disposal of 33,760 tonnes of nickel from the U.S. National Defense Stockpile over a 5-year period. This is expected to exert additional downward pressure on nickel prices in the short and medium terms. 5. Production Cost 12. There are several significant factors that determine the cost of producing nickel. They include the type and nickel content of the ore, the mining method, transportation, infrastructure, energy prices, labor and materials, regulatory compliance, and credit from recoverable byproducts. 13. Generally, nickel can be recovered from sulfide ores at a lower cost than from laterite ores because sulfides are more readily concentrated using established mineral dressing methods. On the other hand, virtually all of the laterite deposits are open pit operations and, 37 therefore, less costly to mine. Most sulfide deposits occur at depth and have to be mined from underground . Shaft sinking, timbering, roof bolting, lighting, ventilation, and pumping all drive up costs. 14. Energy consumption is the most significant cost in recovering nickel from laterite ores. Estimates indicate that for every US$1 increase in the price of a barrel of crude oil, there is a corresponding increase of US$0.05/lb of nickel produced at operations that are dependent on oil for both drying and smelting. 15. Byproduct revenues can significantly reduce net production costs. Smelters that convert laterite ores to ferronickel produce only slag, iron, and occasionally electrical power as byproducts. Smelters that process laterite ores using a chemical leaching method sometimes recover cobalt as a byproduct. In contrast, sulfide operations generate revenues from the recovery of byproduct copper, cobalt, and precious metals. 16. A 1991 U.S. Bureau of Mines reportl/ evaluated the availability of nickel from 36 deposits or districts in 16 market-economy countries, analyzing more than 95% of production capacity in those countries. The study determined the quantity of nickel available on the basis of net production costs and total costs with both a 0% and a 10% discounted cash- flow rate of return. According to the study, between 80-85 percent of potential production from operating mines and selected nonproducers can be attained at or below US$2.25/lb (in constant January 1987 US dollars). Sensitivity studies performed for both laterite and sulfide deposits indicated that the total cost of producing nickel from laterites was most sensitive to increases in energy costs and the total cost of producing nickel from sulfide deposits was most sensitive to increases in labor costs and revenues from byproducts. B. Outlook 1. Demand and Supply 17. Austeniticl/ stainless steel will continue to drive world nickel demand through 1998. Japan is expected to be the dominant austenitic producer for the rest of the century and will continue to rely heavily on Australia, Indonesia, New Caledonia, and the Philippines for nickel matte and mine products. Japan is also the largest per capita consumer of stainless steel of all types. In recent years, Japanese stainless production has been 1.4 to 1.9 times greater than that of the United States. U.S. stainless production peaked in 1988 at about 2 million tonnes and has since been running between 1.70 and 1.85 million tonnes. 18. Western demand for austenitic stainless steel in 1993 should be slightly less than the record high of 1990 because of the Japanese recession. The rest of East Asia will continue expanding stainless production capacity, although perhaps at a somewhat reduced pace. Little or no growth is planned for Western Europe, which accounted for 36% of the 12.4 1/Bleiwas, D.I., Availability of Primary Nickel in Market Economy Countries, U.S. Bureau of Mines IC 9276, 1991, 52 pp. 1/ The so-called 18-8 grade stainless steel, containing 16% to 26% chromium and 6% to 20% nickel. It is not hardenable by heat treatment and is nonmagnetic in the annealed condition. 38 million tonnes of stainless steel (both austenitic and ferritic grades) produced worldwide in 1991. The Republic of Korea is already making more stainless than either Sweden or the United Kingdom, while Taiwan is hard on the heels of Finland, which currently ranks eighth in Western Europe. 19. Consumption of stainless steel by end use is also shifting. Decreased demand in traditional areas such as automobile wheel covers will be partially offset by new uses such as state-of-the-art pollution control equipment. Nickel consumption in stainless plate, the bright spot in 1990, may decline temporarily because growth in the capital goods sector is expected to remain sluggish for the next two or three years. 20. A significant amount of nickel also goes into superalloys. Much of this material ends up either in jet turbine engines or in sophisticated chemical processing equipment such as chemical reactors and pumps. A record number of orders for civil aircraft are expected to materialize sometime after 1997 as aging fleets will need to be replaced. Demand for nickel by jet engine producers will probably be flat until then, as many airlines are experiencing financial difficulties brought on by recession and fierce competition. Similarly, orders for new chemical plants and equipment will continue to be weak through 1996, but the situation should improve as economic restructuring in Germany and recovery in Japan take hold. The long-term outlook for superalloys is favorable. 21. Nickel plays a prominent role in many of the latest battery prototypes to propel the electric cars of the 21st century. Nickel is preferred to lead for its lower density and environmental benignity. An impetus to the manufacture of electric cars was added after the State of California passed environmental legislation in 1990 requiring that at least 2% of the new automobiles sold in the state in 1998 be "zero-emission" vehicles. This figure climbs to 10% by the year 2003. All major U.S. automobile manufacturers and several Japanese companies are currently conducting research on nickel and nickel-cadmium based batteries. 22. Owing to the depressed demand for superalloys and the current recession in much of the Western world, as well as the United States Government sales of nickel from its strategic stockpile, the short-term outlook for nickel remains bleak. In the medium and long term, much will depend upon the usage of nickel in the manufacture of electric car batteries. 2. Substitutes 23. With few exceptions, substitutes for nickel would result in increased cost or some sacrifice in the performance of the product. Present and potential nickel substitutes include aluminum, coated steels, and plastics in the construction and transportation industries; nickel-free specialty steels in the power generating, petrochemical, and petroleum industries; titanium and plastics in severe corrosive applications; and cobalt, copper, and platinum in catalytic uses. 3. Price 24. The global slowdown in economic activity and large LME stocks put pressure on nickel prices in 1992, triggering a slide in the third quarter. During the first half of 1992, the monthly LME cash price was relatively stable, ranging from US$7,193 to US$7,862/tonne (US$3.26-3.57/lb). But by October 1992, the price fell below US$6,614/tonne (US$3.00/Ib), 39 the break-even point for some marginal producers and a psychological barrier for others. At one point in mid-November, the price was as low as US$5,275/tonne (US$2.39/lb). By yearend, it had recovered somewhat after Inco, Falconbridge, Sumitomo, and several other producers announced cutbacks in output for 1993. LME nickel cash prices fluctuated between US$5,780 and US$6,160/tonne (US$2.62-US$2.79/lb) in March and April 1993. However, in July 1993, prices dropped below US$5,000/tonne (US$2.27/lb) and reached the US$4,410/tonne (US$2.00/lb) level in September 1993. 25. According to the World Bank's projections, the nickel price in the 1994-2000 period is expected to grow by 2% annually in real terms due to healthier growth in the OECD and LMIC economies. In addition, it is estimated that capacity expansions and greenfield projects to increase production have been slowed down due to low prices and will lag the upturn in demand, thus supporting higher future nickel prices. The nickel price is projected to reach current US$7,500/tonne (US$3.40/1b) by 1995 and $11,043/tonne (US$5.00/Ib) by the year 2000. 40 ANNEX 3 PARTIAL MECHANIZATION OF ARTISANAL GOLD MINING: PRELIMINARY ANALYSIS Artisanal gold recovery could be partially mechanized by using recovery systems such as sluice concentrators, centrifugal gold concentrator, or "gold miser" with a maximum throughput capacity of about 3 to 5 cubic meters per hour. Based on experience in other countries, a quick and dirty cost analysis of such undertaking is illustrated as follows: Assumptions: - Capital cost of a 3-5 cubic meters/hour throughput gold concentration/recovery system, smelting furnace and related equipment (excludes cost of earthmoving by backhoe or similar equipment): $US30,000 - Average gold content: 1 gram/cubic meter - Mining rate: 1 cubic meter/miner team/day a miner team is defined as members of a family working together (usually 2-3 persons including children) - Number of miner teams served by a concentration unit: 30 - Overall recovery: 80% - Gold price of $350/ounce (about $10/gram) - Average number of working days per year: 100 - 25% of revenues will be used to pay toward the cost of recovery equipment and other supplies Preliminary Analysis: Using the above assumptions, a recovery/concentration unit, serving 30 miner teams, will yield 30 grams x 80% = 24 grams of gold per day worth US$240. This is equivalent to a gross income of $8 per miner team (family) per day or a total of $800 per family per season (year). It is assumed that 25% of the gross revenue will be used to pay for the cost of recovery system and other supplies. This amounts to a total of $US6,000 per season for all 30 miner teams. As a result, each miner team (family) will net $US600 per season (100 working days). Summary of results: -A $US30,000 Capital investment in recoverysystems will have a payback period of 5 years, and - A miner family will net $US600 per season. MAP OF BURUNDI