Could you give us a brief presentation and history of Phelps Dodge Madagascar?
This is an American mining company, with its main interest being in the southwest United States. The company has had a long association with southern Africa since the early 70's. We have a couple of mines. In 1994 we did a global review aiming at studying diversification, and one of the metal of interest was nickel. Madagascar has one of the best underdeveloped nickel deposits in southern Africa. We came here and took a license on the mine. We did an extensive exploration program from 1995 till 1998 when we finished the pre-feasibility study. Subsequent to that study we discovered a titanium deposit in the southern part of Madagascar. This deposit is much less evaluated in terms of exploration compared to the nickel project.
We had an extended period of talks with the ministry of Mines and the World Bank, because the legislation for large mining was not established. There is a law project called " la loi sur les grands investissements miniers" (Law on investments for great mines LGIM) which is scheduled to go before parliament in the coming future. We have been waiting on the legislation for quite a while. We have not done any substantial exploration on the nickel since 1998, but we have been working on the titanium.
Is there exploitation going on at the titanium site?
There has not been any exploitation. It is quite underdeveloped; a number of things must come together before a substantial mining investment can take place. QIT & Rio Tinto have been here since 1986, they have had environmental challenges, but their environmental permit passed last week. Generally around the world, it takes a decade from finding resources and starting the exploitation. In Madagascar it seems to take a bit longer. Apart from the domestic issues, you are probably familiar with the terms necessary and sufficient conditions in economics, so the law "la loi sur les grands investissements miniers" is a necessary condition. The "necessary and sufficient" conditions would be better metal prices, legislation (LGIM), and a general positive feeling for mining companies to move forward with large investments in Madagascar.
How far are the projects right now?
The nickel project has had its pre-feasibility study done. The exploration, the metallurgy, environmental assessment has been done, but a bit dated since it is 4 years old. The LGIM law needs to be put in place, and a sustained improvement in metal prices must occur. Improvements to transport infrastructure such as the railway, and a track-record of reliability would also be a positive factor, lacking at present.
What expectations do you have regarding the quantities of minerals to be found?
The 1998 feasibility study planned on 30,000 tons of nickel, 3,000 tons of cobalt a year. With sagesse rétrospective we now think that it would actually need to be a bit bigger to be economic, around 40,000 tons of nickel and 4,000 tons of cobalt. The usine needed to extract the metal from the ore might have to be located on the coast. There is huge infrastructure bottleneck between Tamatave and Tananarive. You just cannot get 1000 tons of supplies a day up that road.
You said the environmental studies were completed but were obsolete?
The environmental studies did cost more than the drilling itself. The study may have to be updated because things move on. 4 years ago we were not thinking of doing treatment of the ore on the coast, therefore there is a gap in the environmental study. Even though it is a sensitive area our general experience of working on environmental issues with the Government has been positive. The environmental law is "tough but fair". We have a joint venture with the ministry of forest, with a program of co-management of the forest. We have a whole team in the forest permanently, doing inventory of the forest resources.
What has been the total investment so far?
We call it expense rather than investment, we have spent 18 millions dollars and half a million in the south on the titanium project.
Do you think the expense is worth the effort?
You would have to refer that to our head office. That is the way of the mining industry. It has not been a huge proportion of Phelps Dodge's global exploration budget over the 8 years.
How do you foresee the development of the sector in Madagascar?
The small-scale mining industry, for gems or gold for example, has a lot of potential for helping a lot of Malagasy to get out of poverty. The World Bank has made heroic effort to regularize the industry, I wish them luck. On the big mine sector the cut is around 150 million dollars investment threshold for an investors to start. I think the QIT titanium project is going to go ahead, I just have a sense that they are going to do something. It will be interesting to see how that develops particularly now that PD has found a second titanium deposit not far away. The two projects together might have the critical mass to encourage Government or third-party infrastructure development in the South, particularly in transport and power. Lack of infrastructure (that is already in place in competitor countries) is Madagascar's Achilles Heel. Mining companies are happy to be dependable customers for, say, power but don't want to get into the utilities business. Basically Madagascar needs a trophy investor in large mines development, then the herd will follow shortly after. Everybody is hesitant to be the first, particularly if there is no infrastructure. Nickel is a tough business to start up, because it's more volatile. In the nickel mining, there has to be a grouping of 2 or 3 investors. We have got as far as talking to Australian banks that might be prepared to finance a power plant. That is one of Madagascar Achilles' heel, the lack of power. Others might also be prepared to put in a sulfur burning acid plant. We are trying to orchestrate all these people, what we are lacking is a key operator.
| Any good prospect for a central operator?
We are still looking for this key-partner, and there have been a couple of possibilities. In essence the metal industry is really not in a good state at the moment, and possibly the proposed technology needs a few more years to establish a track-record. The global trend towards mergers also affects mining. Major groups are joining forces and forming a few huge companies and a couple of years of consolidation will then follow. Metal prices, paticularly copper are at their worst levels for the past 15 years, which has a negative impact on the mines back in the USA and hence funding for new projects.
what would you advise investors wanting to come to Madagascar?
I think you have to aim for low technology projects, which is why the QIT titanium project is going to work. The titanium project in the south only needs technology that can be fairly easily maintained in a place like Madagascar with a limited industrial capacity. In comparison the nickel project, has a metallurgical flow sheet as long as my arm, it is quite challenging. The country lacks the industrial base to support these type of projects. In mining in Madagascar the immediate future is in titanium but there is a catch. The simple technology is not that expensive, which sounds good but the value of the product is not that high (about $80/tonne for titanium ore) and the Common Law tax regime is unfavorable compared to competitor countries. The old Investment Code fixed this tax problem but was annulled under World Bank pressure. It would be a natural to add-value to titanium ore in Madagascar and qualify for Zone Franche status, but there's no power. Finally, the low capital investment ($50-100 million) means you do not make the investment's threshold for the LGIM and its fiscal advantages. The QIT project is only viable because of, once off, tax concessions. So there is a possibility that QIT will be Madagascar's first, and last, titanium mine.
For our titanium and nickel projects we are looking for someone, established in the industry, to be the lead operator. There has been quite a lot of interest especially in titanium. We had some people here last week, and we took the tax guy through all the local taxes. There were 2 or 3 in there, like the Professional Tax, that are essentially investment taxes. People were questioning why is their custom tax on capital imports? My perception is that there has not been any significant interest in Madagascar mining since the Investment Code was repealed. The economic rationale of lenders to Madagascar is that if a mining investment requires a light tax burden it's not an efficient use of capital. Its better to put your 50 million dollars in investment into a textile operation, which can make return of 25%. But capital is not that fungible, mining companies aren't going to switch into textiles. Better to modify your economic principles than to die a virgin.
What has been your greatest satisfaction so far?
We have pioneered some social-economic programs and some environmental programs that are a first in Madagascar. We have subsidized a clinic, which offers nutrition and basic health programs. Technically, a big satisfaction was finding the titanium in the south. The nickel project has the potential to bring great satisfaction too, but it will be a difficult birth.
what is you biggest challenge for the coming future?
I would say that it would be finding partners for our projects, someone willing to share the heavy lift. It is an awesome challenge to raise awareness of the work remaining to be done. People's thinking seems to be influenced by their appreciation precious stone mining in Madagascar. With gems, you find the deposit on Monday and you are in production by Thursday. It is quite different for large-scale mining of commodities.
What would be you final message to our readers?
My message would be to give the place a good hard look, and be very patient.
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