Mauritania - Guelbs Iron Ore Project

Document of The World Bank FOR OFFICIAL USE ONLY FI'LF C()PYu .. 1 F, Report No. 2224a-MAU STAFF APPRAISAL REPORT MAURITANIA THE GUELBS IRON ORE PROJECT June 20, 1979 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their officiai duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Mauritanian Uguiyas (UM) and U.S. Dollars (US$). EXCHANGE RATES UM 1.0 = US$0.022 UM 45.0 US$:L.00 UM 1,000,000 US$22,222 ABBREEVIATIONS AND AC(RONYMS ADB - African Development Bank AFESD - Arab Fund for Economic and Social Development AISI - American Iron and Steel Institute ARMICO - Arab Mining Company BCM - Banque Centrale de Maur:itanie BRGM - Bureau des Recherches Geologiques et Minieres BRPM - Bureau de Recherche et de Prospection Miniere CCCE - Caisse Centrale de Cooperation Economique COMINOR - Complex Minier du Nord CVRD - Companhia Vale do Rio Doce DCPP - Departement de Commercialisation des Produits Petroliers EIB - European Investment Bank FCB - Fives Cail Babcock IISI - International Iron and Steel Institute IRSID - Institut de Recherche de la Siderurgie KFTCIC - Kuwait Foreign Trading, Contracting and Investment Company MIFERMA - Mines de Fer de Mauritanie MSI - Mineral Services Incorporated ObECF - Overseas Economic Cooperation Fund of Japan OPEC - Organization of Oil Producing Exporting Countries eNIM - Societe Nationale Industrielle et Miniere SNIMEX - SNIM Explosif SOCOMINE - Societe de Cooperation Miniere et Industrielle SOFREMINES - Societe Francaise d'Etudes Minieres SOFRESID - Societe Francaise d'Etudes de la Siderurgie SOMIMA - Societe des Mines de Mauritanie SGTE - Societe Generale de Teclnique et d'Etudes WEIGHTS AND MEASURES 1 Metric Ton = 2,205 pounds 1 Kilometer (km) = 0.62 miles MAURITANIAN FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY MAURITANIA THE GUELBS IRON ORE PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. INTRODUCTION ............................................. 1 II. THE MINING SECTOR ........................................ 2 A. Description of the Sector ........................... 2 1. Iron Ore Operations ............................ 2 2. Copper Operations .............................. 3 3. Gypsum ......................................... 3 B. Contribution to the Economy ..... ........... . 3 1. Contribution to GDP ............................ 4 2. Public Revenues ................................. 5 3. Balance of Payments Effects ..................... 5 4. Employment Effects ............................. 6 III. SNIM - THE COMPANY ....................................... 6 A. Background and Ownership ............................ 6 B. Organization and Management ......................... 7 C. Past Operations ...................................... 12 D. Past Performance and Recent Financial Position ...... 17 IV. THE MARKET FOR IRON ORE ................................. 19 A. The Demand for Crude Steel and Production ........... 19 B. The Supply of Iron Ore ............. .. ............... 22 C. The Demand for Iron Ore ............. .. .............. 24 D. Supply and Demand BaLance for Seaborne Iron Ore 25 E. Pricing of Iron Ore ............... .. ................ 26 1. International Prices ........................... 26 2. Prices for the Kedia and Guelbs Ores .... ....... 28 F. Market Prospects for Guelbs Sinter Feed ............. 29 1. Testing of Guelbs Concentrates .... ............. 29 2. Future Sinter Demand ........................... 30 3. Conclusion ..................................... 32 G. Local Sales ...... ............... .................... 32 V. THE PROJECT .............................................. 32 A. Scope and Objective ................................. 32 B. Technical Description ............................... 33 C. Water ............................................... 38 D. Ecology ............................................. 38 This report was prepared by Messrs. Christoph Lorenz, Yves Duvivier, and Guy de Selliers and Miss Veronica Bates of the Industrial Projects Department. 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 Worid Bank authorization.  Table of Contents (Continued) Page No. VI. CAPITAL COST AND FINANCINC PLAN .......................... 39 A. Capital Cost ........................................ 39 B. Financing Plan for Phase 1 .......................... 42 VII. PROJECT IMPLEMENTATION ................................... 44 A. Project Organization and Management ....... .. ........ 44 B. Implementation ................. .. ................... 48 C. Procurement, Disbursement and Allocation of Bank Loan 48 1. Procurement .................................... 48 2. Allocation of Bank Loan and Disbursement ....... 51 VIII. FINANCIAL ANALYSIS ....................................... 53 A. Methodology Used in Financial Projections ........... 53 B. Production Build-Up and Sales .......... .. ........... 53 C. Operating Costs ................. .. .................. 54 D. Dividends ........................................... 55 E. Royalties ........................................... 55 F. Financing of Phase 2 .............. .. ................ 56 G. Other SNIM Units and Head Office ........ .. .......... 56 H. Future Profitability and Financial Position ......... 58 1. COMINOR ........................................ 58 2. Other SNIM Units, excluding COMINOR .... ........ 59 3. SNIM ........................................... 60 I. Break-Even Point ................ .. .................. 61 J. Financial Covenants ............... .. ................ 61 K. Trust Arrangement and SNIM Operational Account . . 61 1. Purpose ........................................ 61 2. Description .................................... 62 L. Financial Rate of Return ............ .. .............. 64 M. Auditing and Reporting ............. .. ............... 65 N. Major Risks ...... ............... .................... 65 IX. ECONOMIC ANALYSIS ........................................ 67 A. Economic Rate of Return ............. .. .............. 67 B. Foreign Exchange Effects ............ .. .............. 68 C. Other Benefits ...................................... 69 XI. SUMMARY OF RECOMMENDATIONS .............. .. ............... 69  LIST OF ANNEXES 3-1 SNIM Operating Units other tha.- COMINOR 3-2 SNIM Historical Financial Data 4-1 Iron Ore Exports - Industrialized Countries 4-2 Iron Ore Exports - Developing Countries 4-3 Steel Production and Iron Ore Demand - Major Steel Producers 4-4 Steel Production and Iron Ore Demand - Other Developed Countries 4-5 Steel Production and Iron Ore Demand - Non-Iron Ore Exporting Steel Producing Developing Countries 6-1 Capital Cost Breakdown 6-2 COMINOR Projected Working Capital Exchanges 6-3 COMINOR Projected Investments 6-4 Terms and Conditions of External Financing 8-1 Assumptions and other Bases of the Financial Projections 8-2 COMINOR's Projected Financial Results 8-3 SNIM's Units Other than COMINOR - Projected Income Statement and Balance Sheet 8-4 SNIM's Projected Consolidated Cash Flow and Balance Sheet 8-5 Financial Rate of Return and Sensitivity Analysis 9-1 Economic Rate of Return and Sensitivity Analysis 9-2 Foreign Exchange Effects MAP S IBRD 13583 - General Project Location IBRD 13584 - Site Plan of Mining Operations (page 13) DOCUMENTS AVAILABLE IN THE PROJECT FILE A. General Technical 1. The Guelbs Project--Technical-Economic Feasibility Study by SOCOMINE, Blue Version; Paris, April 1976 (French/English). 2. The Guelbs Project--Technical-Economic Feasibility Study by SOCOMINE, TSR Version; Paris, July 1976 (French/English). 3. Guelbs Project, Mauritania---Technical Report by A. Khilkhoff- Choubersky; London, April 1977 (English). 4. The Geology of the Guelbs--COMINOR's Geological Service Department, Ref. 800-060; Souerak, Mauritania (French).  DOCUMENTS AVAILABLE IN THE PROJECT FILE (Continued) B. Beneficiation 1. Centre de Recherches Metallurgiques (CRM)--Industrial Test Series; Liege, Belgium, November 16, 1977 (French). 2. Institut de Recherches de la Siderurgie Francaise (IRSID)-- Industrial Test Series, Ref. Nos. MCF.RC 596, 618, 664 and 704; Paris, June 1977 (French). 3. Studiengesellschaft fur Eisenerzaufbereitung--Industrial Test Series; Othfresca, Germany, November 1977 (German). 4. The Guelbs Concentrates--SOCOMINE, Ref. No. PG511; Paris, March 15, 1977 (French). 5. Pilot Plant Results--Mr. Coursin, SOCOMINE, Report PG595; Paris, May 1977 (French). 6. Realized Beneficiation Plant Results--SNIM/COMINOR; Zouerate, Mauritania, February 1977 (French). 7. Preliminary Direct Reduction Studies on Mauritanian Iron Ore-- Allis Chalmers Direct Reduction Division, Ref. No. 1629, July 23, 1975 (English). C. Market 1. Report on Iron Ore--Future Requirements on Physical Forms, Sizes and Impurities, IISI; Brussels, Belgium, 1974 (English). 2. Guelbs Concentrates--Market Survey, Vols. 1 and 2 (Annexes), SNIM; Paris, December 1976 (English/French). 3. Supply and Demand of Iron Ore--SNIM; Paris, April 1977 (French). 4. Evolution of the Iron Ore and Steel Industries' Requirements for Sintering of Iron Ore Fines--SNIM; Paris, October 1977 (English). 5. Forecast for the Use of Ore for Sintering--SOFRESID; Paris, October 1977 (English). 6. International Prices for Rolled Steel Products--Mrs. Doggart, July 22, 1978 - commissioned by the World Bank.  I. INTRODUCTION 1.01 Bank involvement in Mauritanian iron ore dates back to 1957, when Societe Anonyme des Mines de Fer de Mauritanie (MIFERMA), a company owned predominantly by French, British, German and Italian interests, requested the Bank to finance the exploitation of a high-grade iron ore deposit in the Kedia mountains (Map IBRD-13583). The Bank loan, made in 1960 1/. amounted to US$66 million, out of a total project cost of US$190 million. 1.02 Even during MIFERMA's init:ial appraisal of the Kedia project it was apparent that although the mountains contained a satisfactory reserve, it was limited. The sponsors therefore intended from the outset, to explore and develop the so-called "guelbs" (a number of iron ore outcroppings nearby), in order to continue to make use of the large infrastructure investments - notably the 650 km railway and port facilities-once the Kedia ore was ex- hausted. This exploration work was largely carried out during the 1970s. 1.03 Since start-up in 1963, mining has proceeded smoothly, and by 1973 a production level of about 10 million tons of ore per year (tpy), had been reached, i.e., well above the 6 million tpy output originally intended. Even the nationalization of MIFERMA in 1974 did not seriously disrupt iron ore deliveries, and following successful negotiations with the former share- holders--which led to a US$90 million nationalization compensation - a normal business relationship was resumed. 1.04 In 1976, due to the impencling exhaustion of the known iron ore reserves in the Kedia mountains, the Government of Mauritania and the Societe Nationale Industrielle et Miniere (SNIM) - the state corporation which had taken over the MIFERMA operations - requested the Bank to help finance the Guelbs iron ore project. This project, is to be carried out in two phases. The first phase, which will partiaLly replace the Kedia mining operations, is to be carried out between 1979 and ].982, and will develop the El Rhein mine. The second phase (1986-1989) will develop a second mine (Oum Arwagen), after which time the Kedia operation will cease. Although this appraisal deals primarily with the first phase, it is imperative that the second phase be forthcoming, both in order to maintain the projected ore output of 12-14 million tpy, and to assure the continued financial viability of SNIM. 1.05 The process of project preparation for Board presentation has been a lengthy one. A first identification mission in January 1977, was followed by an appraisal mission in October 1977, led by C.W. Lorenz (Chief), and Y.A.A. Duvivier (Industrial Projects Department), who were joined by repre- sentatives of most of the Arab and European co-lenders. I`he complexity of the project required a total of 12 missions up until April 1979, because: (i) SNIM had to be reconstituted, and made into a viable and creditworthy borrower 1/ Loan 249-FR, March 17, 1960.  (principally through the divestiture of its highly unprofitable copper opera- tions); (ii) four lenders' meetings had to be convened in order to develop a viable financing plan; (iii) meetings with banks and iron ore consumers were necessary in order to structure an acceptable security arrangement for the parties involved; and (iv) extensive working sessions had to be held with SOCOMINE (Societe de Cooperation Miniere et Industrielle), the project con- sultant, in order to ensure proper project management. 1.06 The first phase of the project is expected to be completed by end 1982, and total financing requirements - including working capital, interest during construction and normal and extraordinary contingencies - are expected to be approximately US$500.7 million equivalent, of which US$456.1 million (or 91%) is expected to be in foreign exchange. The financing plan for the first phase envisages US$338 million of long-term loans, US$120 million of new equity to be provided by five new shareholders, the Arab Mining Co. (ARMICO), the Islamic Development Bank, the Kuwait Foreign Trading, Contracting and Investment Co. (KFTCIC), and the Governnents of Morocco and Iraq, in addition to US$42.7 million from SNIM's internal cash generation. 1.07 The proposed Bank loan of US$60 million will finance the ore handling equipment, miscellaneous items in the beneficiation plant, the ore wagons and the civil works contracts, as well as interest during construction on the Bank loan itself. II. THE MINING SECTOR A. Description of the Sector 2.01 Mining is the most important sector of the Mauritanian economy. It consists primarily of the exploitation of iron ore and, to a lesser extent, of copper and gypsum. 1. Iron Ore Operations 2.02 The exploitation of iron ore in Mauritania dates back to 1963, when MIFERMA commenced operations with a French, British, Italian and German con- sortium as the principal shareholders. This same consortium also purchased a major proportion of the ore output. Since MIFERMA's nationalization in 1974, the mines have been operated by the Complex Minier du Nord (COMINOR) - SNIM's primary operating unit. Since the beginning, production capacity has increased steadily; rising from the 6 million tpy originally envisaged, to about 11.5 million tpy. The most recent significant expansion took place in 1973, when somewhat lower grade pits were brought into production. The operations are located inland, about 650 km eastnortheast of Nouadhibou, the port of shipment, which is connected with the mining town of Zouerate by rail.  -3- 2. Copper Operations 2.03 The Societe des Mines de Mlauritanie (SOMIMA) was created in March 1967, 1/ to mine the copper deposits of Akjoujt (200 km Northeast of Nouak- chott). SOMIMA exploited copper ox:.de ore and produced a concentrate based un the TORCO process, which had a very high fuel cost. Furthermore, the arsenic content of the copper concentrate made marketing difficult, and the product therefore sold at a discount from world market prices. 2.04 From the commencement of operations in 1971, major technical diffi- culties were experienced, and most of the time SOMIMA operated at less than 50% capacity, turning out a profit (of UM137 million) only once, in 1973, when copper prices reached an all time peak. 2.05 In late 1974, as a result of the increase in fuel prices and rapidly deteriorating copper prices, the sh.areholders closed the mine. To maintain jobs, the Government of Mauritania took over the copper company, and integrated it with SNIM. SOMIMA resumed operations in the second half of 1975, and its continuous high losses seriously afEected SNIM's overall financial position (para. 3.21) thereafter. As a result, the Government was obliged to separate SOMIMA from SNIM in March 1978, and, in turn, to halt copper operations in May. 3. Gypsum 2.06 The large deposits of gypsum found to the north of Nouakchott have been exploited by SNIM since 1973, with the entire output (roughly 17,000 tpy) being sold to the Rufisque Cement Plant in Senegal, as part of an agreement whereby Senegal purchases Mauritanian gypsurn, and accords a 12% rebate on the price of cement sold in Mauritania in return. Recently, the Government decided to separate the gypsum operation from SNIM. B. Contribution to the Economy 2.07 Iron ore mining by COMINOR is the mainstay of the Mauritanian economy and its development throughout the 1960s has been the principal determinant of the country's rapid economic growth. By the mid-1970s, COMINOR directly accounted for 21% of Mauritania's GDP at factor cost, and 80% of its exports. It is the second largest employer in the country after the Government - with 1/ The share capital was distributed as follows: Charter Consolidated ................................. 44.6% Islamic Republic of Mauritiania ......................... 22.0% French Group ........ ........................ 18.4% IFC ................................ 15.0%  - 4 - a total of about 4,800 workers 1/ - and provides about 25% of total public revenues. Aside from these direct contributions, iron ore mining also sup- ports a host of other economic activities in Mauritania. Moreover, the con- tinuous exploitation of this resource is necessary to finance the development of other sectors, which would in time constitute a renewable base for the country's economic growth. 1. Contribution to GDP 2.08 As mentioned above, COMINOR directly accounts for 21% of GDP at factor cost, but its total contribution is considerably higher. Mauritania: GDP in Current Prices, 1974-76 (In billions of UM) 1974 1975 1976 1977 Traditional sector 4.6 5.2 5.4 4.7 (of which livestock) (3.9) (4.5) (4.7) (4.0) Industrial sector 6.8 5.0 5.6 4.9 Mining (5.2) (3.3) (3.7) (3.0) Fish processing (0.2) (0.2) (0.2) (0.2) Other industries (1.4) (1.5) (1.7) (1.7) Construction and public works 1.2 1.5 1.7 1.7 Transport, commerce and services 2.4 2.3 2.5 2.4 Public administration 2.8 3.1 3.8 4.3 GDP at factor cost 17.8 17.1 19.0 18.0 Indirect taxes less subsidies 2.5 1.9 2.2 2.3 GDP at market prices 20.3 19.0 21.2 20.3 Source: Data provided by the Mauritanian authorities. 2.09 Iron ore mining has a substantial indirect impact on GDP. Many industrial and construction enterprises work mainly, or exclusively, for COMINOR. An analysis of the services sector also shows that mining creates -- directly or indirectly -- local added value amounting to about 25% of public utilities, commerce, transport, and services. In addition, since mining accounts for one-quarter of total current public revenues directly, it pro- vides the means for substantial expenditures in the services sector. 1/ Of which 4,300 are Mauritanian nationals.  .- 5 - 2.10 In summary, iron ore mining generates about 20% of the added value in the other industrial and construction sectors, and about a third in the services sector. This, in turn, represents about 10% of GDP - implying a con- tribution of some 31% in toto. On the other hand, were the iron-ore mines to close (ie. were the Guelbs project not to be executed and t:he current Kedia operations to cease for lack of ore), the ensuing reduction in GDP would almost certainly be more severe than these calculations indicate, as the resultant excess capacity in the services sector would lead to uneconomic levels of operation, and so to a further reduction in value added. In addition, there would be multiplier effects on demand for public and private services, as both Government and private spenders would be forced to rearrange the uses of their remaining disposable incomes. 2.11 Beyond the reduction in GDP, a closing of the iron ore mines would also cause a de facto destruction of the present capital stock in both the mining and services sectors, as most of these investments would become obsolete long before a comparable source of income (and so demand for their services) could be generated. 2. Public Revenues 2.12 In 1976, total taxes received from COMINOR amounted to DM 1,208 million (US$26.9 million), or 29% of total public revenues. Of these, taxes from mineral sales amounted to UM 702 million, while UM 405 million related to personal income tax - the remainder being generated by import duties and other miscellaneous taxes. 2.13 Aside from this direct contribution to Government revenues, a sub- stantial part of the income of employees and enterprises in public admin- istration, public utilities, commerce, and services is supported by iron ore mining. A closure of the mines would therefore cause a further decrease in Government revenues, as the taxes on the personal incomes of the people affected would decline, along with the taxes on the imports related to these incomes. In this context it should be noted that the income tax base in Mauritania is extremely narrow, consisting only of the public sector and a relatively small number of private firms, many of which work directly with COMINOR. 2.14 In conclusion, the total loss in Government revenues which would result from the closure of the mines would most likely be such as to severely impair, and perhaps even prevent, the attainment of the country's social and development goals. Indeed, the capacity of the Governnent to maintain basic health, education and social expenditures would be in question. 3. Balance of Payments Effects 2.15 At present, iron ore exports account for 80% of Mauritania's foreign exchange earnings. Even assuming a major expansion in fish exports, iron ore would still represent 70% of exports of goods and non-factor services for  - 6 - some time to come. The continuation of iron ore production is, therefore, also essential in order to maintain Mauritania's capacity to import the intermediate and capital goods which are necessary for the development of the country. If iron ore exports were to disappear, only a substantial devaluation would permit Mauritania to balance its external accounts. Such a devaluation would have further severe disruptive effects on development, because of the resultant sharp changes in relative factor prices, and the likelihood that foreign exchange rationing would have to be introduced in order to secure essential imports. It is also likely that the remaining foreign exchange earnings would be insufficient to cover the food bill (50% of Mauritania's food requirements are imported), and would thus cause mass migration. 4. Employment Effects 2.16 Iron ore operations currently provide 4,300 direct jobs to Mauritanians. These, in turn, sustain the entire population of Zouerate (30,000 people), along with a substantial proportion of that of Nouadhibou (also about 30,000 people) where the only other industry-fishing-directly employs less than 1,000 workers. The closure of the iron ore mines would, therefore, directly affect between 40-50,000 people. Furthermore, as dis- cussed above, if mining indirectly accounts for a third of service sector value added, then probably almost a third of employment in the services sector, or 6,500 jobs, would be lost. Employment in public administration would also be affected, as a large component of the civil servants' salary bill is supported by royalties on iron ore exports. The repercussions on the economy of a loss of employment of this magnitude would be difficult to exaggerate. 2.17 Both resettling these individuals in some other part of the country, and finding them alternative employment would be difficult. There are no significant alternatives in industry, while the sparsity of farmland would *not offer a viable alternative, and would require investments in housing and social services which are beyond the Government's means. III. SNIM -- THE COMPANY A. Background and Ownership 3.01 As noted earlier (para 2.02), the iron ore operations, originally established by MIFERMA in 1963, were nationalized in 1974. The effects of this change of ownership were fortunately not disruptive. Even though the question of compensation remained unresolved for almost two years, the former shareholders did not interrupt their iron ore purchases, and a satisfactory compensation agreement between the Government of Mauritania and the former shareholders was reached in January 1976. This called for a total payment of US$90 million from Mauritania, of which US$40 million was to be paid in cash, and US$50 million was to be paid in five equal annual installments. The cash payment was funded by a KFTCIC (Kuwait Foreign Trading, Contracting and  - 7 - Investment Company) loan to the Government, at an interest rate of 8% for 6 years. The first US$10 million installment for December 1976 was paid by COMINOR, while the 1977 installment was paid by the Government. SNIM is to be reimbursed for the initial installment as part of a royalties rebate package to be granted by the Goveronent from 1978-85 (para 8.14), under whi<> the Government has also agreed to assume the liability for the remaining installments. 3.02 SNIM was established in 1972, as a State Company into which COMINOR was subsequently incorporated after the nationalization of MIFERMA. Other than COMINOR, which alone generates 90% of SNIM's revenues and constitutes 95% of fixed assets, SNIM includes a few minor ventures such as: (i) SNIM Explosifs (SNIMEX), an explosives factory which is entirely captive to the iron ore mine, (ii) Department de Commercialisation des Produits Petroliers (DCPP), 1/ a petroleum products distribution system, 40% of whose output is sold to the iron ore operations; and (iii) the gypsum operations referred to in para 2.06 above. In 1979 SNIbI will commence operation of SNIM/Acier, a mini steel mill to smelt COMINOR-generated scrap for the production of rebars for the local market (Annex 3-1). SNIM has its head-office and support ser- vices in Nouakchott; these include a technical department for miscellaneous project studies, a geological research group, and training facilities. In addition to separating the gypsum operation from SNIM (para. 2.06), the Government is making plans also to separate the DCPP from SNIM. As the DCPP is a profitable enterprise, the Government will compensate SNIM for all financial effects of the separation and has agreed to discuss with the Bank the level of an adequate compensation. In any event, SNIM would not be prevented from directly importing iLs oil at world market prices should the price of oil on the local market be higher. 3.03 The Government passed a decree officially separating SOMIMA, the copper company, from SNIM, on March 31, 1978, and actual operations were terminated on May 31. The associated financial settlement was reached on .August 10. Under this, the Government has agreed to assume SOMIMA's debt on SNIM's behalf. While there is a project under consideration to mine the underlying sulfide ore body and produce blister copper, the Bank has voiced strong doubts as to whether: (i) the envisioned smelter technique could in fact produce blister; and (ii) the ore's arsenic contamination could be reduced to levels which would not seriously impair the marketability of the final product. UNDP is presently financing a prefeasibility study. B. Organization and Management 3.04 SNIM was initially constituted as a State-owned Company, placed directly under the responsibility of the President of Mauritania, and admin- istered by a Board of Supervisors. In April 1978, following the divestiture 1/ Originally called UCPP - Unite de Commercialisation des Produits Petroliers -  8 - of SOMIMA, the company was reconstituted as a State-controlled, limited liability corporation (Societe d'Economie Mixte a Majorite d'Etat), permit- ting private and foreign ownership. The new SNIM is to be administered by a Board of Directors, chaired by a Mauritanian Governnent official and whose vice-chairman is a representative of the foreign shareholders. 3.05 SNIM's organization chart is shown on the following page (Chart 3-1). As can be seen, all operational units report directly to the Director General, who is assisted by a Secretary General. As mentioned earlier, COMINOR's position within SNIM is of exceptional importance, and its or- ganization chart is therefore shown on the subsequent page (Chart 3-2). 3.06 Although COMINOR's mining operations are physically dispersed between the mining town, which is 650 km inland, the railroad line, and the railroad maintenance yard and port facilities at Nouadhibou, operations have thus far been carried out in a smooth and efficient manner. This has been essentially due to: (i) an experienced and qualified expatriate staff which dates back to the operations prior to nationalization; (ii) a very capable Mauritanian General Manager; and (iii) a cooperative attitude on the part of the Government. In addition, MIFERMA's key management figures, who left after nationalization to form the consultant firm SOCOMINE, have remained closely involved with the management of COMINOR on a full-time basis ever since, and have in fact been chosen by SNIM to be the Guelbs project managers. 3.07 Also, in order to assist the Director General of SNIM, SNIM has agreed to employ prior to December 31, 1979, an experienced Director of Operations who will manage all technical, operational and personnel aspects of the mining, railroad and port operations. He will also be closely involved in coordinating the efforts of SOCOMINE and SNIM's project group at Zouerate. 3.08 Until 1977, the high caliber of SNIM's technical management was not matched by that of the financial management. While COMINOR's financial man- agement was adequate, that of the other operating units, and of SNIM itself, was poor. The problem was compounded by the steady addition of other diverse operating units, the continuing losses of SOMIMA, and the hasty development of SNIM's central organization in Nouakchott. Corrective measures commenced in 1977 with the hiring of a high calibre financial director and the contract- ing of the assistance of Helios (France), a reputable international auditing firm. Some progress has already been achieved, but further improvements are necessary. In particular, improved financial appraisal of new projects and other investments is required, along with the establishment of a new corpo- rate planning capability. SNIM has given assurances that (i) further strengthening of the financial department will take place; (ii) it will keep separate accounts for all its operating units; and (iii) it will not commit itself to new projects, or take over projects from others, without the prior consent of the Bank.  MAURITANIA: THE GUELBS IRON ORE PROJECT SNIM ORGANIZATION CHART Chart 3-1 SharchoIders tDJ,ector GCneral Sra persJnnel Staff Develop- Organzat.on & Fn Ore Techn cal Exploration Mrt Departmene ment & Training Data Procesainn COMINOR Department & Geclogy _ari Oetfic Accounting ExpIotivet MCnOg I Prse n C as Distributions | | Treasury O i Cost Control - Gypsuin Quarry Fin & Plannirng -| Steel Fcunrdry Industrial Projects Department March 1978 V\Drid Bark 18868  MAURITANIA: THE GUELBS IRON ORE PROJECT COMINOR CHART 3-2 ORGANIZATION CHART SNiM Director General Director of NOUADHIBOU Operations ZOUERATE Port atid | Railroad Minin 7 Cost Control Public Relation _ining Public Ore Pr cessing Ortins eatotPltPlant Purchasing Personnel Railad Track Roadsand Schools Data Processing Schools Serice Roads and ~~~~~~~~~~~~~~~~~~~Othe Buildsangsd |-- Medical Service Infrast Buildings Infrastructure Other Infrastructure m Industrial Projects Department Vorld Bank 18867 March 1978  - il - 3.09 SNIM's head office in Nouakchott has grown considerably over the last three years into a complex of some 520 persons. In addition to the facili- ties provided by this organization, overseas commercial and personnel ser- vices are provided by recruitment and marketing agencies in Paris and a pur- chasing agency in Zurich. The cost of these facilities has been increasing rapidly; the technical department has been expending considerable funds in geological and other research, the construction of a new Head Office building in Nouakchott has required a heavy capital outlay, and SNIM's support services have been expanded to provide for the construction of a new State-owned re- finery in Nouadhibou, as well as the initiation of other industrial ventures. As a result, total operating costs of SNIM's central organization amounted to US$14.7 million in 1978, of which the Paris and Zurich offices alone accounted for more than US$3.0 million. This rapid expansion has led to some redun- dancies within the support services of SNIM's operating units, while both the divestiture and closure of SOMIMA, and the cessation of overhead expenditures for the oil refinery, should permit drastic reductions to be made in the central organization. Similarly, although activities not directly related to iron ore mining may in the long term yield benefits to SNIM and the country, they put considerable pressure on SNIM's cash-flow in the short term and thus on its ability to provide adequate equity for the Guelbs financing. They are therefore prime candidates for reduction. SNIM has now presented a compre- hensive program which will substantially cut overhead costs over a 3-year period. This will be partially achieved by closing the purchasing office in Zurich and transferring its activities to Mauritania, and by consolidating the two Paris offices into one, in line with the reduced needs of the company. 3.10 SNIM's training efforts are concentrated in a modern training center in Nouadhibou, on the job training in Zouerate, supplemented by a facility in Nouakchott and a trainee program abroad. While there is a clear need for intensive training at all technical levels, duplication is involved in having training dispersed in 3 locations. It appears that training in Nouakchott, primarily in clerical, administrative and accounting procedures, is largely of benefit to the country, rather than SNIM, as many trainees leave after program completion. The Bank has recently financed 1/ a training center in Nouakchott, which will become operational towards the end of 1979, at which time SNIM should phase out those aspects of training which are duplicated in the new center. Training in SNIM's Nouadhibou facilities concentrates on teaching basic mechanical and electro-mechanical skills. The success rate there, meas- ured in terms of the number of successfully promoted personnel retained within SNIM, is astonishingly high. Out of a total entry of 226 persons at the beginning of 1977, only 15% had been lost at the end of that year. Finally, on-the-job training takes place at Zouerate. Such training of equipment oper- ators is also very successful - all 53 candidates at the beginning of 1977 became successful operators. There are 10 expatriate technical instructors and 9 Mauritanian instructors involved in this latter training effort. 1/ Credit No. 459 MAU, Appraisal Report IBRD No. 255A, February 11, 1974.  - 12 - 3.11 In the future, the major task of the training centers will be the education of the Mauritanians required to manage the Guelbs iron ore opera- tions, and so reduce the need for additional expatriate staff. These require- ments are as follows: Gross Additions of Staff for the Guelbs Project Staff Technicians Foremen Artisans Laborers Total Phase 1 5 24 102 115 352 598 Phase 2 0 6 17 89 455 567 5 30 119 204 807 1,165 Although personnel from the diminishing Kedia operation will be transferred to the Guelbs project, a considerable increase in mining machine operators is nonetheless required. However, SNIM is well equipped to provide the necessary training for these. 3.12 External financial support is justified for those training and research activities whose benefits accrue primarily to the country, rather than SNIM itself. SNIM is therefore preparing a program to find external financial support for such activities, and is to periodically report to the Bank on the progress of this effort. C. Past Operations 3.13 Mining of iron ore in the Kedia mountains occurs over a 25 km east/ west stretch: including Tazadit pits 1 through 9 in the east, followed by Rouessa pits 1 through 9, and Segala Azouazil and F'Derik 1 and 2 in the west (Map IBRD-13584). The remaining ore reserve in the Kedia mountains as of the beginning of 1979 was about 88 million tons. Under the existing ex- ploitation schedule, this will be completely mined out by 1990/91. Exploita- tion of Kedia has been, and will remain, conventional, with excavating shovels and front-end loaders loading the blasted ore onto dump trucks, which deliver the material to three primary gyratory crusher stations. These then either transport the ore via secondary and tertiary crushing stations to the stock areas (Rouessa), or deliver it directly to the storage areas (Tazadit and F'Derik). The ore wagons are loaded by bucket-wheel reclaimers, via load- out stations with a charging capacity of between 26 to 30 80-ton wagons at the Tazadit and Rouessa stations, and 14 wagons at F'Derik. At the end of June 1978, the operations at Zouerate employed 2,225 men, of which 115 were expatriates. 3.14 The railroad line connects the mining town of Zouerate with the Port of Nouadhibou, some 650 km to the west. Daily traffic currently consists of two trains, each 2 km long and transporting up to 15,000 tons. This gives the line an annual capacity of 11.5 million tons. The line could, however, easily accommodate 12 million tpy on a three-train-per day basis  IBRD-13584 ISLAMIC REPUBLIC OF MAURITANIA INDUSTRIAL THE GUELBS IRON ORE PROJECT INSTAtLATONS I> Site Plan of Kedia Mining Operations and EL RHEINGUELB Location of the Eastern Guelbs Y g OUM ARWAGEN GJELE ^:F'DER F i U E RATE