Liberia - NIOC Iron Ore Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3479-LBR STAFF APPRAISAL REPORT LIBERIA NIOC IRON ORE REHABILITATION PROJECT December 1, 1981 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 World Bank authorization.  CURRENCY EQUIVALENTS The official monetary unit is the Liberian dollar with a par value equal to the US dollar. The US dollar is legal tender in Liberia. WEIGHTS AND MEASURES 1 Fe unit = 1% contained iron 1 Kilometer (km) = 0.62 miles 1 Long ton = 2,240 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS ADB - African Development Bank BMC - Bong Mining Company CAEMI - Companhia Auxiliar de Empresas de Mineracao, Brazil, the Marketing Agent FMO - Netherlands Finance Company for Developing Countries LEL - Liberian Enterprises, Ltd. LISCO - Liberian Iron and Steel Corporation LJV - Lamco Joint Venture LMC - Liberia Mining Company LTPY - Long tons per year MMAL - Mine Management Associates, Ltd. NIOC - National Iron Ore Company, the Company LIBERIAN FISCAL YEAR July 1 - June 30 Industrial Projects Department December 1981  LIBERIA FOR OFFICIAL USE ONLY NIOC IRON ORE REHABILITATION PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ........ ...................................... 1 II. THE MINING SECTOR .............................. 2 A. Structure of the Sector .. 2 1. Lamco Joint Venture ............................... 2 2. Bong Mining Company. 2 3. NIOC .. 3 B. Contribution of the Iron Ore Sector to the Economy 3 C. Future Development Potential .. 4 III. THE COMPANY ............................................... 5 A. Ownership and Concession Agreement. 5 B. Organization and Management. 6 1. Past Management ......................... 6 2. Proposed Organization and Management Arrangements . 7 C. Past and Present Operations .. 8 1. Past Operations .. 8 2. Present Operations .. 9 D. Past Financial Performance and Recent Financial Position ....11 IV. THE IRON ORE MARKET .12 A. Trends in the World Iron Ore Market . .13 1. Past Trends .13 2. Future Trends .13 B. Past and Future World Market Price Trends . .15 1. Past Price Trends .15 2. Future Prices .16 C. Market for NIOC Products ..17 D. Marketing Arrangements and Sales Contracts . .19 E. Pricing of NIOC Ore ..19 V. THE PROJECT ................. 20 A. Scope and Objectives .... . 20 1. Summary .......................................... . 20 2. Ore Reserves .. 21 3. Mine Improvements .. 23 4. Beneficiation Plant Improvements . .23 5. Railroad and Bridge Improvements . .24 6. Management and Technical Assistance . .25 7. Economic Development Studies . . 26 This report was prepared by Messrs. Guy de Selliers and Bo Stenberg and Mrs. Jan Wright 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 World Bank authorization.  TABLE OF CONTENTS (Cont'd) Page No. B. Environmental Effects and Safety ..................... 26 C. Project Implementation .............................. 27 1. Project Management and Organization .............. 27 2. Schedule ........... 30 VI. CAPITAL COSTS AND FINANCING PLAN ......................... 30 A. Capital Costs ........................................ 30 B. Proposed Financing Plan .............................. 34 C. Trust Arrangements and Operational Sub-Account ......................................... 37 D. Allocation of Bank Loan and Disbursement Schedule ........................................... 38 VII. FINANCIAL ANALYSIS ....................................... 40 A. Production Build-Up and Sales .......... .. ............ 40 B. Operating Costs ...... ............. ................... 40 C. Financial Projections and Future Profitability ....... 42 D. Auditing ...................... ....................... 44 E. Financial Rate of Return ............ .. ............... 44 VIII. ECONOMIC ANALYSIS ...... ............... ................... 46 A. Short-Term Benefits ................................... 46 1. Employment and Socio-Economic Stability .... ...... 46 2. Social Services .................................. 47 3. Tax Revenues and Other Macroeconomic Benefits ....................................... 47 B. Long-Term Benefits ................................... 47 C. Economic Rate of Return .............................. 48 IX. MAJOR RISKS ....................... ....................... 48 A. Political/Socio-Economic Risks .......... . ....... 48 B. Financial Risks ...... ............. ................... 49 C. Managerial Risks ................ .. ................... 50 D. Technical Risks ................. .. ................... 50 E. Market Risks ....... ............. ..................... 51 X. AGREEMENTS ............................................... 51  - iii - Page No. CHARTS 3 Proposed Company Organization ......... ..................... 8 5-1 Proposed Project Implementation Unit ...... ................. 28 5-2 Project Implementation Schedule ........ .................... 31 MAP IBRD 15723: Liberia--Iron Ore Concession Areas ANNEXES 3-1 NIOC--Historical Income Statements, 1974-80 3-2 NIOC--Historical Balance Sheets, 1974-80 5 Capital Cost Breakdown by Financing Source and Procurement Package 7-1 Assumptions for Financial Projections 7-2 NIOC--Projected Operating Cost Schedule 7-3 NIOC--Projected Changes in Working Capital Schedule 7-4 NIOC--Projected Income Statement 7-5 NIOC--Projected Sources and Application of Funds Statement 7-6 NIOC--Projected Balance Sheet 7-7 Financial Rate of Return Assumptions and Sensitivity Analysis 8 Economic Rate of Return Assumptions and Sensitivity Analysis DOCUMENTS AVAILABLE FROM THE PROJECT FILE Reference Para. A. Met Chem Final Feasibility Report, 1980 5.03 B. British Steel Plant Flowsheet Study 5.03 C. Raymond Technical Bridge Rehabilitation Study 5.03 D. Management and Technical Services Agreement 5.14 E. Effluent Flocculation Study of Mine Tailings 5.19   I. INTRODUCTION 1.01 The Government of Liberi a and the National Iron Ore Company (NIOC) have requested the Bank to provide two loans totalling US$20 million equiva- lent to finance a portion of the cost of a two-part project designed to rehabilitate (i) NIOC's iron ore operations from a virtually bankrupt situa- tion and (ii) existing railroad transportation infrastructure over which the iron ore is transported to the port of Monrovia for export. One loan of US$11.7 million equivalent would be made to NIOC and help finance: (i) an increase in the mine's output from the present level of 2.1 million long tons of iron ore per year (ltpy) 1/ to 3.25 million ltpy by end 1983, and (ii) rehabilita- tion of the railroad infrastructure, except for the St. Paul River railway bridge. The second loan o. US$8.3 million equivalent would be lent to the Government to rehabilitate this bridge and carry out economic studies of the region. 1.02 The project is located in Western Liberia on the Mano River and close to the Sierra Leone border (Map IBRD 15723). It forms part of Liberia's effort to maintain economic stability by curbing the erosion of its iron ore revenues, on which the economy is heavily dependent. The longer-term objec- tive is to use these revenues to assist Liberia in the diversification of its economic base and thus prepare for the eventual depletion of its mineral reserves. 1.03 Project preparation has been undertaken with the assistance of a US$500,000 Project Preparation Facility (PPF) advance granted in September 1979 to finance the feasibility studies and preliminary engineering for both the mine and the railway bridge. A second PPF advance of uS$500,000 was approved in February 1981 to finance detailed engineering as well as legal assistance. 1.04 Total financing for the project, including working capital and interest during construction, is estimated to be US$67.1 million, with a foreign exchange component of US$54.4 million, or 81%. Of this amount, US$58.9 million is needed for the NIOC rehabilitation, US$8.0 million for the rehabilitation of the railway bridge, and US$0.2 million for economic studies. 1.05 The project was appraised in December 1980 by Messrs. G. de Selliers (Mission Leader) and B. Stenberg and Mrs. J. Wright (IPD); Messrs. C. Walser and A. Rigo (LEG) and Ms. L. Lowenstein (WAl). The Bank has played a key role in the preparation of the project. In addition to providing the financing for the preparatory studies (para. 1.03), the Bank has assisted NIOC in all aspects of project preparation including technical aspects, securing of financing, restructuring of the company and management arrangements. A total of eight Bank missions, of which four to Liberia, were required over the last two years to bring this project to fruition. 1/ Five-year average production level for 1976-80. All Liberian production and exports of iron ore are measured in long tons of 2,240 pounds/ton.  II. THE M'lNING SECTOR 2.01 Mining is the backbone of the modern sector in Liberia, contributing more than 54% of the country's export earnings, 5% of Government revenues, and 24% of the country's GDP in 1979. Iron ore accounts for about 95% of total mine output, with artisanal gold and diamonds accounting for the balance. Iron ore is extracted by three companies--the Lamco Joint Venture (LJV), Bong Mining Company (BMC) and NIOC--as discussed below. A. Structure of the Sector 1. Lamco Joint Venture 2.02 The most important mining company is the Lamco Joint Venture which holds the Mount Nimba Concession on the Guinean border and owns a 265-km railroad and the port of Buchanan. LJV is owned jointly by Bethlehem Steel, US (25%), and by Lamco (75%)--a consortium in which the Government of Liberia holds 50%, private local and foreign interests 12.6% and a Swedish consortium headed by Granges AB holds the remaini ng 37.4%. Granges manages the iron ore operation through a managing company, the Lamco Joint Venture Operating Company. LJV's production capacity is 12 million ltpy of iron ore, although over the last few years production has been falling, to less than 10 million ltpy in 1980, mainly because LJV had to stop producing pellets due to prohibi- tively high production costs in combination with a poor pellet market. The deposits which LJV is presently mining are expected to be depleted by 1987, although other deposits have been identified close by. However, as the ore grade is lower than what is presently mined, construction of beneficiation facilities estimated to cost about US$300 million would be required. LJV's future is still uncertain as a decision to undertake this investment has not yet been made. This decision will also be affected by the future development of the Mifergui-Nimba project situated in Guinea on the Liberian border. Current plans call for evacuation of the Guinean ore over the LJV railroad. 2. Bong Mining Company 2.03 The Bong Mining Company is the second largest iron ore producer in Liberia, with an output of 7 s5 million ltpy in 1980 from its mines in Bong County. BMC is half-owned by the Government, but is controlled by several European steel companies, consisting of a consortium headed by Exploration und Bergbau GmbH (34%) of Germany and Finsider SA (16%) of Italy. Besides being a shareholder, Exploration und Bergbau also acts in a managerial capacity under a consulting agreement with BMC. BMC's production capacity is 3.3 million ltpy of concentrates and 4.2 million ltpy of pellets; however, it has recently had to close down half of its pelletizing capacity because of excessively high production costs. BMC's reserves are sufficient to allow production at present levels to continue until the mid-to-late 1990s. However, at the end of 1980, BMC threatened to cease operations because of its critical financial problems. A temporary solution to these problems has been found; it should allow BMC to continue operating, although probably still at a loss. BMC's medium- and long-term prospects remain uncertain.  -3- 3. NIOC 2.04 The National Iron Ore Company is the third iron ore mining company in Liberia. A detailed description of the Company is given in Chapter III. NIOC is 75% owned by the Government, with the balance made up of foreign and local private shareholders. Its mine is located on the Mano River near the Sierra Leone border in Grand Cape Mount County and until recently was producing on average 2.1 million ltpy. Production in 1980 was only 1.7 million tons declining to 1.3 million tons in 1981 due to technical and financial problems which, if not addressed, will lead to the closing of the mine. Sufficient proven reserves exist, however, to allow production at the planned 3.25 million ltpy until 1994 provided the mine is rehabilitated under the proposed project. 2.05 A fourth mining company, the Liberia Mining Company (LMC), operated the Bomi Hills deposit in Montserrado County and produced 4 million ltpy until 1977 when reserves were depleted. Until LMC closed, it owned the railroad from Bomi to Monrovia which forms part of the railroad infrastructure which NIOC uses to transport its product to the Monrovia port. The mine closure created a severe unemployment problem in the Bomi Hills region which has not yet been resolved because no alternative employment opportunities exist in the area. The Government hopes to avoid a recurrence of a similar situation through the NIOC rehabilitation. B. Contribution of the Iron Ore Sector to the Economy 2.06 Total iron ore production and its contribution to GDP showed average annual increases until 1974, during which year production amounted to 25 million tons and iron ore revenues accounted for over 37% of GDP. Since 1976, however, as a result of the difficulties experienced by the mining companies (paras. 2.02-05) and the depressed price levels resulting from the steel crisis in Europe, iron ore's contribution to Liberia's economy has been declining in terms of tonnage exported and as a percentage of GDP, export earnings and of Government revenues. Liberia's total tonnage exported fell by 28% from 1974-79, down to 18 million ltpy. Notwithstanding the sharp decline in exports, iron ore remains the single largest industrial contributor to the economy, both in terms of its share of the GDP and its share of exports. In terms of its contribution to Government revenues, the share of the iron ore mines has been low during the last few years as earnings have been depressed or negative and most of the concession agreements call for profit sharing schemes with the Government and no fixed royalties. Therefore the difficult finanical situation of the iron ore companies during the last few years is directly reflected in the Government earnings from the sector as shown in the table below.  -4- Liberia--Iron Ore Produ tion and Contribution to the Economy (million long to s--US$ millions, 1971 terms) % Annual Growth 1974 19?5 1976 1977 1978 1979 1974-79 Iron Ore Exports 25.2 18 1 20.2 17.4 20.8 18.0 (6.5) Iron Ore Revenues 114.0 110.3 103.9 89.7 88.3 94.2 (3.9) Revenues as % of GDP 37.0 32.1 29.1 25.3 24.0 24.4 (6.6) as % of Export Earnings 65.5 74.4 71.9 61.1 56.4 54.0 (3.8) as % of Government Revenues 12.8 13.0 17.2 7.7 5.1 5.0 (17.1) Source: Economic Survey of Liberia, 1979. Ministry of Planning and Economic Affairs, September 1980. Liberia--Current Economic Situation and Prospects, IBRD, December 1979. 2.07 Mining also provides employment benefits and accounts for over 35% of employment in the modern sector, with a greater proportion of skilled and semi-skilled workers than in the other industrial sectors. The training benefits provided by the mining activities are substantial and have helped promote Liberianization of the sector. In 1979, expatriates accounted for less than 8% of the labor force in the Liberian iron ore sector; at NIOC, this proportion was even less at slightly above 3%. 2.08 The sector also provides socio-economic benefits to the population which depends directly or indirectly on the mining activities for its support. The mining companies provide housing, schooling and medical services in remote areas of the country. Further, through the maintenance of their infrastruc- ture, the mining companies provide crucial linkages between these areas and the urban regions of the country, especially Monrovia. C. Future Development Potential 2.09 The prospects of the iron ore sector are uncertain. As noted, all operating companies are experiencing financial, technical, and/or marketing problems (paras. 2.02-04) which might jeopardize their future operations. Furthermore, the prospects for developing new deposits in the foreseeable future are slim. 2.10 In addition to the three operating mining concessions, three other iron-bearing areas are covered by concession/lease agreements. These areas are the Bie mountains, the Wologisi range and the Putu range. The Bie Mountain concession is held 50/50 by NIOC and LMC; the Wologisi range is under a 70-year lease to the Liberian Iron and Steel Corporation (LISCO); and BMC has rights to the Putu concession. Exploration work has been done in all areas and reserves are estimated at 200-600 million tons of low-grade (33-41% iron),  - 5 - fine-grained ores suitable mainly for pellet feed production. 1/ The areas are also characterized by their lack of infrastructure and would require substantial investments to be developed. In this respect, Bie Mountain is most favorably located, about 15 km from the Mano River-Bomi Hills section of the NIOC railroad. In view of the poor quality of the reserves in these conces- sions and the high investment costs required to develop them, the likelihood that these deposits will be developed in the foreseeable future is remote. III. THE COMPANY A. Ownership and Concession Agreement 3.01 The National Iron Ore Company was organized in 1958 to develop the Mano River deposit located about 120 km NW of Monrovia. The Government of Liberia received 50% of the shares in exchange for permanent exemption from any profit tax or royalty (para. 3.03). Mr. Lansdell Christie, a US citizen who had initially explored the deposit and had already formed the Liberia Mining Company (LMC), 2/ retained 27%, LMC received 15% for the Bie Mountain and Mano River concessions which it owned, and small US and Liberian investors (financed principally by Christie) put up the 8% balance. This balance as well as Christie's participation was made through a holding company called Liberian Enterprises Limited (LEL) in which Christie owned more than 75% of the shares. 3.02 Until recently, the Company s original ownership composition had not changed. Simultaneously with the finalization of the financing package for the proposed project, a restructuring of the Company's ownership will take place to reflect the new equity contribution of the Government which was required as part of the financing plan for the project (para. 6.07) as well as to cover the 1980 cash short-falls (para. 3.22). Through its equity contribution of US$12 million and through the acquisition of some of the shares in LEL which were held by certain Liberian citizens, the Government will increase its share in NIOC from 50% to 80%, the remainder being distri- buted 12% to the Christie Estate and 8% to private US and Liberian citizens. 3.03 NIOC was organized under Liberian law iin 1958, when the mining concession was signed for a twenty-year period. This concession was extended for another twenty years in 1978. Separate agreements exist for NIOC-s use (and maintenance) of the Government-s railway (the Bomi-Monrovia link which the Government took over when LMC closed) and for renting space at the 1/ However, up to 25% of Bie Mountain's production could possibly be low- grade sinter fines. 2/ LMC was owned 41% by the late Mr. Christie and 59% by Republic Steel (US). In 1980, Republic Steel transferred all of its shares in LMC to the Christie Estate which presently holds Mr. Christie's interests.  Monrovia port. U-nder this arrangement, NIOC has om.ership of all assets at the mine, plant site and port, as wel as of railway yards, repair facilities and rolling stock. In addition, NIOC owns the railway link from Mano to Bomi. This concession agreement was very favorable to NIOC because, under the agreement, rno taxes or royalties were payable. Under the proposed project, it has been agreed that the concession agreement would be amended as a condi- tion of loan effectiveness in a manner satisfactory to the Bank, to submit NIOC to the payment of taxes of general application. B. Organization and Management 1. Past Management 3.04 NIOC is governed by a seven-member Board of Directors. Until recently the Government, in its role of controlling shareholder, appointed four directors including the President of the Company and Chairman of the Board, the remaining three being appointed by LEL (2) and LMC (1). NIOC-s Board, which used to meet only infrequently, did not exercise effective control over the operations of the Company. Furthermore, the Government-- although the majority shareholder--did not play a significant role in the supervision of the Company until 1979, since NIOC's affairs were, by contract, managed by a managemert firm, Mine Management Associates, Ltd. (MMAL), owned by the Christie Estate. 3.05 MMAL's involvement dates back to the mine's opening in 1958, when the first management contract was effected for the duration of the concession agreement. The contract was renewed in July 1978 for a five-year period but was terminated in 1979. Although based in New York, MMAL fully controlled NIOC's operations as all decisions relating to expansion plans, renewal investments, pay scales and selection of senior-level personnel were taken by MMAL's small staff. The services actually provided by MMAL were limited in scope and included: (i) acting as purchasing agent for spares and supplies procured in the U.S., (ii) accounting and financial work (mostly bank deal- ings), and (iii) expatriate recruitment. At the mine site, a General Manager appointed by MMAL was in charge of day-to-day operations. Marketing was, and continues to be, handled by Caemi International, Brazil (Chapter IV) in the Hague, which in recent years also handled expatriate recruitment. The manage- ment fees payable to MMAL amounted to 3% of sales or about US$900,000 per year, part of which was not paid but accumulated as a liability of NIOC. 3.06 This management arrangement--whereby decision-making was totally divorced from physical operations--proved to be less than satisfactory and, therefore, in 1979 the Board of Directors decided to terminate what they perceived as a costly and inefficient management contract. A termination agreement was signed calling for payments which have been rescheduled under the global arrangements mentioned in para. 6.12. Since theri, the management of the Company has been taken over by the General Manager and the Chairman of the Board of NIOC on an ad-hoc basis. Under the proposed project, the organization and management of NIOC will be reorganized as discussed below.  -7- 2. Proposed Organization and Management Arrangements 3.07 As majority shareholder, the Government will control NIOC in the future. To ensure a unified management to carry out the project, it has been decided that the role of the minority shareholders will be limited, with control of management decisions to be placed in the Government which, by guaranteeing all of the loans for the proposed project, effectively takes the entire risk. To provide for this, a voting trust arrangement has been set up in which all the shares in the Company will be placed, thereby transferring the control of the Company to the Government through a group of four trustees. This voting trust arrangement will remain valid until all long-term loans contracted for the proposed project are repaid. The trustees will appoint a Board composed entirely of Liberians nominated by the Government. The Board is expected to meet at least semi-annually and otherwise as circumstances require. 3.08 The Board will appoint an Executive Committee composed of three to five members with proven expertise in the fields of mining, finance and labor relations, to be chaired by the Chairman of the Board. This Executive Committee will meet at least once a month and is expected to supervise the operations of the mine closely. The Executive Committee has been appointed and the terms of reference of the Committee have been agreed with the Bank. The day-to-day operations of the mine will be managed by a General Manager located at the mine site, who will report to the Executive Committee. The General Manager will, however, have extensive responsibilities, especially regarding technical decisions, in order to enable him to manage operations effectively. 3.09 Presently NIOC suffers from a severe shortage of qualified manage- ment personnel. As a result of the perceived deterioration in NIOC's future prospects and the unsettled climate following the April 1980 revolution, the number of NIOC expatriates dropped from about 70 at the end of 1979 to about 55 at present. Both the General Manager and the Assistant General Manager have left, as well as some of the more senior Liberian personnel. In order to strengthen this deteriorating management situation, the Bank has discussed with the Government the necessity for outside assistance on a continuing basis. As a result, an agreement has been negotiated with Met Chem (of Canada, a wholly-owned subsidiary of US Steel) to provide the necessary management and technical services. This agreement provides for total manage- ment of NIOC's operations during the project implementation period and one additional year thereafter. The terms and provisions of this agreement are discussed in detail in Chapter V. Appointment of Met Chem is a condition of loan effectiveness. 3.10 The proposed organization chart for NIOC is shown below and is being reviewed now by Met Chem.  LIBERIA NIOC IRON ORE REHABILiTATION PROJECT PROPOSED COMPANY ORGANIZATION NIOC Board Executive Committee I' Ge,neral Meanuger IjA General Manager' rF| - Technical Operations Manager- Services Manager' Controller' Trainig' j Mine' Maintenance Accounting -| ndastrial l Mill' Warehoase Budgeting l LRelations l lllll Safety l i Railroad' Power Plant Medical Port' l Construction | Schools '-Positions hbich might be held by Met Chem personnel. VWoHd Bank-222539 Under this arrangement the 16 departments, which previously all reported directly to the General Manager, will be grouped along functional lines into three main units. Each of these units will be headed by a Met Chem-appointed manager, respectively responsible for operations, technical services, and financial planning and reporting/administration. These units will report directly to the General Manager, who is assisted by an Assistant General Manager. The General Manager, in turn, will report through the Executive Committee to the Board. 3.11 NIOC employs about 250 Liberian salaried staff and slightly over 1,700 hourly paid workers. Together with the technical experts provided under the management contract, there will be about 65 expatriates. The low proportion of expatriate staff to total employees (3%), which is well below that in the other mining companies in Liberia as well as in other developing countries, reflects the long history of operation of the Mano River mine and on the job training of liberian workers. C. Past and Present Operations 1. Past Operations 3.12 The Mano River iron ore deposits were discovered in 1957 and were developed in two phases. The first phase which started in 1957 comprised,  - 9 - for an investment of US$27 million, the development of the "Mano I" ore beneficiation plant which was commissioned in April 1962. However, as this plant was ill-conceived from the beginning, NIOC rarely met its expected annual production rate of 3 million tons with plant as initially designed. 3.13 Therefore, a new plant flow sheet was developed and about US$30 million was invested over the 1972-74 period to create the "Mano II" plant with a production capacity of 4.5 million ltpy of sinter fines. However, the "Mano II" plant encountered severe operational problems from start-up in 1975, and NIOC has never been able to meet projected annual output or grade speci- fications. This was largely the result of poor technical decisions made by the managing firm and of poor supervision of the engineering firm in charge of plant modification, resulting in a lawsuit which was settled only recently to the benefit of NIOC. A breakdown of NIOC-s production and shipments of iron ore during 1971-80 is shown below: NIOC--Tonnage Mined, Processed and Shipped, 1971-80 (million long tons) a! 1971 1972 1973 1974 1975- 1976 1977 1978 1979 i980 Ore Mined 5.3 5.8 5.0 5.0 5.7 5.6 5.2 4.5 4.4 3.0 Plant Production: Fines 2.3 2.2 2.1 2.1 2.0 1.6 2.2 2.1 1.9 1.4 Coarse 1.2 1.0 0.6 0.2 0.4 0.3 0.3 0.2 0.2 0.1 Total 3.5 3.2 2.7 2.3 2.4 1.9 2.5 2.3 2.1 1.5 Products Shipped: Fines b/ 2.8 3.0 2.5 2.5 2.3 2.3 2.3 2.1 2.1 1.4 Coarse 1.2 0.9 0.8 0.8 0.2 0.3 0.3 0.2 0.2 0.1 Siliceous Fines n.a. n.a. n.a. 0.2 0.2 0.2 0.2 0.2 0.1 0.2 Total 4.0 3.9 3.3 3.5 2.7 2.8 2.8 2.5 2.4 1.7 a/ First year of "Mano II" plant operation. b/ Fines shipped during 1971-74 include LMC concentrates purchased to upgrade NIOC's product. 2. Present Operations 3.14 The mine is a conventional open pit operation employing both diesel- driven and electric shovels for overburden removal and digging and loading  - 10 - ore, and rigid-frame off-the-road trucks for hauling ore to the crusher. Blasting is required for about 15% of all material being handled, with blast- hole drilling performed by air track drills. Support equipment consists of front-end loaders, bulldozers and graders for road construction, bench pre- paration and haulage road maintenance, and a number of light vehicles for equipment maintenance, personnel transport and supervision. 3.15 The ore is transported by truck an average of 2 miles and dumped into the crusher adjacent to the ore beneficiation plant. The crushed ore is transported on a conveyor belt directly, i.e., without any surge facilities, into the plant and treated by impactors, mills, jigs, screw and rake classi- fiers and Humphrey spirals. The products are then conveyed to the two-train loading bins, loaded into rail cars and hauled by three daily trains 90 miles to the stockpiling and shiploading terminal in Monrovia. Tailings are pumped into a ditch running through three completely full tailings ponds to a small creek which discharges into the Mano River, the result being heavy discoloration (red) of the river (para. 5.19). 3.16 Infrastructure for the mining operation includes a captive 8.5 MW diesel power plant, a water supply system from the nearby Mano river, townsite with a Company-run hospital and schools, warehouse, workshops, port loading facilities at Monrovia, and a 90-mile single-track railroad with loco/car repair shops in Bomi Hills. The railroad is paralleled by an unpaved road. The mine is the only commercial activity of any significance in the area, and although at least 16,000-18,000 people are directly or indirectly dependent on it, other linkages with the area's economy are minimal. Most food and other materials, for example, are brought in from Monrovia. 3.17 At present, NIOC is facing technical problems in all phases of operations, except for stockpiling and shiploading at the port of Monrovia which are working satisfactorily. The problems in the mine are caused by a very old and mixed equipment fleet (trucks, scrapers, shovels) with deteriorating availability, inadequate maintenance of haulroads and benches--causing produc- tion disturbances and losses in the rainy season--and a lack of any production planning and grade control (except on a day-to-day basis) which would enable NIOC to produce an even plant feed in terms of grade as well as tonnage. The proposed project will improve mine performance by providing new mining equip- ment (para. 5.08) and by ensuring that adequate mine planning is carried out (para. 5.09). The variations in plant feed rates and grades, due to disturbances at the mine and the lack of any surge facility between the mine and plant, cause the beneficiation plant to operate unsatisfactorily with low recovery and production losses. Also, any production stops in the plant will directly cause ore production in the mine to stop due to the lack of any buffer between the mine and plant. Variations in plant production have an impact on the railroad operation, and trains have to be rescheduled constantly. Furthermore, the existing plant flowsheet is not optimal even if the plant feed could be kept even in terms of grade. The proposed project addresses these issues by including the construction of a surge facility and improvement to the flowsheet of the plant (para. 5.10).  - 11. - 3.18 The capacity of the railroad as such is no bottleneck at present, provided the maintenance of rolling stock can be kept up and no major derail- ment occurs. The latter cannot be excluded since hardly any track maintenance has been done for years and the rail and trackbed are in very poor condition. Furthermore, one of the railroad bridges, the 35-year old St. Paul River bridge, is in particular need of repair. The riverbed scouring and corrosion of the bridge piers have reached such a stage that the bridge has to be repaired in the near future if a collapse is to be avoided. Temporary repairs carried out in November 1979 are expected to reduce such risk until more permanent rehabilitation can be done. Rehabilitation of the railroad track and rolling stock and permanent repair of the St. Paul River bridge form part of the proposed project (paras. 5.12-5.13). 3.19 In addition to addressing these areas, the project also includes management support to improve mining and plant operations and maintenance (para. 5.14). D. Past Financial Performance and Recent Financial Position 3.20 NIOC's past financial performance suffered from the technical problems described above (para. 3.17). NIOC has been an unprofitable opera- tion and its financial situation has been deteriorating continuously since 1974, as can be seen in the table below which summarizes relevant sales and financial data. Detailed historical statements are given in Annex 3-1 and Annex 3-2. NIOC--Financial Indicators (US$ million) 1974 1975 1976 1977 1978 1979 1980 Shipments (million tons) 3.49 2.66 2.78 2.79 2.44 2.38 1.65 Average FOB price/ton (US$) 5.76 7.22 7.73 8.49 8.20 8.85 9.73 Sales Revenue 20.1 19.2 21.5 23.7 20.0 21.1 16.05 Net Profit (Loss) (1.6) (0.9) (0.1) 1.4 (0.1) (2.8) (6.4) Net Cash Generation 1.0 1.5 2.3 3.8 2.1 (0.8) (5.0) Cost of Goods Sold/ton (US$) a/ 4.58 5.54 5.80 6.08 6.29 8.3 13.3 Net Profit as % of Sales (%) (8.1) (4.9) (0.2) 6.0 (0.7) (13.3) (40.0) Total Debt:Equity Ratio b/ 53:47 56:44 54:46 47:53 46:54 56:44 74:26 Current Ratio 1.4 1.0 0.9 1.0 0.7 1.7 1.0 Long-Term Debt Service Coverage Ratio n.a. n.a. 1.2 0.9 0.7 - - a/ Includes direct operating costs and overheads, but excludes depreciation, selling expenses, management and other fees. b/ Includes current portion of long-term debt and debt to associated companies.  - 12 - 3.21 NIOC has experienced losses nearly every year since 1974. The only exception was 1977 when NIOC benefitted from a peak in its selling prices while managing to keep its costs at a stable level. NIOC's poor financial performance is due primarily to high direct operating costs and relatively low selling prices, reflecting the generally depressed nature of the iron ore market for the last few years. The arrival of a new manager in 1975 had a beneficial impact on the operation. The situation tended to improve slightly from 1976 to 1978 as a result of improved selling prices and substantial efforts from management to curtail costs. However, since 1979 there has been a dramatic deterioration. Production costs increased by more than 14%, production volume remained static, and the 1979 year-end loss was approxi- mately US$1.7 million. Furthermore, in the same year (1979) the Company was unable to meet its debt service obligations and was in default on payment of about US$6.5 million of long-term loans. 3.22 In 1980, the NIOC's situation deteriorated even further, putting the Company virtually in a state of bankruptcy. As the production fell to around 1.7 million tons, NIOC's losses increased to more than US$6 million which were covered by commercial bank credit until August 1980, at which time these liabilities were assumed by the Government, which will turn them into equity. as part of the financial restructuring of NIOC (para. 6.12). During the first months of 1981, the Government was financially unable to support NIOC any longer and NIOC was forced to depend solely on its limited sales revenues which provided barely enough funds to cover its payroll. At the same time, NIOC's payables increased dramatically as the company was unable to pay its suppliers, particularly the oil refinery. Over the last three months, however, the Government provided about US$3 million to NIOC to cover the cash shortfalls as well as to finance downpayments on mining equipment. 3.23 NIOC's present critical financial situation is the result of a long history of technical and financial problems. The continuing losses and shortage of funds from which NIOC has been suffering since 1974 have prevented the Company from maintaining its equipment and facilities adequately, let alone from taking the corrective actions required to resolve the technical problems it has been facing. Under the proposed project, the financing plan (para. 6.06) as well as the security arrangements (para. 6.13) have been set up in a manner that will ensure that NIOC will have adequate working capital to prevent excessive financial constraints from jeopardizing the Company's operations as they have in the past. IV. THE IRON ORE MARKET 4.01 NIOC iron ore is a specialty product for which demand is not directly affected by fluctuations in the world iron ore market demand/supply situation. The price of NIOC ore, however, is tied to world market prices. Therefore, the following review of the iron ore market is very brief and aims only at highlighting the major market trends as they will influence future prices. Subsequently, a more detailed analysis of the particular market for NIOC's ore, the marketing arrangements which have been set up, and projected prices is given.  - 13 - A. Trends in the World Iron Ore Market 1. Past Trends 4.02 Demand for iron ore is directly tied to raw steel production. From 1960-75, world iron ore production grew continuously, reflecting the constant increase in raw steel production. As the steel industry in the major his- torical producing areas (US, Europe, and Japan) entered into a crisis in 1976, production and sales of iron ore steadily declined until 1978. The iron ore market turned up in 1979, and in 1980 iron ore production was 895 million tons and demand about 880 million tons. Despite this upturn, the present situation of the iron ore industry is still characterized by an under-utilization of existing production capacity, estimated at about 1,080 million tpy 1/ (the capacity utilization factor is estimated at about 83%), and a potential over- supply estimated at about 185 million tons of iron ore. World production of iron ore from 1960-80 is given below. World Production of Iron Ore, 1960-80 (million tons) Year Iron Ore 1960 522.1 1965 624.3 1970 773.8 1975 889.0 1977 826.2 1978 806.5 1979 860.0 1980 895.0 % Annual Growth Rate 1960-70 4.0 1970-75 2.8 1975-80 0.1 2. Future Trends 4.03 Future iron ore demand is derived from the estimates of future world steel production. There is general consensus that the increase in steel production in OECD countries will be about 1 to 1.5 percentage points below their expected increase in real GNP, presently projected at 3.5% per year. Various estimates are given below for 1985 production and derived iron ore demand. 1/ Effective operating capacity based on 1,200 million tpy rated capacity.  14 Projected Raw Steel Production and Derived Iron Ore Demand (million tons) 1985 Source of Date of Raw Steel Derived Iron Estimate Estimate Production Ore Demand CVRD (Brazil) 1980 893 1,000 Nisso Iwai 1981 860 970 Mitsui 1981 823-879 a/ 970-1,030 World Bank 1981 855 1,040 a/ The most likely estimate is 879; the lower end of this range is an alternative scenario considered by Mitsui as pessimistic. Projections to 1990 are very uncertain. The various estimates above correspond to annual increases in iron ore demand ranging from 2.0% to 3.4% per annum over the period 1980-85 depending on the estimate. 4.04 According to the latest Bank forecast, future potential supply of iron ore is expected to be 1,100 million tons by 1985, corresponding to an increase in annual capacity of about 20 million tons. Some iron ore production will be retired as reserves are depleted, but it is expected that this drop will be more than made up for by a number of small projects and expansions. Substantial growth is likely in the late 1980s, but this will depend on the timing of a few large-scale projects which are presently at the feasibility! financing stage--particularly in Australia, West Africa and Brazil--which would account for 50-75 million tons of new capacity in the late 1980s if implemented as presently planned. Estimates of potential iron ore supply in 1985 are given below: Estimated Potential Iron Ore Supply a/ (million tons) Source Date of Estimate 1985 Mitsui 1981 1,000 AMAX 1980 1,096 USBM 1981 1,050 World Bank 1981 1,100 a! These estimates vary from one source to another both because of different opinions as to the likely iron ore retirements and the prospects for implementation of new projects.  - 15 - 4.05 The medium-term supply/demand balance for iron ore is characterized by a diminishing oversupply situation (or possibly balance) as illustrated in the table below. Iron Ore--Projected Supply/Demand Balance (million tons) 1980 1985 Derived Iron Ore Demand 880 970-1,040 Potential Iron Ore Supply 1,030 1,000-1,100 Potential Oversupply 150 (40)-130 Whatever the actual demand/supply situation is likely to be in 1985, it is to be expected that by then part of the unutilized capacity will re-enter produc- tion; and, if some of the larger iron ore projects are delayed (e.g., the Carajas project), and others are not added, the market should reach equili- brium between 1985 and 1990. B. Past and Future World Market Price Trends 1. Past Price Trends 4.06 Price trends in iron ore reflect both the evolution of mining production costs and of the iron ore demand situation. From the 1950s to the early 1970s, iron ore prices have dropped continuously in real terms as a result of the reduction in production costs resulting from the opening of large-scale open pit mines with high levels of mechanization and economies of scale. In the late 1960s and early 1970s, a number of smaller and more costly mines closed (particularly in Europe) and were replaced in the market by a few large-scale Brazilian and Australian mines which have largely dominated the iron ore seaborne trade ever since. The drop in iron ore prices as a result of this basic structural change is estimated to have levelled out in the early to mid-1970s. 4.07 In 1975-77, however, as a result of the softening in world iron ore demand, prices fell also in current terms. The subsequent continuing weakness in steel consumption and the resulting depressed condition of the iron ore market resulted in further declines in prices (in constant terms) in 1977 and 1978. Notwithstanding small increases in real-term iron ore prices in 1979 and 1980 to cover increased production costs, the prices in 1980 were still well below the 1970-75 level. The present difficult financial situation of a number of mines around the world shows that the current price levels are hardly sufficient to cover production costs. Past iron ore prices are given in the table below.  - 16 Past Iron Ore Prices-CIF Rotterdam (US4 per Fe unit per ton) Brazilian Reference Ore Year Current Price Constant (1980) Price 1968 12.7 - 13.5 46.9 - 49.7 1970 13.5 - 14.8 44.3 - 48.6 1972 14.5 - 16.5 39.8 - 45.3 1974 23.0 - 24.0 42.2 44.0 1975 32.0 - 33.0 50.8 - 52.3 1976 27.5 - 28.5 42,8 44.4 1977 28.0 - 28R5 40.5 - 41.2 1978 25.0 - 26.5 31.1 - 33.0 1979 29.0 - 29.5 31.9 - 32.5 1980 37.0 - 38.0 37.0 - 38.0 1981 37.0 - 38&0 32.9 - 33.8 Source: Industrial Projects Department. 2. Future Prices 4.08 Future prices will continue to be affected by both slightly increasing production costs and the supply/demand situation. As discussed earlier, future supply and demand are expected to move progressively towards equilibrium and reduction of the present overcapacity. This general evolution--without being expected to have any drastic effect on iron ore prices--will contribute to an improving long-term CIF price trend. 4.09 Future production costs for iron ore are not expected to change substantially in real terms. No fundamental structural change leading to further larger economies of scale similar to those which took place in the 1960s is expected in the future. The large mining projects which are presently under consideration are not expected to enjoy substantially lower FOB export costs than the mines now in operation and therefore the introduction of these new producers in the market is not expected to exert a drastic downward pressure on the iron ore market prices. To the contrary, increases in FOB iron ore prices will be necessary if these new operations are to have a positive cash flow, especially during the first years of operations when debt service obligations are at their maximum. Furthermore, an increase in real-term production costs can be expected because of the high fuel cost component in the production and transportation costs. For most iron ore mines (as well as for the larger projects presently under consideration), the fuel component amounts to up to 25% of their direct production cost, which implies that for every 4% increase in real-term fuel prices, an increase of 1% in real-term iron ore production costs can be expected. These increases in real-term production costs are expected to be reflected in the iron ore prices also. 4.10 Future CIF as well as FOB iron ore prices are thus forecast to increase in real terms over the long term from the presently depressed levels,  - 17 - such increases however, being limited by the potential oversupply situation. In particular, it has been assumed that--after the sharp drop in real-term iron ore prices in 1981, particularly in Europe, caused by the crisis in the steel industry (prices remained constant in current terms on the European market whereas the inflation in 1980 was 12.5%)--prices will recover in 1982 to the pre-1981 level. Because 1980 prices were somewhat above the long-term trend, it has been assumed that the 1982 price will recover to a level which would still be below the 1980 price, corresponding to the average real-term price for the period 1979-81. Thereafter, prices are expected to increase by an average of 0.5% per year until 1985 and 1% per year from 1986 to 1990. As a result, the European market iron ore prices are expected to recover to their 1980 level by 1988. The index of projected iron prices on the European market is given below. 1/ Index of Projected Iron Ore Price (Real terms) 1980 1981 1982 1983 1985 1990 Index (Base year 1980) 1.00 0.89 0.95 0.96 0.97 1.02 C. Market for NIOC Products 4.11 NIOC has produced until 1979, and will produce after project implementation, three different products with the following average chemical composition: NIOC--Iron Ore Product Charactistics a/ X Fe X SiO2 % Al2 03 % Moisture Mano II Fines 57.5 4.5 4.5 10-11 Blast Furnace Feed 53-55 3.5 6.9 8-10 Siliceous Fines 50 12-15 7.5 12-13 a! Natural state. During the last two years, NIOC's operational difficulties provoked a drop in the quality of its ore, with the average iron content falling in 1981 by 10% below the above specifications. With the rehabilitation project, however, it is expected that the quality will gradually improve and by 1984 will be at 1/ The assumptions hereabove relate to the European market only. On the Japanese market, since the drop in real terms in 1981 was substantially smaller than on the European market (drop of 5% as opposed to 11% in Europe) the real-term price increases expected for 1982-83 are expected to be much smaller.  - I S - the level it was until 1979. I/ Mano II fines account for 85-90% of NIOC's total production and the balance is evenly split between the other two products. Siliceous fines are reclaimed from old tailings ponds and, as opposed to the other two products9 are not produced in the beneficiation plant and therefore will not be affected by the rehabilitation project. 4.12 Because of their particular characteristics illustrated in the table above and especially because of their silica/alumina content, NIOC products, as noted previously, must be considered as specialty products which are used by steelworks for very specific uses. Mano II fines are used primarily as grading material for sinter feed. They are mixed in the sinter phase with higher-quality ore (i.e., higher iron and lower silica/alumina content) in order to reach the optimum levels of the flux media (silica) and slag (of which alumina is an integral component). This is needed to ensure proper physical and chemical conditions in the blast furnace. The Mano II fines are also used as a binding agent in pellet feed as a substitute for bentonite. The siliceous fines are used as a grading material in sinter feeds. The blast furnace feed--a coarse product--is fed directly into the blast furnace in combination with high-grade material or it is ground to sinter feed. 4.13 There is a particular market niche in Europe for NIOC products or for products with similar characteristics. Indeed, the European steel producers are now, and will be in the future, highly dependent on imported iron ore. As these ores are all of high-grade quality, NIOC's or similar products are needed for grading purposes. Indeed, to make up for the low silica/alumina content in the high-grade ores, the high silica/alumina ores are mixed with these in different proportions and grades, depending on the steelworks and their ore supplies/blends. According to NIOC's marketing agent, Caemi (para. 4.14), there is at present a market in Europe of about 4-5 million ltpy for high silica/alumina-type ores, essentially sinter fines. NIOC's major competitor in this market is Robe River (Australia), which produces a similar ore. However, considering the difference in sea freights to Europe between West Africa and Australia, NIOC is very competitive and there should be no constraints to NIOC increasing its market share. Caemi is confident that, notwithstanding the future fluctuations in the world seaborne iron ore demand/supply situation, demand for NIOC's products will remain strong. The specific steps taken to secure the market are discussed below. 1/ The expected improvements in NIOC products' quality are illustrated by the following index: NIOC Iron Ore Quality Index 1979 1981 1982 1983 1984 1.40 0.90 0.92 0.95 1.00  - 19 - D. Marketing Arrangements and Sales Contracts 4.14 The sales agent for NIOC is Caemi International BV, located in the Hague, Holland. Caemi International is the trading arm of Companhia Auxiliar de Empresas de Mineracao, a well-known Brazilian industrial conglomerate with interests in mining, steel, paper, machinery and forestation. 1/ They have a good reputation in the international trade of iron ore and are considered businesslike and knowledgeable. Caemi has been able, over the years, to place all of NIOC s production and to obtain from NIOC's clients their agreement to take all quantities corresponding to contractual arrears which, as of end-1980, amounted to 13.6 million tons. NIOC has agreed that Caemi or an able marketing agent acceptable to the Bank will be retained. 4.15 NIOC's products have been marketed through both short-term (one-to- three year) and long-term (ten-year) sales contracts to about six different European steel producers. The siliceous fines have been marketed in the frame of a barter deal with a steel company against rail produced by that company. The short-term contracts, in the past, have been extended with provisions for annual price and quantity negotiations. The long-term contracts which NIOC presently has are due to expire in 1983-84; however, Caemi has been successful in obtaining letters of intent from five of NIOC's six major long-term customers explicitly stating the customers willingness to receive the 13.6 million tons of arrears under current contracts and their intention to negotiate new long- term contracts with similar annual quantities totalling 3.25 million tons of Mano II fines. Copies of these letters have been received by the Bank. Also, the steel company presently purchasing the siliceous fines has expressed its desire to replace the barter arrangement which is to expire end of 1981 by a regular long-term sales contract. On the basis of such assurances and of the strength of the market for NIOC's products, the marketing of NIOC's production is not considered to pose any problem. E. Pricing of NIOC Ore 4.16 In the past, the price of NIOC ore was negotiated with the steel companies on the basis of a fixed FOB Monrovia price, valid for five years. Starting in 1979, however, NIOC negotiated with its clients to change these procedures for the fines and blast feed and agreed to adopt the current practice in the trade, i.e., an annually negotiated price in US cents/Fe unit based on the CIF Rotterdam price for large iron ore producers. In 1979, there was still a difference of about US2.5U/Fe unit between the Brazilian ore CIF price and the NIOC CIF price, but this difference disappeared in 1980. Although no commitment on price can be obtained from the ore buyers, it is expected that there will be no significant difference in the future between CIF US