Madagascar Makes its Mining Mark

TORONTO (ResourceInvestor.com) -- Best known for lemurs, baobab trees and vibrant music, Madagascar is now aiming to be regarded for something that has long eluded this southern African nation - economic growth.

The island government has targeted mining to be a key driver of this advancement.

Host to approximately 17 million people, the world's fourth largest island is mired in poverty, even by African standards - the country ranked in the bottom 30 of the 2004 United Nation's Human Development Index.

Formerly an independent kingdom, Madagascar became a French colony in 1896 and gained full independence in 1960 (French remains an official language, along with Malagasy, and the legal system is based on French civil law).

Ever since, the country has been plagued by political instability, including a disastrous experiment with Marxism in the 1970s.

The latest strife occurred following the presidential elections in December 2001 in which Marc Ravalomanana, the popular mayor of Antananarivo, Madagascar's capital, challenged Didier Ratsiraka, who had ruled the country for close to 25 years.

Ravalomanana accused Ratsiraka of vote rigging; Ratsiraka denied the charges and called for a run-off. A general strike ensued and the country was effectively split with Ravalomanana in the capital and Ratsiraka establishing a rival government in the eastern port city of Toamasina. Not until April of 2002 did Madagascar's courts declare Ravalomanana the rightful winner with more than 51 percent of the vote; recognition from the international community followed.

Nevertheless, the damage was done, with the crisis triggering a 12% drop in GDP.

A fresh start

To his credit, Ravalomanana, a former businessman, initiated economic reforms, cut taxes and allowed the sale of land for the first time since independence. As a result, the economy grew an impressive 9.6% in 2003.

Part of the economic reforms included changes to the mining code, sponsored by the World Bank. These changes included reduced income and dividend taxes, reduction or elimination of customs duties, a uniform licensing regime and rights to international arbitration of disputes.

The revised mining code should attract investment to this potentially rich, yet largely unexplored, island, host to numerous nickel, ilmenite, sapphires, rubies, diamonds, gold and bauxite targets.

One of the biggest and most advanced projects is Dynatec's [TSX: DY] Ambatovy nickel project, located 80 kilometres east of the capital. Dynatec acquired a 100% stake in the project in January from its partner, Phelps Dodge [NYSE: PD]

Ambatovy is currently pegged at 125 million tonnes of proven and probable reserves at 1.04% nickel and 0.099% cobalt using a 0.8% nickel cutoff grade. A feasibility study released in February determined an annual design capacity of 60,000 tonnes of LME Class 1 nickel, 5,600 tonnes of cobalt and 186,000 tonnes of ammonium sulphate over a 27-year mine life

The plan is for an open-pit mining operation and an ore preparation plant at the mine site, with the ore transported in a slurry through a 195 kilometre long pipeline to a pressure acid leach plant located near Toamasina. Capital costs are estimated at US$2.25 billion, including infrastructure improvements, producing an after-tax rate of return at up to 16.4%.

Dynatec is now on the hunt for a partner or partners to help defray the huge cost.

Right behind the Ambatovy project is work on two large ilmenite deposits.

Rio Tinto [LSE: RIO] has an 80/20 joint venture with the government to develop a US$350 million mine near Fort Dauphin on the southeast coast of the island. The project has generated strong opposition from environmental groups that say it will destroy the coastal forest and displace the surrounding communities. The company will decide whether to go ahead with the project by middle of this year.

Ticor Ltd. [ASE: TOR] is advancing its Toliara sands project, located in the southwestern part of the country. In January 2005, the company announced a reserve estimate for the Ranobe deposit of 465 million tonnes with a heavy mineral content grading 6.2%.

Further down the development scale are a number of companies with early-stage prospects.

Cline Mining [TSX-V: CMK], better known for its coal properties in British Columbia, owns the Bekisopa iron ore deposit in the south central part of the island. Previous exploration, including trenching and drilling, was carried out by the French government and the United Nations. The work indicates the deposit could approach 150 million tones of magnetite ore with low amounts of deleterious phosphorus and sulphur. Cline Mining is reviewing the data and plans to carry out a comprehensive work program to fully evaluate the deposit's potential.

Pan African Mining [TSX-V: PAF], which went public in July 2004, is exploring a number of properties for gold, uranium, diamonds and precious stones, base metals and industrial commodities. Diamond Fields International [TSX: DFI] is looking at early-stage diamond, nickel and platinum group metals (PGM) properties, while Jubilee Platinum [AIM: JLP] has found a large nickel deposit that will likely result in it spinning off its PGM properties. In October 2004, Majescor Resources [TSX-V: MAJ] struck a joint venture with De Beers to carry out diamond exploration in northern and central Madagascar.

Could all this mining activity be the beginning of a properly functioning economy, or will Madagascar's hopes be just another false dawn that has haunted sub-Saharan Africa since breaking its colonial yoke?

The hurdles are high. The country is very poor; life expectancy is below 60 years. Infrastructure, everything from energy to transportation, is sparse. Time will tell if title issues are worth more than the paper they are printed on. But the government is putting in place a framework to attract investment in the mining sector and it is working given the amount of capital being expended now on exploration and project development.

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