Madagascar - Ilmenite Mining Engineering Credit Project

Docunent of The World Bank FOR OmCIAL USE ONLY C2 / 9Sc s0' -S Report No. P-4802-MAG MEMORANDUM AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 6.2 MILLION TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A ILNENITE MINING ENGINEERING CREDIT May 25, 1988 Industry and Energy Operations Division South-Central and Indian Ocean Department Africa Region This document has a restricted distributon 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 AND EQUIVALENT UNITS Currency Unit - Malagasy Franc (FMG) US$1.00 = FMG 1,273 (May 2, 1988) WEIGHTS AND MEASURES Metric system ABBREVIATIONS BRGM - Bureau de Recherches Geologiques et M1ni;res ('runce) DGM - Direction des Mines et de la Geologie MIEM - Ministere de l'Industrie, de l'Energie et des Mines MM - QIT - Madagascar Minerals Ltd. et Cie. OMNIS - Office Militaire National des Industries Strategiques QIT - QIT-Fer et Titane Inc. (Canada) FISCAL YEAR January 1 - December 31  FOR BOFmCL USE ONLY MADAGASCAR ILMENITE MINING ENGINEERING PROJECT CREDIT AND PROJECT SUMMARY Borrowers Democratic Republic of Madagascar Beneficiary: Office Militaire National des Industries Strategiques (OMNIS). Amounts SDR 6.2 million (US$8.55 million). Term:s Standard, with 40 years maturity. Onlendina Terms: The government would make the proceeds of the credit available to OMNIS as an advance and shall ensure that OMNIS shall make available such funds as its contribution to the Joint-Venture for the carrying out of the Project. Upon the final decision of the partners as to whether to proceed with the development of the ilmenite mine, associated facilities and infrastructure, the Borrower and OM0IS shall decide on the terms and conditions of arrangements for settlement of the advance, which shall be satisfactory to the'Association. Financing Plan: OMNIS US$ .2 million QIT US$ 7.4 million IDA USS 8.55 million TOTAL US$ 16.15 million Economic Rate of Return: Not applicable Staff ADDraisals None Maps IBRD 20699 |of their ofdicial uties. Its contents may not othewise be disclosed without World Bank autborztion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO MADAGASCAR FOR AN ILMENITE MINING ENGINEERING CREDIT 1. The following memorandum and recommendation on a proposed engineering credit to Madagascar for SDR 6.2 million (US$8.55 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and help finance an engineering project. QIT, the private partner, would make an equity contribution of SDR 5.3 million (US$7.4 million equivalent). 2. B&ckground. Madagascar is wi11 known for its wide variety of mineral deposits as would be expected in view of its geological continuity with the southern African continent. While it is best known for the production of chromite, graphite and mica, there have been a multiplicity of other minerals produced in the country, i.e. gold, industrial beryl, monazite, garnet, feldspar, kaolin, barytes, quartz and the full range of carbonate rocks (marble, limestone, calcite). There has also been continuous production of ornamental and semiprecious stones. In addition many other mineral resources have been identified: rare earth metals, ilmenite, zircon, bauxite, iron ore, nickel, copper, platinum group metals, lead, molybdenum, manganese and tin. However, this vast potential is largely untapped and so far the valu' of mineral production has not been significant in the overall economic performance of Madagascar; it currently contributes just over three percent of export revenues (down from five percent in 1978). The mining sector, like the rest of the industrial sector, has been adversely affected between the mid-1970s and early 1980s by interventionist economic policies of the Government characterized by nationalizations, price controls, overvaluation of the Malagasy franc and centralized rationing of foreign exchange. 3. The mining sector is at a critical stage where transition from a sector with a very restricted investment climate to an open sector welcoming private investment, both local and foreign, should be supported. The proposed engineering credit would be used to prepare a large-scale mineral sands project to be developed as a joint-venture by Office Militaire National des Industries Strategiques (OMNIS), the principal Government enterprise for mineral development and mining operations, and QIT. The latter, a Canadian wholly-owned subsidiary of BP/Minerals, is a major player in the titanium dioxyde slag industry controlling about 40 percent of the world market. OMNIS and QIT have formed an unincorporated joint-venture (OMNIS 51 percent, QIT 49 percent) with QIT the operator. The proposed OMNIS/QIT ilmenite mining project concept is to produce about 600,000 tons of ilmenite (used primarily for the production of titanium dioxide pigment, the major pigment in nearly all white paints), and smaller quantities of the co-products rutile (main source material for titanium metal which is widely used in high performance aircraft), zircon (the principal source of the element zirconium used mainly in foundries,  -2- refractories and ceramics), and monasite (used in petroleum catalysts, metallurgy, electronics, optical and special glasses, magnets). The proposed operation will require careful planning to avoid long-term environmental damage to the areas being mined which include one of the remaining tracts of littoral tropical rain forests. 4. Rationale for IDA Involvement. The proposed ilmenite mining project is central to Madagascar medium-term development strategy which aims to diversify exports and encourage private sector participation. The proposed engineering credit, which would finance OMNIS's share of the engineering phase of the ilmenite mining project, would allow a more active participation by OMNIS during the preparation stage of the main project. The credit, by enhancing collaboration between OMNIS,. QIT and the Bank, would facilitate preparation of the ilmenite mining project. Successful implementation of the project will help demonstrate to the outside world that the development of the mineral potential of Madagascar can now be realized with the participation of private foreign investment. It would help establish the credibility of Madagascar for major new investments in mining as well as other ssetors. In view of the relative importance of this new mining venture, IDA participation would also provide an avenue for linking the project to country policy and institutional reform strategy, setting an example of a sound project in the areas of management, operational responsibilities, fiscal regime, environmental protection and social impact. IDA's involvement would ensure that the delicate environmental questions raised by the project are properly addressed in the context of the comprehensive environmental action plan under preparatioa by the Government (with IDA's assistance). 5. Proiect Objectives. The main objective of the proposed engineering project is to help OMNIS carry out its share of Phase III of project preparation. In accordance with the terms of the joint-venture agreement which was signed in March 1986, QIT provided all the financing for Phase I (exploratory work to confirm the quantity, grades and product qualities of the ore body amounting to US$2.2 million and covering the May 1986 to February 1987 period) and Phase II (detailed drilling work in order to select a mining plan for 20 years and pilot-scale plant to produce heavy mineral concentrates to provide data for a full-scale plant design amounting to US$12 million and covering the period March 1987-December 1988). Phase III, which would be partly financed by this engineering credit, is described below. 6. Project Description. In order to assist preparation of the ilmenite mining project, the engineering credit would finance OMNIS's share of the following work: (a) setting up of a Wet Pilot and Mineral Separation Pilot Plant to optimize and confirm flowsheets developed during Phase II; (b) completion of basic engineering for the following facilities: dredge and concentrator plant, mineral separation plant, power plant, dock/harbor; (c) completion of the environmental impact study. Also included would be some complementary drilling, ore body delineation and limited infrastructure development, i.e. road and bridge construction to have access to the area which is the likely location of the mineral processing and product facility, market studies, and product/pilot plant test work. If the project is judged economically and financially viable, the engineering credit would also finance preparation of bid documents, prequalification of  -3- contractors as needed and evaluation of bids. In addition to the above elements, the project scope includes OMNIS internal costs, to minitor and promote the project, technical assistance for 0MNIS, and the refinancing of a Project Preparation Fund advance (PPF) which had been granted to the Government in October 1987 to prepare the ilmenite mining project. The total cost of the engineering project is estimated at US$16.2 million equivalent (exclusive of taxes, from which the project is esempt), of which US$15.2 million equivalent represent foreign costs (94 percent of the total). An amount of US$8.55 would be financed by the proposed credit, including US$750,000 for the refinancing of the PPF and US$700,000 for technical assistance to OMNIS, monitoring and follow-up activities. The cost estimate is based on 1988 prices. Price contingencies based on an annual worldwide inflation rate of 5 percent and physical contingencies of 15 percent of all costs are included. The Government would make the proceeds of the credit available to OMNIS as an advance and would ensure that OMNIS make such funds available as its contribution to the joint- venture for the carrying out of the Project. Upon the final decision of the partners of the Joint-Venture Agreement as to whether to proceed with the development of the ilmenite mine, associated facilities and infrastructure, the Borrower and OMNIS would decide on the terms and conditions of arrangements for settlement of the advance, which would be satisfactory to the Association. QIT would finance both foreign and local project costs through its equity contribution. Within the framew^_k of the unincorporated joint-venture, QIT-Madagasear Minerals, which is registered and domiciled in Madagascar and which is the operator for the joiixt- venture, will be the operator for the proposed engineering credit. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbuzoement schedule are shown in Schedule B. A timetable of key project pro-casing events and the status of Bank Group operations in Madagascar are given in Schedules C and D respectively. A map is attached. The following technical annexes are also attacheds Annex I, project background informations Madagascar Mining Sector Development Issues, Objectives and Strategy; Project Formulation and Preparation; The Impact of Madagascar 1lmenite Mining Project on the World Market; Annex II, Environmental issues; Annex III, Project Execution. 7. Agreed Actions. The Government/OMNIS have agreed on the following actions: (a) a legal agreement between OMNIS, QIT, and QIT-Madagascar Minerals as operator for the joint-venture acceptable to IDA, spelling out the specific obligations of the partners to the joint-venture and of the operator for the carrying out of the engineering credit. Effectiveness of this agreement would be a condition of effectiveness of the credit; (b) IDA approval of the terms of reference for an environmental impact study would be a condition of effectiveness. 8. Benefits. Heavy mineral sand reserves in Madagascar are amongst the largest in the world and the country stands to become a major source of these minerals. There are strong indications that exploitation of these heavy mineral sands is a financially and economically viable proposition. The project would require an investment of approximately US$130 million and would generate about US$40 million per year in gross foreign exchange earnings. In addition, it would provide employment and stimulate develop- ment of the Southeast region of Madagascar. The engineering credit would  -4- enable OMNIS to become a more effective partner in project preparation, and it would advance the project implementation schedule while ensuring adequate consideration of envircnmental issues. 9. Risks. The major risk associated with the project is a change in corporate strategy of QIT or its parent company BP/Minerals. Market or political risks could also affect the attractiveness of the deposit. The Government's professional approach to the development of the ilmenite mining project, as shown by its request for the engineering credit to ensure satisfactory preparation, should reduce the political risk. Market risks are not considered high because the titanium dioxide pigment market has been experiencing a significant recovery since 1984 after 10 years of low growth. Plants worldwide are now working at full capacity and a medium-to long-term growth rate of 2-3 percent per year is forecast. Last, there is an inherent risk in the execution of a major project in a country with minimal infrastrn'e.ure and scarce resources. The potential benefits outweigh the risks discnssed above. 10. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber Conable President Attachments Washington, D.C. May 25, 1988  -5- Schedule A MADAGASCAR ILNENITE MINING ENGINEERING CREDIT ESTIMATED COSTS AND FINANCING PLAN 1/ Estimated Ccsts Local Foreign Total ---------(US$ million)-------- 1. Basic Engineerings - 6.3 6.3 Wet Plant/Dry Plant Dock/Harbor Dredge Power Plant Infrastructure 2. Complementary Drilling and 0.2 0.9 1.1 Orebody Delineation 3. Logistical Support 0.2 0.5 0.7 Activities 4. Market Studies - 0.2 0.2 5. Product/Pilot Plant - 0.3 0.3 Testwork 6. Heavy Equipment and 0.3 3.2 3.5 Infrastructure Construction Base Cost 0.7 11.4 12.1 Physical Contineancies 0.1 1.7 1.8 Price Contingencies - 0.6 0.6 Joint-Venture Project Cost 0.8 13.7 14.5 7. Technical Assistance OMNIS - 0.5 0.5 8. ONNIS Internal Project Cost 0.2 0.2 0.4 9. Refinancing of PPF 0.75 0.75 Total OMNIS Cost 0.2 1.45 1.65 Total Project Cost 1.0 15.15 16.15 Mm 1/ Exclusive of taxes and duties. Financing Plan Local Foreign Total ---- (US$ million)-------- OMNIS 0.2 - 0.2 QIT .8 6.6 7.4 IDA - 8.55 8.55 Total 1.0 15.15 16.15 wmu  -6- Schedule B MUDAGASCAR ILMUNITE MINING ENGINEERING CREDIT PROCUREMENT METHOD AND DISBURSBMENTS Project Element Procurement Method Total ICB LIB Other Cost -------(US$ million)------ 1. Consultants/lasic- ngineering 6.3* 6.3 (3.9) (3.9) 2. Complementary Drilling and Ore Body Delineation 1.1 1.1 3. Logistical Support Activities 0.7 0.7 4. Market Studies 0.2 0.2 5. ProductlPilot Plant Testwork 0.3 0.3 6. Hesvy Equipment 3.2 0.3 , 3.5 (3.2) (3.2) 7. Consultants for OMNIS 0.5 0.5 (0.5) (0.5) 8. OWNIS - Project Promotion/ .2 .2 Monitoring (.2) (.2) i. Refinacing of PPF 0.75 0.75 (0.75) (0.75) Total 3.2 10.35 13.55 (3.2) (5.35) (8.55) Note: - Figures in parenthesis are amounts financed by the Association - * Includes amounts for item. financed by QIT and procured under its own procedures. - Consultants for ONNIS and Consultants/Basic Engineering (US$4.4 million) will be procured as per IDA guidelines. Equipment (US$3.2 million) will be procured by LIB because of the specialized nature of the equipment and the l$mited number of suppliers for this type of equipment. US$0.2 million will be spent for project monitoring and promotion by ONIS. Disbursements (US$ million) Catesory Amount Percentae- 1. Basic Engineering 3.9 1002 of foreign expenditures 2. Heavy Equipment 3.2 100S of foreign expenditures 3. Consultants for 0NNISI 0.7 '100 of foreign expenditures Project Promotion/ Monitoring 4. Refinancing of PPF 0.75 Note: To expedite disbursements, a special account to be maintained in foreign currency will be opened in an institution acceptable to IDA. The initial amount of the deposit into the account would be US$1.8 million. Disbursement will be fully documented except that statement of expenditures will be used for contracts costing less than-US$50,000. Estimated IDA Disbu,rsements IDA Fiscal Year 89 90 --- (US$ million)- Annual 4.45 4.1 Cumulative 4.45 8.55  -7- Schedule C MADAGASCAR ILMENITE MINING ENGINEERING CREDIT Timetable of Key Proiect Processinx Events a) Time taken to prepare: Eight months b) Prepared by: QIT/OMNIS with IDA assistance c) First IDA mission: February 1987 d) Appraisal mission departure: January 1988 e) Negotiations: Hay 17-18, 1988 f) Planned Date of Effectiveness: November 1988  - 8 - Schedule D Page I of 2 SrATUS OF BANK GROUP OPERATIONS IN MADAGASCAR A. STATSEMENT OF BANK LOANS AND IDA CREDITS (March 31, 1988) Loan or Amount in US$ Million Credit Year swmber Signed Borrower Bank IDA (1) Undisbursed Six Loans Fully Disbursed and 38.77 Twenty five Credits Fully Disbursed 281.56 1155 1981 GOVT OF MADAGASCAR Accounting & Audit Training 11.50 0.51 1211 1982 GOM IFOFIFAMA Village Livestock II 15.00 10.05 1298 1983 OMNIS He#vy Oil Exploration II 11.50 3.15 1337 1983 GOVT OF MADAGASCAR Alaotra Rice Intensification 18.00 9.11 F 004- 1984 MTP & MTRT Sixth Highway 20.00 2.35 F 008 1984 GOM IHASYMA Cotton Development 9.90 1.05 1391 1984 GOVT OF MADAGASCAR Sixth Highway 25.00 3.37 1433 1984 GOVT OF MADAGASCAR Cotton Development 7.90 0.89 1497 1984 GOVT OF MADAGASCAR Urban Development 12.80 12.26 A 007 1985 GOVT OF MADAGASCAR Industrial Assistance 20.00 3.32 1541 1985 GOVT OF MADAGASCAR Industrial Assistance 40.00 13.51 1589 1985 GOVT OF MADAGASCAR Irrigation Rehabilitation 12.00 12.35 1661 1986 GOVT OF MADAGASCAR Accounting & Management Training 10.30 12.91 1691 1986 GOVT OF MADAGASCAR Agricultural Sector Adjustment 20.00 14.30 A 016 1986 GOVT OF MADAGASCAR Agricultural Sector Adjustment 33.00 25.94 1694 1986 RNCFM Third Railway 12.00 10.93 1709 1986 GOVT OF MADAGASCAR 2nd Agricultural Institutions 10.00 10.18 A 0032 1987 GOVT OF MADAGASCAR Industry & Trade Policy Adj. 67.00 44.97 15260 1987 GOVT OF MADAGASCAR Cyclone Rehabilitation 15.00 0.76 15261 1987 GOVT OF MADAGASCAR Cyclone Rehabilitation 10.00 6.88 1752 1987 G00 IDACMM AND SEPT Port Rehabilitation 16.00 16.51 1787 1987 G0M IJRPAMAIMIEHIMPAREnergy I 25.00 27.47 1804 1987 G0M /BTM 2nd Agricultural Credit 10.00 10.60 1834 1987 GOVT OF MADAGASCAR Industry & Trade Policy Adj. 16.00 10.84 ** 1378 1988 GOVT OF MADAGASCAR Fovest Management & Protection 7.00 7.08 Subtotal active projectas 0.00 454.90 271.29 Total less caeellationss 38.77 736.46 of which has been repaid 8.81 6.48 Total outstanding mndl. undisbursed: 29.96 729.98 (2) Amount sold t 0.00 6.86 of which has been repaid - 0.00 6.86 Total now held by Bank and IDA (1) : 23.76 561.13 (2) Total undisbursed s 0.00 271.29 (2) ** Not yet effective. (1) US$ amounts for credits are computed at rate of negotiations dates. (2) Sum of Total now held by IDA and Total Undisbursed Is higher than Total Outstanding because of depreciation of the USS.  Schedule U Page 2 of 2 B. Statement of IFC Investmgng (March 31. 1988) Loan Equity Total ----------(USS Million)--------- .1987 Sotema - Textile Mill et Majunga 11.000 0.299 11.299 1980 Bata - Shoe Manufacturing in 1.250 - 1.250 Antananarivo 1983 Pecheries de Nossi-Be 2.570 0.099 2.669 1985 Cotona, S.A. at Antairab. 9.563 0.184 9.747 1987 Satema-Textile Mill 3.744 0.010 3.754 Total 28.127 0.592 28.719 Less: Repayments, sales cancellations and exchange adjustments 8.469 8.469 Total commitments now held by IFC 19.658 Q.592 20.250 Total undisbursed 3.385 0.583 3.968  - 10 - ANNEX I Page 1 of 14 MADAGASCAR ILMENITE MINING ENGINEERING PROJECT A. SECTORAL CONTEXT 1 Sector Development Issues. Oblectives and Strategy 1. Madagascar is well known for its diverse suite of mineral deposits as would be expected in view of its geological continuity with the southern African continent. While it is best known for the production of chromite, graphite and mica, there have been a multiplicity of other minerals produced in the country. In the metallic mineral group, production of chromite, gold, industrial beryl, monasite, has been recorded. In the industrial mineral sector there has been production of graphite, mica, garnet, feldspar, kaolin, barytes, quarts and the full range of carbonate rocks (marble, limestone, calcite, etc.). There has also been continuous production of ornamental and semiprecious stones. In addition, many other mineral resources have been identified: rare earth metals, ilmenite, zircon, bauxite, iron ore, nickel, copper, platinum group metals, lead, molybdenum, manganese and tin. 2. The value of mineral production has not been significant in the overall economic performance of Madagascar and it currently contributes just over three percent of export revenues (down from five percent in 1978). Some 1,500 persons are directly employed in the sector while perhaps another 3,000-4,000 derive at least a part of their income from small-scale mining activities. The mining sector, like the rest of the industrial sector, has been adversely affected during the 1970s and early 1980s by the interventionist economic policies of the Government characterized by nationalizations, price controls, overvaluation of thG. Malagasy franc and severe rationing of foreign exchange. 3. KRAOMA, the state-owned and controlled chromite firm is, in terms of export receipts, the most important industrial mining operation in Madagascar. The French consortium, Compa nLe Miniare d'Andriamena (COMINA), which had developed the chromite mines in the late 19609 was nationalized in 1976. Production of saleable chromite ore, which was 200,000 tons at the time of nationalization, decreased to less than 50,000 tons in 1982 due to management, technical and marketing problems. Since 1982 some improvements have been achieved and in 1986, 83,000 tons of marketable ore was produced. Today, the operation of KRAOMQ is facing severe difficulties because of increased costs. A study of the strategic options available to the company, funded with a grant from the US Trade and Development Program, is assessing RRAOMA's present situation within a global industry context and will recommend strategies to enable KRA0MA's survival and viability. 1/ A review of the Malagasy mining sector was presented in "HMmo$re sur le Secteur Minier a Madagascar' (Report No.6782-HAG, Industry and Energy Operations Division, South-Central and Indian Ocean Department, Africa Region, dated November 30, 1987)  - 11 - ANNEX II Page 2 of 14 4. Graphite which, in terms of export receipts is second to chromite, is produced by five private producers. Over the last ten years, production has been stable. It appears that the Malagasy graphite industry is quite profitable. In view of the app4cent profitability of the industry, the large reserves of high grade graphite and the established acceptability and desirabilty of Malagasy graphite, there seems to be scope to increase the output of the existing mines. However, the restricted availability of foreign exchange during the period under review, and the fear of nationalization resulted in an unfavorable investment climate for even minimal investment. 5. Quartz production, dominated by small-scale private operators has increased rapidly since the mid-1970s from less than 200 tons to about 1,500-2,000 tons per year, with over 99 percent of the quartz being produced to supply the market for high purity feedstock for the production of special glasses. At present, there are many restraints to expansion of capacity ranging from inadequate access to the principal producing areas in northeast Madagascar to the inability of the small producers to obtain either credit or foreign exchange for the purchase of equipment. 6. Recorded sold production, dominated by small-scale private operators or cooperatives has decreased steadtly. The apparent poor performance of the sector is largely due to the increased smuggling which resulted from the Government requirement (until September 1987) that Malagasy gold be sold to a government agency at an official purchase price in FMG stgnificantly below world price. 7. Mining is regulated by the Ministry of Industry, Energy. and Minini (MIEM) through the Directorate of Mines and Geologv (DMG). The DMG is administratively divided into three services or departments, namely: i) the Service de la Giologie; ii) the Service des Pro1ets Miniers and, iii) the Service de l'Administration Miniere. DMG appears to be adinistering the sector in a competent manner despite the paucity of professional staff and physical resources. Activities of the various departments are well documented in a timely manner and the work program is executed to acceptable standards. As in most developing countries, there is a lack of physical resources which impedes the efficiency of the DMG. For example, there is a shortage of vehicles to carry out field projects and a shortage of reagents for laboratory test work. Technical assistance to DMH with both economic and geology training and with the strengthening of the physical resource base would provide major benefits to Madagascar in the shortimediu terms. 8. The National Military Office for Strategic Industries (OMNIS), created in 1975 is an autonomous agency under the direct authority of the President. OMNIS is responsible for the exploration of petroleum, bituminous sandstones and radioactive minerals as well as the execution of other strategic projects including the ilmenite mining project. OMNIS also supervises two state-owned enterprises, XRAOMA and SECREN, a ship- building and repair enterprise. In 1986 ONIS entered into a joint-venture  - 12 - ANNEX I Page 3 of 14 agreement with a private Canadian firm QIT for the exploration, exploitation and marketing of titanium-bearing mineral sands on the southeast coast of Madagascar (OMNIS 51 percent, QIT 49 percent) with QIT the operator. 9. The investment climate and legislation for the sector is established by the Investment Code (1985), and the Mining Code which is currently under revision. Both documents have as one of their principal objectives the stimulation of private investment, both national and foreign, in the mining sector. The new investment code makes provision for a lcontrat de partenariat" (partnership contract) whereby a joint- venture is set up with the State, the various incentives being subject to negotiation. Since the partnership contract is subject to legislative ratification, negotiated advantages have statutory force which contributes to their stability. On the whole, compared to the Charte des Entreprises Socialistes which was adopted by the Government in 1973, the new investment code represents a significant effort to induce the private sector to cooperate with the State. The principal problems with the legislation appear to be the lack of clear cut rules under which investors are able to operate in the sector. There is still a lack of automaticity for receipt of fiscal incentives under the Investment Code and the Mining Code has many discretionary provisions. Although these two Codes do not remove all ambiguities from the conditions offered to investors, they are major steps forward. In the mining sector, potential investors must have, in addition to an appropriate legislative and fiscal framework, ready access to the geological data base, which is not presently the case. MIEN has a considerable mass of geological data, but most of it is not catalogued and there are no facilities for potential investors to obtain copies of data. 10. The mining sector is now at a critical stage where transition from a sector with a very restricted investment climate to an open sector velcoming private investment, both local and foreign, is feasible and should be supported. The geological framework of the island suggests that private investment could be attracted and the Government should now select options to encourage this. Madagascar has three princival priorities in the mining sector. They ares (i) to establish the administrative, legal, fiscal and geological framework necessary to attract investment in the exploration for and development of its mineral resources. For example, the legislation should be modified to provide automaticity for potential investors with regard to at least the minimum fiscal incentives; (ii) to preserve the earning potential of the sector by managing efficiently government enterprises in the sector and improving relationships with private investors both foreign and local. The role of the Government as a partner in several on-going exploration/feasibility ventures with private sector and foreign investors is currently being exercised in the ilmenite mining project and in a gold project with  - 13 - ANNEX I Page 4 of 14 the French Bureau de Recherches Geologiques et Minieres (BRGM). The adequate representation of Government interests in the initial negotiations for joint-ventures is a most important and responsible task, as it is at this time that the ground rules for the mineral development are set; and (iii) to direct resources to those projects most likely to benefit the national economy in the short to medium term. In Madagascar, this can be interpreted to mean projects for relatively high value commodities in areas where the necessary infrastructure already exists. The Government is becoming increasingly aware of this as witnessed by the downgrading of priority for the iron and bauxite projects and the high priority currently being given to mineral sands on the southeast coast, gold and quartz. 11. The outlook for inereasing mineral production is particularly good because of the proposed large-scale titanium-bearing mineral sands project to be developed as a joint-venture by-NIS and QIT, a Canadian subsidiary of BPlMinerals which is a major player in the titanium dioxyde slag industry controlling about 40 percent of the world market. The proposed OMNISIQIT Ilmenite Mining Project to produce concentrates for export from the Fort- Dauphin area of southeast Madagascar is the most significant new mining activity under consideration in Madagascar for over 20 years and is the first major new venture in the sector with either foreign or private participation for some years. B. PROJECT FORMULATION AND PREPARATION Proiect Oriain 12. The presence of heavy mineral sand deposits in southeastern Madagascar was established in the 1950s and commercial quantities of monazite were produced in that area during early 19609. Detailed exploration campaigns for heavy mineral sand deposits were conducted by a number of private companies, including US Steel, in the early 1970s along the eastern coast of Madagascar. These programs established the presence of significant reserves of ilmenite as well as commercially important quantities of zircon and monazite. The US Steel program conducted in 1974-75 had outlined a 25 million metric tons reserve of low-alkali secondary ilmenite in the southeast corner of Madagascar, in the Fort-Dauphin area. QIT acquired US Steel geological data and associated feasibility studies and, in 1986, set up a joint-venture with OMNIS to explore, develop and market the titanium-bearing sands on the east coast.  - 14 _ ANNEX I Page 5 of 14 13. The Government of Madagascar requested Bank involvement in the proposed ilmenite mmnmni proiect during a 1987 mining sector review mission in Madagascar. The mission concluded that the Bank could play a key role in bringing to fruition this Important and attractive project for Madagascar and in providing technical assistance to OMNIS for project preparation and monitoring. In May 1987, representatives of the Government of Madagascar, OMNIS, QIT, and Its parent company visited the Bank and made a presentation on the overall project schedule and goals. The Government indicated that it would welcome from the Bank not only financing to the OMNISIQIT project but also technical assistance. Ways in which financing and technical assistance could be made available to OMNIS were then reviewed. Subsequently in July 1987, the Government addressed a formal request for a PPF advance to finance consultancy services to assist OMNIS prepare, evaluate and monitor the project. In September 1987, a mining sector mission held discussions with O0NIS in Madagascar and reached agreement on the work to be financed. The PPF amounting to $750,000 provides inter alia general assistance to OMNIS for consultant services in the areas of mining, financial and economic analysis, organization, legal affairs and marketing. The PPF was granted in October 1987. The question of a possible engineering credit was Initially discussed at the May 1987 meeting referred to above, during the September 1987 mission and at a meeting held in Montreal in December 1987 between representatives of OMNIS, QIT and the Bank. Following an official request of the Government In January 1988, the engineering credit was appraised in JanuarylFebruary 1988. Status of Proiect Preparation 14. Phase I (evaluation phase of the exploration period) of project preparation (May 1986 to February 1987) financed entirely by QIT (US$2.2 million) focused on determining the quantity, grades and product qualities of the ore body. Moreover, exploratory drilling revealed additional reserves of heavy mineral-bearing sands underlying the reserves previously Identified by US Steel. Drilling work of the whole deposit had to be repeated to establish an accurate picture of the lower deposit. Although this work delayed the project by several months, it resulted in probable geological reserves of ilmenite being increased from 25 to 60 million tons. As work continues in Madagascar it Is expected that estimates of probable geological reserves will be enlarged beyond 60 million tons of ilmenite. Heavy mineral sand reserves in Madagascar are now considered amongst the largest in the world. In addition to ilmenite, the deposit contains zircon, rutile and monazite, in the approximate ratios 60 ilmenite: 3 zircon: 3 rutile: 1 monazite. A preliminary project feasibility study was also prepared and sufficient process flowsheet definition provided to permit preparation of a capital estimate within a 30 percent range and a preliminary economic assessment for the proposed operation.  - 15 - ANNEX 1 Page 6 of 14 15. The results vere encouraging enough to justify proceeding with Phase II of the project (feasibility phase of the exploration period) which started in March 1987 and is expected to be completed in November/December 1988. The on-going work under Phase II includest (i) completion of all drilling at the Mandena sector and confirmation drilling at the Ste. Luce deposit in the Fort-Dauphin area; (ii) definition and evaluation of the Xandona deposit; (iii) preliminary mine planning for a 20 year period; (iv) production of test samples by the Wet Pilot Plant at Mandena; (v) closed circuit testing at site to enable initial spiral selection to be made; (vi) further testing of mineral separation process to firm up prelimimnry flowsheet and equipment selection for a pilot plant; (vii) environmental assessment; (viii) gathering of necessary geographic and marine data to comnence study for selection of best loadinglshipping location; (ix) updating of prefeasibility estimate and economics; (x) obtaining of Phase III approval. Requesting quotes for Phase III activities and selection of engineering f_ims. 16. Activities under Phase II are proceeding steadily. This program is expected to be completed by the end of 1988 and will cost about US$12.8 million compared to an original budget estimate of US$7.4 million as a result of the additional drilling to delineate the lower ore body. By the end of Phase II, QIT will have invested about US$15 million compared to the original budget estimate of about US$10 million. Satisfactory results would lead to approval of Phase III Which will start in January 1989 through March 1990. This phase, described below (para. 18), will include the completion of preliminary and basic engineering, and a revised capital cost estimate. This is the phase which will be ,artlY financed by the iroposed enftineerint credit.  - 16 - ANNEX I Page 7 of 14 17. Phase IV (mine development period) which will follow completion of Phase III and a decision by the partners to proceed with the project would include procurement and detailed engineering followed by construction, commissioning and start-up of the mining operation to the point where 75 percent of the designed production capacity is achieved. Phase IV will cover the period March 1990 to April 1994 (the ewvisaged plant start-up date is November 1992). Project Description 18. In order to assist preparation of the ilmenlte mining project the engineering credit would finance OMNIS's share of the following work: (i) completion of preliminary and basic engineering to a point where detailed design and tendering can commence for the: (a) dredge and concentrator plant, (b) mineral separation plant, (c) power plant, (d) dock/harbor, (e) other infrastructure facilities; (ii) setting up of a Wet Pilot Plant and Mineral Separation Pilot Plant to optimize and confirn flowsheets developed during Phase II; (iii) preparation of a capital cost estimate and an estimate of mine start-up and operating costs. The capital cost estimate will be based on detailed quantity take-offs from layouts and budget price quotations for major equipment, in addition to utilization of current data-bank pricing for standard materials. The operating cost estimate will be developed from detailed itemization of all cost centers; (iv) preparation of market analysis and marketing strategy; (v) complementary drilling and ore body delineation to improve definition of mineable reserves at Mandena; (vi) infrastructure, in particular road and bridge construction for improved access to the location of the mineral processing and product fa$ility; (vii) completion of an environmental impact study.  - 17 - ANNEX I Page 8 of 14 19. The total cost of Phase III activities to be financed under the engineering credit has been estimated at US$16.2 million equivalent including contingencies. OMNIS has requested IDA financing for approximately US$8.55 million. Key milestone dates in the overall project implementation plan are as followst - completion of site investigation, metallurgical December 1988 and environmental studies and update of prefeasibility estimate and economics - completion of preliminarylbasic engineering October 1989 - approval to proceed with detailed design and March 1990 construction - initial ilmenite production November 1992 - 75 percent production capacity achieved April 1994 C. IMPACT OF MADAGASCAR ILMENITE MINING PROJECT ON WORLT MARKET Demand for Titanium Dioxide MTiO2) Pigments 20. Approximately 95 percent of world's annual production of titanium minerals, goes to make white titanium dioxide pigment. It is not poisonous and has excellent qualities of opacity and brightness. It is the major pigment for nearly all white paint and it is also used in paper, plastics, textiles and ceramics. The other five percent of world's annual production of titanium minerals goes to make titanium metal. The titanium dioxide industry has seen a substantial turn round in the past four years, after ten years of low growth. In the 1950s and 1960s this white pigment enjoyed secure markets which grew steadily at five percent per year world-wide and, due to the fact that there was no real alternative to TiO2 as a pigment, its future seemed secure. The first oil-shock terminated this outlook abruptly in 1974, when demand for TiO2 fell 30 percent almost overnight, in line with the fall in demand for consumer products. The next ten years saw a slow recovery, with a second check occuring in 1980 after a further hike in oil prices. The low growth and the fact that the industry was obliged to meet increasingly stringent environmental controls made many producers question their continuing participation in the TiO2 business. Some companies divested their interest in TiO2, several old plants closed, and the construction of new plants virtually stopped. By 1983, TiO2 demand and the available capacity to produce it (about 2.6 million tons), were again reasonably in balance. Pigment prices, which had fallen sharply during the oversupply years, returned to better levels and allowed producers to improve profitability, or return  ANNEX I Page 9 of 14 to a profit making situation. In the period from 1983 to date pigment demand recovered significantly. In the last four years the average growth in consumption has exceeded 5 percent in the U.S.A compared to an average annual growth rate of 1.1 percent during the preceeding seven years. 21. By 1986 production resources were strained and new capacity was required once again. The first step in responding to the increased demand was debottlenecking of existir.g capacity which could be carried out relatively quickly and cheaply. It is believed that debottlenecking of some sort, if only by rationalization of grades produced, was practiced by almost all the world's major pigment plants in 1986 and 1987 and that at least 330, 000 tons per year (TPY) of new capacity, or about 12 percent of the 1986 total will be added to world productive capacity in the period 1986-89. It is estimated that TiO2 demand will grow by about 2-3 percent per annum in the period 1988-93. 22. Production of titanium dioxide pigment is split between the "sulfate process' and 'chloride process", representing respectively 2/3 and 113 of pigment capacity in 1983. Most of the world's chloride process capacity is located in the U.S. at present, but through new plants and conversions of sulfate plants growth in the less environmentally sensitive chloride route is expected in other areas during the late 1980s and early 1990s. In the sulfate process, ilmenite or titanium slag is reacted with sulfuric acid, a portion of the iron sulfate formed is crystallized and removed, and the titanium hydroxide is precipitated by hydrolysis, filtered and calcined. In the chloride process, rutile is converted to titanium tetrachloride by chlorination at 8500 to 9500 C in the presence of petroleum coke. Rutile is the preferred raw material for making titanium tetrachloride, although ilmenite and titanium slag can be used for this purpose. Titanium tetrachloride so prepared may be used either in making pigment, or with additional purification, for reduction to metal. For the past twenty years chloride process pigment production has been growing rapidly, but at the same time many sulfate process plants have been very successful. A supplier of TiO2 raw materials, must be concerned not only with the growth in total demand for TiO2 pigment, but also with the proportion of the total demand which is likely to be supplied from either the sulfate or the chloride process. One of the advantages of low alkali TiO2 slags (the product supplied by QIT group) is that either chloride or sulfate process plants can be satisfactorily supplied with this product. Chantes in the Raw Material Supply Pattern 23. Titanium is the ninth most abundant element in the earth's crust and there is, therefore, little question of any scarcity of this element in the foreseeable future. What has changed over the past twenty years and will continue to do so in future, is the relative importance of the titaniferous feedstocks produced. The two basic ores are rutile and ilmenite and the latter can be transformed by smelting or beneficiation into upgraded ilmenite (UGI), of which slag and synthetic rutile (SR) are the two main types.  ,FIGURE 1 TiO2 RAW MATERIAL TRENDS 1978-88 0004MT contained TiO2 1400 [-uti i400 rC'i 2 |)Synthetic .fl (yJf~~~~~~~~~lmenite Sooot | | t i S | "