Cablegate: Moving Laos Into China, Truck by Truck

VZCZCXRO1315
RR RUEHCHI RUEHDT RUEHHM
DE RUEHVN #0632/01 1880301
ZNR UUUUU ZZH
R 070301Z JUL 06
FM AMEMBASSY VIENTIANE
TO RUEHC/SECSTATE WASHDC 0105
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBJ/AMEMBASSY BEIJING 1989
RUEHBY/AMEMBASSY CANBERRA 0889
RUEHCHI/AMCONSUL CHIANG MAI 0426
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 VIENTIANE 000632

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP/MLS AND EB/ESC/IEC
PASS TO USTR FOR D. BISBEE

E.O. 12958: N/A
TAGS: ECON EMIN ENRG ETRD LA
SUBJECT: MOVING LAOS INTO CHINA, TRUCK BY TRUCK

REF: 05 VIENTIANE 1298

VIENTIANE 00000632 001.2 OF 003

1. (SBU) Summary: Laos has mineral resources and China wants
them. A regional mining conference in Vientiane shows the
deep penetration of the Chinese into the mining sector, and
the GoL's preferential treatment of its Chinese investors.
Anxious to attract the investment, the Lao have little
capacity or commitment for insisting on mining companies'
respecting environmental standards. Left to its own devices,
the mining industry, spearheaded by myriad Chinese companies,
may wreak havoc on Laos' environment and provide very little
in exchange. End Summary.

Hot rocks
-----------
2. (U) The June 16 Greater Mekong Subregion Mining
Conference, organized by the newly-formed Ministry of Energy
and Mines, aimed at attracting investor attention to this
booming sector of the economy. Laos is comparatively
mineral-rich, sharing a common geology with the
mineral-producing region of southern China. However, only
about 30 percent of the country has been mapped (mostly by
the Soviet Union during the late 1970s), and less than 10
percent has been extensively explored. Gold and silver are
both present in commercially viable amounts, and gold, along
with copper, are currently big-ticket export items. There are
also substantial deposits of zinc, lead, tin, antimony and
bismuth. Of metallic minerals there are scattered but
substantial deposits of cobalt, manganese, and tungsten, and
probably substantial amounts of iron. Precious and
semi-precious stones are found in several parts of the
country. Anthracite coal is found in the northern provinces.

3. (U) Mining is clearly set to become one of the mainstays
of the Lao economy, perhaps eventually its largest earner of
revenues, and the GoL is accordingly keen to develop the
sector. Oxiana, the Australian gold and copper mining firm
operating in Salawan Province, is emblematic of how this will
happen. Another Australian firm, Phu Bia mining, is running a
smaller gold and copper mining operation in northern
Vientiane Province. Gold and copper exports, non-existent
before 2003, by 2005 were valued at $53 and $64 million
respectively. Those figures will climb significantly over the
next several years, especially when Phu Bia begins production
on a larger scale.

4. (U) In 2006 the Oxiana operation is expected to produce
170,000 oz. of gold and 60,000 tons of copper. Oxiana paid $7
million in royalties to the GoL in 2005 (their first full
year of production). For 2006 that figure is expected to
exceed $16 million. The company paid taxes of an additional
$7 million, up to more than $30 million for 2006. These are
very considerable revenues in a tiny economy with a total GDP
of $2.5 billion, and unlike the case of hydropower from the
Nam Theun II Project, there are no safeguards or guidelines
for how these revenues are to be used or accounted for within
the GoL.

The investment climate gives China another edge
--------------------------------------------- --
5. (SBU) Dreadful infrastructure and worse government have
made the kinds of investment needed to exploit these mineral
riches hard to come by. The Australians, accustomed to
working in bad neighborhoods, have been the exception. These
days, such large and lucrative investments are generally safe
from GoL interference or harassment (though Oxiana did have
to agree to an un-scheduled re-negotiation the amounts they
remit to the GoL as the world market prices of Gold and
Copper rose). But lack of rule of law has resulted in some
expropriation and claim-jumping of smaller foreign-owned
operations over the years, sometimes by Chinese interests and
with official GoL connivance.

An environmental and political price
------------------------------------
6. (SBU) Reading between the lines of the mining conference,
the mining sector is set to become another environmental
disaster, if the customary Chinese disregard for pollution
and ecological degradation pertains. A representative of the
Yunan Bureau of Mineral Resources gave a lengthy paper on ore
prospecting and extraction methods. He made no mention at all
of the environment or methods to mitigate negative
externalities. In fact, among the investors only the
Australians mentioned environmental concerns. After he spoke,
two American academics in the environmental field gave a

VIENTIANE 00000632 002.2 OF 003

brave but hopeless soliloquy on mistakes made and lessons
learned during mining in the Philippines.

7. (SBU) In fact, the Lao Mining Law of 1997 provides, albeit
in very general terms, for mitigation of environmental
damage. There is even a provision for restoration of the
topography to its original configuration, as well as for
resettlement and compensation for villagers affected by
mining operations - articles no one believes will ever be
fully enforced. The law also identifies all the mineral
wealth in the country as the property of the State, and
subject to centralized management by the GoL, so there is
little question of the mining sector becoming a spur to Lao
private enterprise. However, some Chinese and Vietnamese
outfits pursue exploration and extraction without GoL input.

Dig that coal, and get the lead out
-----------------------------------
8. (U) Coal and lead are growing in importance as exports to
China (Lao anthracite finds a ready market in Yunan), with
Chinese exploitation hampered only by poor infrastructure.
Coal deposits in Vientiane Province alone are estimated at
about 11 million extractable tons, requiring the removal of
at least 25 million cubic meters of overburden in open pit
operations. Plans are well under way for Chinese-Lao joint
ventures to begin mining at three locations in the province,
and coal exploration is on-going in Luang Prabang and
Phongsali Provinces, as well.

9. (U) A Lao lead mining company, financed with Chinese
loans, is extracting lead and zinc at several points (Pha
Deng and Pha Sot) in northern Vientiane Province. All this is
for the Chinese market, hauled by trucks up torturous Route
13, to the border with China. Estimates for 2006 production
levels are 20,000 tons of zinc and 10,000 tons of lead. Iron
is mined in at least five locations in several northern
provinces, with estimated reserves at those five places in
excess of 4.4 million tons. Although there have been some
Thai buyers in the past, all the iron is now being sold to
Chinese.

Obeisance to the Middle Kingdom
-------------------------------
10. (SBU) Laos has a new Ministry of Energy and Mines (MEM),
intended to be a counterpart to other such ministries among
the ASEANs. As the new MEM Minister Bosaykham Vongdara
presided over the opening of the GMS meeting on mining
opportunities, it became immediately apparent that the
meeting was a showcase for Yunan Chinese mining interests.

11. (SBU) The representative of Australia's Oxiana Co.
(currently the largest single mining operation in Laos, and
having an interest in the Chinese market) praised the Chinese
for their bold exploitation of minerals around the world and
elicited some raised brows among the diplomats present by
referring to China as East Asia,s natural hegemon, now at
last returning to its historically rightful place at the head
of the World Order. The proper economic role of the GMS
countries in this order of things is that of supplier of raw
materials to the Chinese economy. He bemoaned the slow pace
at which raw materials are currently making their way
northward from Laos and the other ASEANS. In Laos,
inefficient regulatory structures and poor infrastructure
were the cause.

Get on the stick, little comrades
---------------------------------
12. (SBU) The President of the Yunan Chamber of Commerce then
took the floor to describe the mineral-rich geology of Yunan
Province and to boast of the number of international joint
ventures under way there. He expressed interest in Lao coal,
copper, and gold, and mentioned some 20 Yunan Chinese
mining-related interests in Laos, including a new aluminum
oxide operation. As he finished he snapped everyone to
attention by forthrightly identifying the low level of
efficiency among GoL officials as a main impediment to
commerce. He encouraged Laos, and all the GMS countries, to
do away with regulatory prohibitions, to develop
infrastructure and transportation, to simplify customs
procedures, and to offer more tax incentives for foreign
mining companies.

Comment: The Chinese are trying to corner the market
--------------------------------------------- -------
13. (SBU) Marginally on the scene in Lao mining since the

VIENTIANE 00000632 003.2 OF 003

Soviets left, the Chinese are now moving in fast, with as
many as 30 mining operations officially in the country, and
probably quite a few others working underground. Their
insatiable appetite for raw materials and the strategic
proximity of Laos to their southern border make it inevitable
that this undeveloped country will fall into the China,s
orbit - indeed into its maw. The GoL does not have the
finances or the expertise to exploit their own mineral
wealth, and evidently has no intention of reforming their
economy sufficiently to attract more socially or
environmentally conscious investors.

14. (SBU) The Chinese connection makes these things
unnecessary. The prospect of large revenues untrammeled by
outside scrutiny or interference regarding their use make
this growing dependence upon China more congenial to the GoL
than it would have been formerly, even to the cost of their
erstwhile patrons, the Vietnamese (who also run a handful of
mining and quarrying operations in the south-central part of
the country). The North Koreans have mined for tin
(allegedly) in Khammuan Province, but evidently have stalled.
With their exploration teams looking for bauxite in the
south, and with the whole survey and exploration concession
for the north already sewn up, the Chinese have a clear field
before them. They are already prospecting for gems, zinc,
lead and tin in several provinces north-central provinces. To
hear the Australians tell it, the Chinese have a corner on
future concessions for extraction of precious minerals.

HASLACH

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