Document of

The World Bank

FOR OFFICIAL USE ONLY

FI'LF C()PYu.. 1 F,

Report No. 2224a-MAU

STAFF APPRAISAL REPORT

MAURITANIA

THE GUELBS IRON ORE PROJECT

June 20, 1979

Industrial Projects Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir officiai duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Except where otherwise indicated, all figures are quoted in MauritanianUguiyas (UM) and U.S. Dollars (US$).

EXCHANGE RATES

UM 1.0 = US$0.022UM 45.0 US$:L.00

UM 1,000,000 US$22,222

ABBREEVIATIONS AND AC(RONYMS

ADB - African Development BankAFESD - Arab Fund for Economic and Social DevelopmentAISI - American Iron and Steel InstituteARMICO - Arab Mining CompanyBCM - Banque Centrale de Maur:itanieBRGM - Bureau des Recherches Geologiques et MinieresBRPM - Bureau de Recherche et de Prospection MiniereCCCE - Caisse Centrale de Cooperation EconomiqueCOMINOR - Complex Minier du NordCVRD - Companhia Vale do Rio DoceDCPP - Departement de Commercialisation des

Produits PetroliersEIB - European Investment BankFCB - Fives Cail Babcock

IISI - International Iron and Steel InstituteIRSID - Institut de Recherche de la SiderurgieKFTCIC - Kuwait Foreign Trading, Contracting and Investment CompanyMIFERMA - Mines de Fer de MauritanieMSI - Mineral Services IncorporatedObECF - Overseas Economic Cooperation Fund of JapanOPEC - Organization of Oil Producing Exporting CountrieseNIM - Societe Nationale Industrielle et MiniereSNIMEX - SNIM Explosif

SOCOMINE - Societe de Cooperation Miniere et IndustrielleSOFREMINES - Societe Francaise d'Etudes MinieresSOFRESID - Societe Francaise d'Etudes de la SiderurgieSOMIMA - Societe des Mines de MauritanieSGTE - Societe Generale de Teclnique et d'Etudes

WEIGHTS AND MEASURES

1 Metric Ton = 2,205 pounds1 Kilometer (km) = 0.62 miles

MAURITANIAN FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

MAURITANIA

THE GUELBS IRON ORE PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION ............................................. 1

II. THE MINING SECTOR ........................................ 2

A. Description of the Sector ........................... 2

1. Iron Ore Operations ............................ 2

2. Copper Operations .............................. 3

3. Gypsum ......................................... 3

B. Contribution to the Economy ..... ........... . 3

1. Contribution to GDP ............................ 4

2. Public Revenues ................................. 5

3. Balance of Payments Effects ..................... 5

4. Employment Effects ............................. 6

III. SNIM - THE COMPANY ....................................... 6

A. Background and Ownership ............................ 6

B. Organization and Management ......................... 7

C. Past Operations ...................................... 12

D. Past Performance and Recent Financial Position ...... 17

IV. THE MARKET FOR IRON ORE ................................. 19

A. The Demand for Crude Steel and Production ........... 19

B. The Supply of Iron Ore ............. .. ............... 22

C. The Demand for Iron Ore ............. .. .............. 24

D. Supply and Demand BaLance for Seaborne Iron Ore 25

E. Pricing of Iron Ore ............... .. ................ 26

1. International Prices ........................... 26

2. Prices for the Kedia and Guelbs Ores .... ....... 28

F. Market Prospects for Guelbs Sinter Feed ............. 29

1. Testing of Guelbs Concentrates .... ............. 29

2. Future Sinter Demand ........................... 30

3. Conclusion ..................................... 32

G. Local Sales ...... ............... .................... 32

V. THE PROJECT .............................................. 32

A. Scope and Objective ................................. 32

B. Technical Description ............................... 33

C. Water ............................................... 38

D. Ecology ............................................. 38

This report was prepared by Messrs. Christoph Lorenz, Yves Duvivier, and

Guy de Selliers and Miss Veronica Bates of the Industrial Projects Department.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without Worid Bank authorization.

Table of Contents (Continued) Page No.

VI. CAPITAL COST AND FINANCINC PLAN .......................... 39

A. Capital Cost ........................................ 39B. Financing Plan for Phase 1 .......................... 42

VII. PROJECT IMPLEMENTATION ................................... 44

A. Project Organization and Management ....... .. ........ 44B. Implementation ................. .. ................... 48C. Procurement, Disbursement and Allocation of Bank Loan 48

1. Procurement .................................... 482. Allocation of Bank Loan and Disbursement ....... 51

VIII. FINANCIAL ANALYSIS ....................................... 53

A. Methodology Used in Financial Projections ........... 53B. Production Build-Up and Sales .......... .. ........... 53C. Operating Costs ................. .. .................. 54D. Dividends ........................................... 55E. Royalties ........................................... 55F. Financing of Phase 2 .............. .. ................ 56G. Other SNIM Units and Head Office ........ .. .......... 56H. Future Profitability and Financial Position ......... 58

1. COMINOR ........................................ 582. Other SNIM Units, excluding COMINOR .... ........ 593. SNIM ........................................... 60

I. Break-Even Point ................ .. .................. 61J. Financial Covenants ............... .. ................ 61K. Trust Arrangement and SNIM Operational Account . . 61

1. Purpose ........................................ 612. Description .................................... 62

L. Financial Rate of Return ............ .. .............. 64M. Auditing and Reporting ............. .. ............... 65N. Major Risks ...... ............... .................... 65

IX. ECONOMIC ANALYSIS ........................................ 67

A. Economic Rate of Return ............. .. .............. 67B. Foreign Exchange Effects ............ .. .............. 68C. Other Benefits ...................................... 69

XI. SUMMARY OF RECOMMENDATIONS .............. .. ............... 69

LIST OF ANNEXES

3-1 SNIM Operating Units other tha.- COMINOR3-2 SNIM Historical Financial Data

4-1 Iron Ore Exports - Industrialized Countries4-2 Iron Ore Exports - Developing Countries4-3 Steel Production and Iron Ore Demand - Major Steel Producers4-4 Steel Production and Iron Ore Demand - Other Developed Countries4-5 Steel Production and Iron Ore Demand - Non-Iron Ore Exporting

Steel Producing Developing Countries

6-1 Capital Cost Breakdown6-2 COMINOR Projected Working Capital Exchanges6-3 COMINOR Projected Investments6-4 Terms and Conditions of External Financing

8-1 Assumptions and other Bases of the Financial Projections8-2 COMINOR's Projected Financial Results8-3 SNIM's Units Other than COMINOR - Projected Income Statement

and Balance Sheet8-4 SNIM's Projected Consolidated Cash Flow and Balance Sheet8-5 Financial Rate of Return and Sensitivity Analysis

9-1 Economic Rate of Return and Sensitivity Analysis9-2 Foreign Exchange Effects

MAP S

IBRD 13583 - General Project LocationIBRD 13584 - Site Plan of Mining Operations (page 13)

DOCUMENTS AVAILABLE IN THE PROJECT FILE

A. General Technical

1. The Guelbs Project--Technical-Economic Feasibility Study bySOCOMINE, Blue Version; Paris, April 1976 (French/English).

2. The Guelbs Project--Technical-Economic Feasibility Study bySOCOMINE, TSR Version; Paris, July 1976 (French/English).

3. Guelbs Project, Mauritania---Technical Report by A. Khilkhoff-Choubersky; London, April 1977 (English).

4. The Geology of the Guelbs--COMINOR's Geological ServiceDepartment, Ref. 800-060; Souerak, Mauritania (French).

DOCUMENTS AVAILABLE IN THE PROJECT FILE (Continued)

B. Beneficiation

1. Centre de Recherches Metallurgiques (CRM)--Industrial Test

Series; Liege, Belgium, November 16, 1977 (French).

2. Institut de Recherches de la Siderurgie Francaise (IRSID)--

Industrial Test Series, Ref. Nos. MCF.RC 596, 618, 664 and704; Paris, June 1977 (French).

3. Studiengesellschaft fur Eisenerzaufbereitung--IndustrialTest Series; Othfresca, Germany, November 1977 (German).

4. The Guelbs Concentrates--SOCOMINE, Ref. No. PG511; Paris,March 15, 1977 (French).

5. Pilot Plant Results--Mr. Coursin, SOCOMINE, Report PG595;Paris, May 1977 (French).

6. Realized Beneficiation Plant Results--SNIM/COMINOR; Zouerate,Mauritania, February 1977 (French).

7. Preliminary Direct Reduction Studies on Mauritanian Iron Ore--

Allis Chalmers Direct Reduction Division, Ref. No. 1629,July 23, 1975 (English).

C. Market

1. Report on Iron Ore--Future Requirements on Physical Forms, Sizesand Impurities, IISI; Brussels, Belgium, 1974 (English).

2. Guelbs Concentrates--Market Survey, Vols. 1 and 2 (Annexes),SNIM; Paris, December 1976 (English/French).

3. Supply and Demand of Iron Ore--SNIM; Paris, April 1977 (French).

4. Evolution of the Iron Ore and Steel Industries' Requirements for

Sintering of Iron Ore Fines--SNIM; Paris, October 1977 (English).

5. Forecast for the Use of Ore for Sintering--SOFRESID; Paris,

October 1977 (English).

6. International Prices for Rolled Steel Products--Mrs. Doggart,

July 22, 1978 - commissioned by the World Bank.

I. INTRODUCTION

1.01 Bank involvement in Mauritanian iron ore dates back to 1957, when

Societe Anonyme des Mines de Fer de Mauritanie (MIFERMA), a company owned

predominantly by French, British, German and Italian interests, requested the

Bank to finance the exploitation of a high-grade iron ore deposit in the Kedia

mountains (Map IBRD-13583). The Bank loan, made in 1960 1/. amounted to US$66

million, out of a total project cost of US$190 million.

1.02 Even during MIFERMA's init:ial appraisal of the Kedia project it was

apparent that although the mountains contained a satisfactory reserve, it

was limited. The sponsors therefore intended from the outset, to explore and

develop the so-called "guelbs" (a number of iron ore outcroppings nearby),

in order to continue to make use of the large infrastructure investments -

notably the 650 km railway and port facilities-once the Kedia ore was ex-

hausted. This exploration work was largely carried out during the 19 70s.

1.03 Since start-up in 1963, mining has proceeded smoothly, and by 1973

a production level of about 10 million tons of ore per year (tpy), had been

reached, i.e., well above the 6 million tpy output originally intended. Even

the nationalization of MIFERMA in 1974 did not seriously disrupt iron ore

deliveries, and following successful negotiations with the former share-

holders--which led to a US$90 million nationalization compensation - a

normal business relationship was resumed.

1.04 In 1976, due to the impencling exhaustion of the known iron ore

reserves in the Kedia mountains, the Government of Mauritania and the Societe

Nationale Industrielle et Miniere (SNIM) - the state corporation which had

taken over the MIFERMA operations - requested the Bank to help finance the

Guelbs iron ore project. This project, is to be carried out in two phases.

The first phase, which will partiaLly replace the Kedia mining operations, is

to be carried out between 1979 and ].982, and will develop the El Rhein mine.

The second phase (1986-1989) will develop a second mine (Oum Arwagen), after

which time the Kedia operation will cease. Although this appraisal deals

primarily with the first phase, it is imperative that the second phase be

forthcoming, both in order to maintain the projected ore output of 12-14

million tpy, and to assure the continued financial viability of SNIM.

1.05 The process of project preparation for Board presentation has been

a lengthy one. A first identification mission in January 1977, was followed

by an appraisal mission in October 1977, led by C.W. Lorenz (Chief), and

Y.A.A. Duvivier (Industrial Projects Department), who were joined by repre-

sentatives of most of the Arab and European co-lenders. I`he complexity of

the project required a total of 12 missions up until April 1979, because: (i)

SNIM had to be reconstituted, and made into a viable and creditworthy borrower

1/ Loan 249-FR, March 17, 1960.

(principally through the divestiture of its highly unprofitable copper opera-tions); (ii) four lenders' meetings had to be convened in order to develop aviable financing plan; (iii) meetings with banks and iron ore consumers werenecessary in order to structure an acceptable security arrangement for theparties involved; and (iv) extensive working sessions had to be held withSOCOMINE (Societe de Cooperation Miniere et Industrielle), the project con-sultant, in order to ensure proper project management.

1.06 The first phase of the project is expected to be completed by end1982, and total financing requirements - including working capital, interestduring construction and normal and extraordinary contingencies - are expectedto be approximately US$500.7 million equivalent, of which US$456.1 million (or91%) is expected to be in foreign exchange. The financing plan for the firstphase envisages US$338 million of long-term loans, US$120 million of newequity to be provided by five new shareholders, the Arab Mining Co. (ARMICO),the Islamic Development Bank, the Kuwait Foreign Trading, Contracting andInvestment Co. (KFTCIC), and the Governnents of Morocco and Iraq, in additionto US$42.7 million from SNIM's internal cash generation.

1.07 The proposed Bank loan of US$60 million will finance the ore handlingequipment, miscellaneous items in the beneficiation plant, the ore wagons andthe civil works contracts, as well as interest during construction onthe Bank loan itself.

II. THE MINING SECTOR

A. Description of the Sector

2.01 Mining is the most important sector of the Mauritanian economy.It consists primarily of the exploitation of iron ore and, to a lesser extent,of copper and gypsum.

1. Iron Ore Operations

2.02 The exploitation of iron ore in Mauritania dates back to 1963, whenMIFERMA commenced operations with a French, British, Italian and German con-sortium as the principal shareholders. This same consortium also purchaseda major proportion of the ore output. Since MIFERMA's nationalization in1974, the mines have been operated by the Complex Minier du Nord (COMINOR) -SNIM's primary operating unit. Since the beginning, production capacity hasincreased steadily; rising from the 6 million tpy originally envisaged, toabout 11.5 million tpy. The most recent significant expansion took place in1973, when somewhat lower grade pits were brought into production. Theoperations are located inland, about 650 km eastnortheast of Nouadhibou,the port of shipment, which is connected with the mining town of Zouerate byrail.

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2. Copper Operations

2.03 The Societe des Mines de Mlauritanie (SOMIMA) was created in March1967, 1/ to mine the copper deposits of Akjoujt (200 km Northeast of Nouak-chott). SOMIMA exploited copper ox:.de ore and produced a concentrate based unthe TORCO process, which had a very high fuel cost. Furthermore, the arseniccontent of the copper concentrate made marketing difficult, and the producttherefore sold at a discount from world market prices.

2.04 From the commencement of operations in 1971, major technical diffi-culties were experienced, and most of the time SOMIMA operated at less than50% capacity, turning out a profit (of UM137 million) only once, in 1973,when copper prices reached an all time peak.

2.05 In late 1974, as a result of the increase in fuel prices and rapidlydeteriorating copper prices, the sh.areholders closed the mine. To maintainjobs, the Government of Mauritania took over the copper company, and integratedit with SNIM. SOMIMA resumed operations in the second half of 1975, and itscontinuous high losses seriously afEected SNIM's overall financial position(para. 3.21) thereafter. As a result, the Government was obliged to separateSOMIMA from SNIM in March 1978, and, in turn, to halt copper operations in May.

3. Gypsum

2.06 The large deposits of gypsum found to the north of Nouakchott havebeen exploited by SNIM since 1973, with the entire output (roughly 17,000 tpy)being sold to the Rufisque Cement Plant in Senegal, as part of an agreementwhereby Senegal purchases Mauritanian gypsurn, and accords a 12% rebate onthe price of cement sold in Mauritania in return. Recently, the Governmentdecided to separate the gypsum operation from SNIM.

B. Contribution to the Economy

2.07 Iron ore mining by COMINOR is the mainstay of the Mauritanian economyand its development throughout the 1960s has been the principal determinantof the country's rapid economic growth. By the mid-1970s, COMINOR directlyaccounted for 21% of Mauritania's GDP at factor cost, and 80% of its exports.It is the second largest employer in the country after the Government - with

1/ The share capital was distributed as follows:

Charter Consolidated ................................. 44.6%Islamic Republic of Mauritiania ......................... 22.0%French Group ........ ........................ 18.4%IFC ................................ 15.0%

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a total of about 4,800 workers 1/ - and provides about 25% of total publicrevenues. Aside from these direct contributions, iron ore mining also sup-

ports a host of other economic activities in Mauritania. Moreover, the con-tinuous exploitation of this resource is necessary to finance the developmentof other sectors, which would in time constitute a renewable base for thecountry's economic growth.

1. Contribution to GDP

2.08 As mentioned above, COMINOR directly accounts for 21% of GDP at

factor cost, but its total contribution is considerably higher.

Mauritania: GDP in Current Prices, 1974-76(In billions of UM)

1974 1975 1976 1977

Traditional sector 4.6 5.2 5.4 4.7(of which livestock) (3.9) (4.5) (4.7) (4.0)

Industrial sector 6.8 5.0 5.6 4.9Mining (5.2) (3.3) (3.7) (3.0)Fish processing (0.2) (0.2) (0.2) (0.2)Other industries (1.4) (1.5) (1.7) (1.7)

Construction and public works 1.2 1.5 1.7 1.7Transport, commerce and services 2.4 2.3 2.5 2.4Public administration 2.8 3.1 3.8 4.3

GDP at factor cost 17.8 17.1 19.0 18.0

Indirect taxes less subsidies 2.5 1.9 2.2 2.3

GDP at market prices 20.3 19.0 21.2 20.3

Source: Data provided by the Mauritanian authorities.

2.09 Iron ore mining has a substantial indirect impact on GDP. Manyindustrial and construction enterprises work mainly, or exclusively, forCOMINOR. An analysis of the services sector also shows that mining creates --

directly or indirectly -- local added value amounting to about 25% of public

utilities, commerce, transport, and services. In addition, since mining

accounts for one-quarter of total current public revenues directly, it pro-vides the means for substantial expenditures in the services sector.

1/ Of which 4,300 are Mauritanian nationals.

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2.10 In summary, iron ore mining generates about 20% of the added value

in the other industrial and construction sectors, and about a third in the

services sector. This, in turn, represents about 10% of GDP - implying a con-

tribution of some 31% in toto. On the other hand, were the iron-ore mines to

close (ie. were the Guelbs project not to be executed and t:he current Kedia

operations to cease for lack of ore), the ensuing reduction in GDP would

almost certainly be more severe than these calculations indicate, as the

resultant excess capacity in the services sector would lead to uneconomic

levels of operation, and so to a further reduction in value added. In

addition, there would be multiplier effects on demand for public and private

services, as both Government and private spenders would be forced to rearrange

the uses of their remaining disposable incomes.

2.11 Beyond the reduction in GDP, a closing of the iron ore mines would

also cause a de facto destruction of the present capital stock in both the

mining and services sectors, as most of these investments would become

obsolete long before a comparable source of income (and so demand for their

services) could be generated.

2. Public Revenues

2.12 In 1976, total taxes received from COMINOR amounted to DM 1,208

million (US$26.9 million), or 29% of total public revenues. Of these, taxes

from mineral sales amounted to UM 702 million, while UM 405 million related

to personal income tax - the remainder being generated by import duties and

other miscellaneous taxes.

2.13 Aside from this direct contribution to Government revenues, a sub-

stantial part of the income of employees and enterprises in public admin-

istration, public utilities, commerce, and services is supported by iron ore

mining. A closure of the mines would therefore cause a further decrease

in Government revenues, as the taxes on the personal incomes of the people

affected would decline, along with the taxes on the imports related to these

incomes. In this context it should be noted that the income tax base in

Mauritania is extremely narrow, consisting only of the public sector and

a relatively small number of private firms, many of which work directly with

COMINOR.

2.14 In conclusion, the total loss in Government revenues which would

result from the closure of the mines would most likely be such as to severely

impair, and perhaps even prevent, the attainment of the country's social and

development goals. Indeed, the capacity of the Governnent to maintain basic

health, education and social expenditures would be in question.

3. Balance of Payments Effects

2.15 At present, iron ore exports account for 80% of Mauritania's foreign

exchange earnings. Even assuming a major expansion in fish exports, iron ore

would still represent 70% of exports of goods and non-factor services for

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some time to come. The continuation of iron ore production is, therefore,also essential in order to maintain Mauritania's capacity to import theintermediate and capital goods which are necessary for the development ofthe country. If iron ore exports were to disappear, only a substantialdevaluation would permit Mauritania to balance its external accounts. Sucha devaluation would have further severe disruptive effects on development,because of the resultant sharp changes in relative factor prices, and thelikelihood that foreign exchange rationing would have to be introduced inorder to secure essential imports. It is also likely that the remainingforeign exchange earnings would be insufficient to cover the food bill (50%of Mauritania's food requirements are imported), and would thus cause massmigration.

4. Employment Effects

2.16 Iron ore operations currently provide 4,300 direct jobs toMauritanians. These, in turn, sustain the entire population of Zouerate(30,000 people), along with a substantial proportion of that of Nouadhibou(also about 30,000 people) where the only other industry-fishing-directlyemploys less than 1,000 workers. The closure of the iron ore mines would,therefore, directly affect between 40-50,000 people. Furthermore, as dis-cussed above, if mining indirectly accounts for a third of service sectorvalue added, then probably almost a third of employment in the servicessector, or 6,500 jobs, would be lost. Employment in public administrationwould also be affected, as a large component of the civil servants' salarybill is supported by royalties on iron ore exports. The repercussions onthe economy of a loss of employment of this magnitude would be difficult toexaggerate.

2.17 Both resettling these individuals in some other part of the country,and finding them alternative employment would be difficult. There are nosignificant alternatives in industry, while the sparsity of farmland would*not offer a viable alternative, and would require investments in housing andsocial services which are beyond the Government's means.

III. SNIM -- THE COMPANY

A. Background and Ownership

3.01 As noted earlier (para 2.02), the iron ore operations, originallyestablished by MIFERMA in 1963, were nationalized in 1974. The effects ofthis change of ownership were fortunately not disruptive. Even though thequestion of compensation remained unresolved for almost two years, the formershareholders did not interrupt their iron ore purchases, and a satisfactorycompensation agreement between the Government of Mauritania and the formershareholders was reached in January 1976. This called for a total payment ofUS$90 million from Mauritania, of which US$40 million was to be paid in cash,and US$50 million was to be paid in five equal annual installments. The cashpayment was funded by a KFTCIC (Kuwait Foreign Trading, Contracting and

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Investment Company) loan to the Government, at an interest rate of 8% for 6years. The first US$10 million installment for December 1976 was paid byCOMINOR, while the 1977 installment was paid by the Government. SNIM is tobe reimbursed for the initial installment as part of a royalties rebatepackage to be granted by the Goveronent from 1978-85 (para 8.14), under whi<>the Government has also agreed to assume the liability for the remaininginstallments.

3.02 SNIM was established in 1972, as a State Company into which COMINORwas subsequently incorporated after the nationalization of MIFERMA. Otherthan COMINOR, which alone generates 90% of SNIM's revenues and constitutes95% of fixed assets, SNIM includes a few minor ventures such as: (i) SNIMExplosifs (SNIMEX), an explosives factory which is entirely captive to theiron ore mine, (ii) Department de Commercialisation des Produits Petroliers(DCPP), 1/ a petroleum products distribution system, 40% of whose outputis sold to the iron ore operations; and (iii) the gypsum operations referredto in para 2.06 above. In 1979 SNIbI will commence operation of SNIM/Acier, amini steel mill to smelt COMINOR-generated scrap for the production of rebarsfor the local market (Annex 3-1). SNIM has its head-office and support ser-vices in Nouakchott; these include a technical department for miscellaneousproject studies, a geological research group, and training facilities. Inaddition to separating the gypsum operation from SNIM (para. 2.06), theGovernment is making plans also to separate the DCPP from SNIM. As the DCPPis a profitable enterprise, the Government will compensate SNIM for allfinancial effects of the separation and has agreed to discuss with the Bankthe level of an adequate compensation. In any event, SNIM would not beprevented from directly importing iLs oil at world market prices should theprice of oil on the local market be higher.

3.03 The Government passed a decree officially separating SOMIMA, thecopper company, from SNIM, on March 31, 1978, and actual operations wereterminated on May 31. The associated financial settlement was reached on.August 10. Under this, the Government has agreed to assume SOMIMA's debton SNIM's behalf. While there is a project under consideration to mine theunderlying sulfide ore body and produce blister copper, the Bank has voicedstrong doubts as to whether: (i) the envisioned smelter technique could infact produce blister; and (ii) the ore's arsenic contamination could bereduced to levels which would not seriously impair the marketability of thefinal product. UNDP is presently financing a prefeasibility study.

B. Organization and Management

3.04 SNIM was initially constituted as a State-owned Company, placeddirectly under the responsibility of the President of Mauritania, and admin-istered by a Board of Supervisors. In April 1978, following the divestiture

1/ Originally called UCPP - Unite de Commercialisation des ProduitsPetroliers -

8 -

of SOMIMA, the company was reconstituted as a State-controlled, limitedliability corporation (Societe d'Economie Mixte a Majorite d'Etat), permit-ting private and foreign ownership. The new SNIM is to be administered by aBoard of Directors, chaired by a Mauritanian Governnent official and whosevice-chairman is a representative of the foreign shareholders.

3.05 SNIM's organization chart is shown on the following page (Chart3-1). As can be seen, all operational units report directly to the DirectorGeneral, who is assisted by a Secretary General. As mentioned earlier,COMINOR's position within SNIM is of exceptional importance, and its or-ganization chart is therefore shown on the subsequent page (Chart 3-2).

3.06 Although COMINOR's mining operations are physically dispersedbetween the mining town, which is 650 km inland, the railroad line, and therailroad maintenance yard and port facilities at Nouadhibou, operations havethus far been carried out in a smooth and efficient manner. This has beenessentially due to: (i) an experienced and qualified expatriate staff whichdates back to the operations prior to nationalization; (ii) a very capableMauritanian General Manager; and (iii) a cooperative attitude on the partof the Government. In addition, MIFERMA's key management figures, who leftafter nationalization to form the consultant firm SOCOMINE, have remainedclosely involved with the management of COMINOR on a full-time basis eversince, and have in fact been chosen by SNIM to be the Guelbs project managers.

3.07 Also, in order to assist the Director General of SNIM, SNIM hasagreed to employ prior to December 31, 1979, an experienced Director ofOperations who will manage all technical, operational and personnel aspects ofthe mining, railroad and port operations. He will also be closely involved incoordinating the efforts of SOCOMINE and SNIM's project group at Zouerate.

3.08 Until 1977, the high caliber of SNIM's technical management was notmatched by that of the financial management. While COMINOR's financial man-agement was adequate, that of the other operating units, and of SNIM itself,was poor. The problem was compounded by the steady addition of other diverseoperating units, the continuing losses of SOMIMA, and the hasty developmentof SNIM's central organization in Nouakchott. Corrective measures commencedin 1977 with the hiring of a high calibre financial director and the contract-ing of the assistance of Helios (France), a reputable international auditingfirm. Some progress has already been achieved, but further improvements arenecessary. In particular, improved financial appraisal of new projects andother investments is required, along with the establishment of a new corpo-rate planning capability. SNIM has given assurances that (i) furtherstrengthening of the financial department will take place; (ii) it will keepseparate accounts for all its operating units; and (iii) it will not commititself to new projects, or take over projects from others, without theprior consent of the Bank.

MAURITANIA: THE GUELBS IRON ORE PROJECTSNIM

ORGANIZATION CHART Chart 3-1

SharchoIders

tDJ,ector GCneral Sra

persJnnel Staff Develop- Organzat.on & Fn Ore Techn cal Exploration Mrt

Departmene ment & Training Data Procesainn COMINOR Department & Geclogy _ari Oetfic

Accounting ExpIotivet MCnOg I Prse n

C as Distributions | |Treasury O i

Cost Control - Gypsuin QuarryFin & Plannirng

-| Steel Fcunrdry

Industrial Projects Department

March 1978

V\Drid Bark 18868

MAURITANIA: THE GUELBS IRON ORE PROJECTCOMINOR CHART 3-2

ORGANIZATION CHART

SNiM

Director General

Director of

NOUADHIBOU Operations ZOUERATE

Port atid |

Railroad Minin 7

Cost Control Public Relation _ining Public Ore Pr cessingOrtins eatotPltPlant

Purchasing Personnel Railad Track Roadsand Schools

Data Processing Schools Serice

Roads and ~~~~~~~~~~~~~~~~~~~OtheBuildsangsd |-- Medical Service InfrastBuildings Infrastructure

OtherInfrastructure m

Industrial Projects Department Vorld Bank 18867March 1978

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3.09 SNIM's head office in Nouakchott has grown considerably over the lastthree years into a complex of some 520 persons. In addition to the facili-ties provided by this organization, overseas commercial and personnel ser-vices are provided by recruitment and marketing agencies in Paris and a pur-chasing agency in Zurich. The cost of these facilities has been increasingrapidly; the technical department has been expending considerable funds ingeological and other research, the construction of a new Head Office buildingin Nouakchott has required a heavy capital outlay, and SNIM's support serviceshave been expanded to provide for the construction of a new State-owned re-finery in Nouadhibou, as well as the initiation of other industrial ventures.As a result, total operating costs of SNIM's central organization amounted toUS$14.7 million in 1978, of which the Paris and Zurich offices alone accountedfor more than US$3.0 million. This rapid expansion has led to some redun-dancies within the support services of SNIM's operating units, while both thedivestiture and closure of SOMIMA, and the cessation of overhead expendituresfor the oil refinery, should permit drastic reductions to be made in thecentral organization. Similarly, although activities not directly related toiron ore mining may in the long term yield benefits to SNIM and the country,they put considerable pressure on SNIM's cash-flow in the short term and thuson its ability to provide adequate equity for the Guelbs financing. They aretherefore prime candidates for reduction. SNIM has now presented a compre-hensive program which will substantially cut overhead costs over a 3-yearperiod. This will be partially achieved by closing the purchasing officein Zurich and transferring its activities to Mauritania, and by consolidatingthe two Paris offices into one, in line with the reduced needs of the company.

3.10 SNIM's training efforts are concentrated in a modern training centerin Nouadhibou, on the job training in Zouerate, supplemented by a facilityin Nouakchott and a trainee program abroad. While there is a clear need forintensive training at all technical levels, duplication is involved in havingtraining dispersed in 3 locations. It appears that training in Nouakchott,primarily in clerical, administrative and accounting procedures, is largely ofbenefit to the country, rather than SNIM, as many trainees leave after programcompletion. The Bank has recently financed 1/ a training center in Nouakchott,which will become operational towards the end of 1979, at which time SNIMshould phase out those aspects of training which are duplicated in the newcenter. Training in SNIM's Nouadhibou facilities concentrates on teachingbasic mechanical and electro-mechanical skills. The success rate there, meas-ured in terms of the number of successfully promoted personnel retained withinSNIM, is astonishingly high. Out of a total entry of 226 persons at thebeginning of 1977, only 15% had been lost at the end of that year. Finally,on-the-job training takes place at Zouerate. Such training of equipment oper-ators is also very successful - all 53 candidates at the beginning of 1977became successful operators. There are 10 expatriate technical instructorsand 9 Mauritanian instructors involved in this latter training effort.

1/ Credit No. 459 MAU, Appraisal Report IBRD No. 255A, February 11, 1974.

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3.11 In the future, the major task of the training centers will be theeducation of the Mauritanians required to manage the Guelbs iron ore opera-tions, and so reduce the need for additional expatriate staff. These require-ments are as follows:

Gross Additions of Staff for the Guelbs ProjectStaff Technicians Foremen Artisans Laborers Total

Phase 1 5 24 102 115 352 598Phase 2 0 6 17 89 455 567

5 30 119 204 807 1,165

Although personnel from the diminishing Kedia operation will be transferredto the Guelbs project, a considerable increase in mining machine operators isnonetheless required. However, SNIM is well equipped to provide the necessarytraining for these.

3.12 External financial support is justified for those training andresearch activities whose benefits accrue primarily to the country, ratherthan SNIM itself. SNIM is therefore preparing a program to find externalfinancial support for such activities, and is to periodically report to theBank on the progress of this effort.

C. Past Operations

3.13 Mining of iron ore in the Kedia mountains occurs over a 25 km east/west stretch: including Tazadit pits 1 through 9 in the east, followed byRouessa pits 1 through 9, and Segala Azouazil and F'Derik 1 and 2 in thewest (Map IBRD-13584). The remaining ore reserve in the Kedia mountains asof the beginning of 1979 was about 88 million tons. Under the existing ex-ploitation schedule, this will be completely mined out by 1990/91. Exploita-tion of Kedia has been, and will remain, conventional, with excavating shovelsand front-end loaders loading the blasted ore onto dump trucks, which deliverthe material to three primary gyratory crusher stations. These then eithertransport the ore via secondary and tertiary crushing stations to the stockareas (Rouessa), or deliver it directly to the storage areas (Tazadit andF'Derik). The ore wagons are loaded by bucket-wheel reclaimers, via load-out stations with a charging capacity of between 26 to 30 80-ton wagons atthe Tazadit and Rouessa stations, and 14 wagons at F'Derik. At the end ofJune 1978, the operations at Zouerate employed 2,225 men, of which 115 wereexpatriates.

3.14 The railroad line connects the mining town of Zouerate with the Portof Nouadhibou, some 650 km to the west. Daily traffic currently consistsof two trains, each 2 km long and transporting up to 15,000 tons. Thisgives the line an annual capacity of 11.5 million tons. The line could,however, easily accommodate 12 million tpy on a three-train-per day basis

IBRD-13584

ISLAMIC REPUBLIC OF MAURITANIA INDUSTRIAL

THE GUELBS IRON ORE PROJECT INSTAtLATONS I>

Site Plan of Kedia Mining Operations and EL RHEINGUELB

Location of the Eastern Guelbs Y

g OUM ARWAGEN GJELE

^:F'DER F

i

U E RATE

î ROUSS5A t

I D 3I LL K E DIA IAIIMBEROFPITS

012045J \ 9 ° t Z ? t ? '° l MERIZET GUELS

- L4 -

and, with additional sidings, up to 14 million tpy could be transported. Therailroad maintenance department is organized as shown on the following page(Chart 3-3). The Nouadhibou and Zouerate services are the most importantdivisions, each operating three or more equally-spaced, fixed maintenancestations along the track. Ore transport is effected by 26 Alsthom dieselelectric locomotives, and 1,080 ore wagons.

3.15 The main railroad shops at Nouadhibou have developed a rigorousoverhaul system over the years, which is essential for effective operationin desert conditions. The main features for locomotive maintenance are: (i)daily three-hour, routine servicing; (ii) 7,500 and 15,000 km partial over-hauls; (iii) 30,000 km full overhauls; and (iv) total disassembly after275,000 km, and re-assembly over a period of 17 days. Currently, 111 expatri-ates are employed in the railroad operations, along with 1,127 Mauritanians.

3.16 At the mineral port, located about 14 km south of Nouadhibou, theore trains are subdivided into lots c,f 15 cars. Each car is emptied by anore car tipper which can handle 40 wagons per hour. After this the ore istransported by conveyors to the crushing and screening station, and eventuallydeposited by two stackers alongside the port, in an area capable of holding atotal of 2 million tons of ore. The mineral is carefully stocked accordingto the 9 Kedia qualities marketed. l`he reclaiming of the stocks is effectedby 3 bucket wheels, with a capacity of 3,000 tons per hour each. These unitsare augmented by power shovels. The shiploader can handle 5,500 tons per hourand can charge 100,000 tons in about 30 hours if the ship demands only onequality of ore. Currently the pier handles ships up to 150,000 dwt. The portdepartment employs a total of 514 persons (of which 68 are expatriates) inoperating and managing these facilit:Les, which are capable of handling a totalof 12 to 14 million tons per year. A layout of the port area, with a func-tional description, is given in Chari: 3-4.

3.17 Port, railyard and mining operations are supplemented by adequate*power generation in Nouadhibou, as well as in Zouerate. Social infrastruc-ture includes an integrated primary and secondary school, a modern hospitalin Zouerate, and adequate housing and sports facilities for staff and workersin both Zouerate and Nouadhibou.

3.18 The physical security of CtDMINOR's entire iron ore operation remainspotentially threatened by guerilla attacks. The attacks of the Polisarioagainst the mining town of Zouerate in the spring of 1977, and the frequentdisruption of railroad operations in late fall of the same year and there-after, taxed COMINOR's management heavily. However, while the successfulspring attack caused about 30% of the expatriate staff to Leave and had atemporary negative effect on the morale of those remaining, it resulted in alowering of operating costs because of salary savings due to expatriatedepartures. Additional lowering of operating costs were simultaneouslyachieved through improvement of the ore-handling system and reductions in thecost of truck haulage. While these simultaneous operational improvementswould indicate that management has been more than successful in Mauritaniz-ing key posts at the mine (which, te an extent, is certainly due to theelaborate training programs COMINOR has mounted), there is, nevertheless,a limit as to how many expatriates can be lost without affecting efficient

MAURITANIA: THE GUELBS IRON ORE PROJECTORGANIGRAMM DEPARTEMTMENT RAILROAD-MAINTENANCE CHART3-3

Department Chief

Rail \NorksStud ips Administrativ Maintenance Service Maintenance Service Include Sand Removal,

Nouadhibou Zouerate ~~~~~~~Ballaeting and RailResearchService Nouadhibou Zouerate VVWeld ing Shop

Permanent Station Permanent StationNouadhibou KM 319

j _Permanent Station Permanent StationKM 96 KM 460

2 Permanent Station i | Permanent Station| KM 180 J 7 KM 569

Grinding Train Permanent StationUnit 1 J Zouerate

Grinding Train_Unit 2

Industrial Projects DepartmentMarch 1978

World Bank - 18866

MAURITANIA: THE GUELBS IRON ORE PROJECT CHART 3-4PORT INSTALLATIONS

S N

Distribute 10GE3 -108 CrusherDouble Deck 1

m Screening 5ûl1 0 ,rm I *

~ >\~ ^;Si6r cm i 06 A

5 I Mobile Feeder

v m ~~~~~~~~~ ^t-Silo2 Screens

- - Pre Screened I of 50 mm

ç Rclaimer1X o n -5 E-: --

_= DD 1 2 -_ -D

mmm...] m iua Tt TmTS losa ,_-3D - -- "3 D -CE, »w- | t^o

L- Front End Loader < < I

End ' 4 1 : ; :1Secondary:~ J tt .i st} J S c re e n in g

Reclaimer 1 Screen at 40mmLJ-1 -3E 1i Screen at lOmmL.J

t~) Shore LUne

Moistering $ |Legend

Stathiong muwmmwwmwmW -Minerais to Stock

mz/mcm _ Primary ScreeningSampl ing Station

/ mummumM Secondary ScreeningSecondary Crushing

Load i ng

Shiploader 4D -/

~~~~~~~~~~Pontons

Industrial Projects Department World Bank 18869March, 1978

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operations. Efforts must therefore be made to hire and retain the necessary

key expatriate personnel. In addition, whether the Company could cope with

other continuing disruptions of the railway line and keep up proper maintenance

despite such disruptions over extended periods of time remains to be seen.

Whilst the mining town of Zouerate ncw appears well protected by mobile

Mauritanian units surrounding a walled defense perimeter, which is in turn

permanently manned by Moroccan troops, the railroad line to the coast remains

vulnerable to guerilla attack, and this has already had repercussions on

COMINOR's excellent track maintenance system. However, it should be noted

that since the new government took over on July 10, 1978, the ceasefire

proclaimed by the Polisario has held, and no military incident has occurred

since. It is to an extent a measure of confidence that all maintenance

stations along the track have been remanned and are operating normally.

Nevertheless, due to events in the early part of 1978, iron ore sales for

1978 amounted to 6.5 million tons instead of the 8.6 million tons originally

projected.

D. Past Performance and Recent Financial Position

3.19 As noted earlier, COMINOR is the most significant entity in SNIM,representing about 85% of total sales, or 90 to 95% of the Company's sales

excluding SOMIMA. The financial position of SNIM is therefore, predominantly

determined by COMINOR's operating results. Recent sales and financial data

for COMINOR - for which separate financial statements and accounts are kept -are summarized below and are detailed in Annex 3-2:

COMINOR: FiLnancial Indicators(US$ million)

/a /b1971 1972 1973 1974- 1975- 1976 1977 1978

Sales volume (million tons) 8.60 8.62 10.33 10.69 9.65 9.66 8.42 6.5

Average FOB price/ton (US$) 10.5 10.1 9.5 11.6 15.6 16.3 15.5 14.4

Iron ore sales 98.7 87.6 98.2 124.0 150.4 156.2 130.6 94.7

Taxes /c 7.1 6.5 8.1 10.5 10.0 15.9 13.2 4.2

Net profit after taxes 3.5 3.7 4.2 21.6 22.0 18.6 (4.8) (9.9)

Cash generation n.a. 20.8 14.2 31.8 28.9 40.0 15.5 11.0

Gross fixed assets 282.2 306.2 325.1 332.2 351.8 366.1 369.1 382.7Net profit after taxesas % of sales 3.6 4.3 4.3 17.2 14.6 15.0 (3.2) (9.7)

Total direct costs/ton(US$/ton) 4.8 4.6 4.8 5.8 9.3 9.0 10.4 9.3

Debt/equity ratio 45:55 44:56 44:56 25:75 19:81 14:86 12:88 11:89

Current ratio 1.62 1.393 1.04 0.94 19.81 1.51 1.14 0.98

Debt service coverage n.a. 2.14 1.17 1.96 1.00 6.1 n.a. n.a.

/a Eleven months./b Thirteen months./c Royalties and other direct taxes, but excluding taxes on salaries,

imports, etc.

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COMINOR's, and before 1974, MIFERMA's, sales and profitability have variedclosely in line with the cycles in the world iron ore market, and the generallevel of economic growth in the major steel producing countries. Sales andprofitability peaked in 1973-74, when the completion of MIFERMA's expansionprogram, resulting in a total capacity of 11.5 million tpy, coincided with avery strong demand for iron ore world-wide. Average FOB prices for Kedia orefurther increased to US$15.6/ton in 1975, but sales volumes began to decrease,as the first effects of the recession of the steel industry in the majorproducing countries were felt.

3.20 Profitability was further reduced in 1977 as export prices droppedalmost US$1 per ton on average against 1976 and as security problems seriouslyaffected operations. In 1977, the net effect of the security problems wasto reduce exports from an estimated 9.5 million to 8.4 million tons, with acorresponding reduction in net cash flow of US$12 million. In 1978 theproduction further dropped to 6.5 million tons resulting in a net loss forCOMINOR of about US$10 million. The last two years' results cannot howeverbe considered a valid illustration of COMINOR's earning capacity under normaloperating conditions. It should also be noted that in bad years COMINOR'sfinancial results have been further adversely affected by the tax system,under which, since 1976, COMINOR has essentially been paying an export royaltyof 10% of FOB sales, regardless of the operation's actual net profits. Thissystem has been perpetuated because of the Government's need to keep its mainsource of revenues steady, rather than depend on fluctuating income taxes ordividends. The Government has however, agreed to change the rate of taxation- at least during the project execution period (para. 8.07).

3.21 Within SNIM, the positive results generated by COMINOR have in thepast unfortunately been offset by the substantial losses of SOMIMA, and, forthe last two years, by the heavy expenditures of SNIM's Nouakchott organiza-tion as well (para. 3.08). This is illustrated by the financial data summar-ized below from that provided in Annex 3-2.

SNIM: Selected Financial Data 1975-78(US$ Million)

1975 1976 1977 1978

Total Revenues: Total SNIM 192.0 189.1 166.9 119.8of which COMINOR /a 169.1 168.2 141.0 102.4

Net Profit: Total SNIM (0.2) (0.8) (22.6) (15.6)of which COMINOR 22.0 18.6 (4.8) (9.9)

Cash Generation: Total SNIM 39.4 30.2 10.6 9.5of which COMINOR 28.9 40.0 15.5 11.0

/a Includes also other revenues than from iron ore sales.

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A more detailed breakdown is given below for 1978.

SNIM: Selected 1978 Financial Data(US$ Million)

Total Other SNIMSNIM COMINOR lJnits

Revenue 119.8 102.4 17.4Taxes 4.9 4.2 0.7Net profit after tax (NPAT) (15.6) (9.9) (5.7)Cash generation 11.0 9.5 1.5Net fixed assets 170.8 140.4 30.4

NPAT as % of sales (13.0) (9.7) (32.8)Debt/equity ratio 25:75 11:89 81:19Current ratio 0.66 0.98 0.45

/a Includes US$10.4 million of revenues other than iron ore sales.

b After allocation of 83% of SNIM's overhead to COMINOR. (If, for example,the high cost of SNIM's Nouakchott training center could be financedotherwise, the loss is reduced to US$2.2 million).

From 1975 to 1977, SNIM's consolidat.ed results reflected the poor perfor-mance of SOMIMA, which generated average net losses of US$20.3 million andcash shortfalls of US$11.8 million per annum throughout the period. As theabove tables indicate, excluding SOMIMA, SNIM has been an essentially profit-able venture, with the exception of a net loss incurred in 1977 and 1978.This result, however, stemmed principally from COMINOR's low profit generationin the face of security problems, coupled with the high royalty paymentsreferred to above, and was combined with the first effects of the ambitiousprogram initiated by SNIM in 1975 for the development and diversification ofits central organization.

IV. THE MARKET FOR IRON ORE

A. The Demand for Crude Steel and Production

4.01 Forecasting of future steel demand is particularly difficult giventhe present depressed market and the uncertain prospects for the steel industryin traditional steel producing counlries. This is demonstrated by variousrecent forecasts (EC, UNIDO, IISI, AISI and the 1977 Bank study) 1/ whichdiffer substantially.

1/ EC = European Community, IISI = International Iron and Steel Institute,AISI = American Iron and Steel Institute.

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4.02 The latest published (1977) forecast of the IISI was the following:

Crude Steel Demand in 1981 and 1985(In Million Tons of Crude Steel Equivalent)

1977-85Projections Annual Rate1981 1985 of Growth %

Total World 995 1,058 +4.9%

World, excluding Centrally PlannedEconomies (CPEs) 606 717 _of which

Industrialized countries 512 588 +4.7%Developing countries 94 129 +8.4%

The above projection is roughly in line with UNIDO's forecast 1/ of 1,069million tons in 1985, but is considerably higher than the 900 million tonsthat the 1977 Bank study 2/ would suggest for the same year.

4.03 For the purpose of this market study, three new demand forecastshave been prepared. The first 2 forecasts, prepared by the Bank's EconomicAnalysis and Projection Department (EPD), use a trend line (based on theelasticity of demand for steel and GNP growth) for specific groups of coun-tries, assuming future growth rates of GNP lower than the historic ones. Thefirst of these (Case A) uses a trend line adjusted for a decline in elastici-ties below historic values after 1977. The second forecast (Case B) uses as a"high case" the unadjusted historical trend line i.e. with historic elasticityvalues. The third forecast, the base case, was prepared by the Bank's Indus-trial Projects Department, and uses as a base the 1977 actual consumption(instead of the high base of 1974/1975 used by other studies), and a growthrate of 3.4%, 3/ against the historical 4.5% for the period of 1955-77. CasesA and B generate projections which are perhaps over-optimistic and out of linewith views expressed by industry sources. The base case, on the other hand,is conservative but not unreasonable considering present expectations. Thethree projections are detailed below:

1/ UNIDO Draft Worldwide Study of the Iron and Steel Industry 1975-2000(December 1976).

2/ International Prices for Rolled Steel Products, Report commissionedby the Bank, by Mrs. Caroline Doggart (June 1977).

3/ IJsing for specific groups of countries specific growth rates ofsteel consumption intermediate between those of the 1977 Bank studyand Case A above.

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Crude SteeL Demand Forecast(Million Tons)

Growth Rates1977-85 (%) 1977 1980 1985

la lbBC BC- A B BC A B

US, Japan, EEC 3 316 345 357 380 400 408 436

Other Developed Countries 3 64 70 78 78 81 90 90LDCs 7 69 85 94 104 119 128 165

Total, excluding CPEs - 449 500 529 562 600 626 691

CPEs 3 250 280 275 275 319 341 341

Total: World 3.4 699 780 804 837 919 967 1,032

/a IISI preliminary data for 1977.

/b BC = Base Case; A = declining income elasticity after 1977.B = historical income elasticity.

4.04 A forecast of world steel production has been established by compar-ing data from different sources (IISI, 1977 World Bank study, UNIDO, AISI 1/

and various project feasibility studies), and by making various correctionsregarding capacity utilization, probable delays in start-up of new plants,and export patterns. In particular, production from plants in LDCs hasbeen discounted in 1980 and 1985 by 10% and 15% respectively below announced

production capacity, to account for longer than expected implementation delays

and slower than foreseen learning curves in new plants. A likely pattern of

crude steel production, corresponding to the Base Case of steel demand, wouldlook as follows:

1/ Economics of the International Steel Trade, Putnam, Ilayes and Bartlett,May 1977, prepared for the American Iron and Steel Institute (AISI).

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Crude Steel Production Forecast (Market Economies)(Million Tons)

1976 1977 1980 1985

us 115 113 127 141Japan 107 101 115 134EEC 134 127 138 162

Subtotal 356 341 380 437

Other DCs 58 56 77 93LDCs 36 40 57 87

Subtotal 94 96 134 180

Total, excluding CPEs 450 437 514 617

Net exports to CPEs 10 10

Total Available Production 504 607

The country by country production forecasts corresponding to the summarytable above are detailed in Annexes 4-1 to 4-5 inclusive. Total productionin Market Economies is projected at 514 million tons of crude steel in 1980and 617 million tons in 1985. Net exports to CPEs are estimated to be about10 million tons 1/ during the eighties. The resulting steel productionavailable for consumption in the Market Economies corresponds to the "BaseCase" demand forecast of para. 4.03.

B. The Supply of Iron Ore

4.05 During recent months, documentation on iron ore developmentshas been compiled on a country-by-country basis, in order to establish thedegree of certainty with which additional iron-ore capacity is likely to beforthcoming. The following categories of capacity additions, with theirvarying degrees of certainty, have been differentiated:

(i) expansions and new projects currently under implementation,to be completed prior to 1981;

(ii) other expansions and new projects which are firmly plannedto come on stream by 1981;

1/ The forecast of the Japan Iron and Steel Exporters Association foreseescontinued steel imports into the CPEs. Net imports of steel by the CPEsreached 10.7 million tons in 1975.

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(iii) planned increases in mining capacity to be completed during1983-85 through expansions of existing and new mines; and

(iv) possible increases in mining capacity by 1985, throughexpansions of existing ancl new mines, the implementationof whicti is not yet assured.

4.06 Production estimates under categories (i) and (ii) can be forecastfairly reliably, since they generally relate to firmly committed capacity ex-pansions. On the other hand, forecasts for the period 1983 to 1985 (catego-ries (iii) and (iv)) are less reliable. Many projects, though well developedon the drawing board, are not yet firmly planned, and will tend to slip ifmarket expectations are not forthcoming. The total production of all mineswhich could be operative by 1985 should therefore be considered a "possible"maximum. Furthermore, the production of all new projects cannot entirely betreated as incremental, since some of these projects replace existing mines.To take these factors into account (as well as realistie capacity utilizationsites) nominal capacities have been discounted by 10% in the projections ofavailable production given here.

4.07 The supply of iron ore worldwide is essentially dominated by theseaborne iron ore trade. Available seaborne iron ore exports consist of netexports of iron ore-producing countries, calculated as the total iron ore pro-duction minus internal requirements. Annexes 4-1 and 4-2 contain detailedforecasts of seaborne iron ore supply from major export areas. In theseforecasts, the portion of ore production not available for exports i.e.required for the domestic steel industry, has been estimated on the basisof the Base Case steel production forecast of para. 4.03. The resultingprojected seaborne iron ore supply is summarized below:

Total Supply of Seaborne Iron Ore(In Million Tons)

1975 1980 /a 1985 /b(Actual) (Implemented) (Possible)

Iron Ore Exports

From Developed Countries 155 213 266Frnm LDCs 175 202 263

Total (nominal capacity) 330 415 529

Total available(at 90% capacïty utilization) 374 476

/a Based on categories (i) and (ii) of para. 4.05./b Based on categories (i), (ii), (iii) and (iv).

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C. The Demand for Iron Ore

4.08 Total iron ore requirements can be derived from steel productionforecasts. However, the ratio of iron ore to crude steel varies with suchfactors as Fe content and the use of scrap as a source of additional ironunits. Such factors have been examined on a country-by-country basis. Theiron ore/crude steel ratio for Japan, the EEC and other countries where theconventional blast furnace is the major route for steel making, was assumedto be 1.2, which corresponds to an average iron-ore grade of 56% Fe. Steelproducers with existing or future direct reduction capacities are projectedto use a factor of 1.5 for the conversion of iron ore to sponge iron. On theother hand, the actual average ore/crude steel ratio for the US in the 1970shas been only 1.07, which reflects the high use of scrap in that country.

4.09 The demand for seaborne iron ore in major steel producing countries(Annex 4-3) is, of course, also determined by domestic iron ore production, 1/particularly in the US. Since 1950, US domestic ore supplies have steadilydecreased, to the benefit of imported ores. Although reserves are availableto cover the entire US demand in the foreseeable future, benefication oftaconite iron ore resources is expensive. Whether the US mining companies,and the steel companies who operate many captive mines, are willing or ableto commit substantial additional financial resources to taconite mining andexpensive benefication (pelletizing) plants remains open to question. Forthe purposes of this study, it has been conservatively assumed that the USwill not allow imports above the 1965-75 average, which means a domesticiron ore production of no less than 70% of their total requirements.

4.10 Another important domestic market exists in France, where theLorraine region produces about 50 million tons of ore annually. However, allmarket studies consulted indicate that this region will produce increasinglyless in the future because of: (i) the low grade and high phosphorus contentof the ore; (ii) ever-increasing mining costs as the mines get deeper; and(iii) rail transportation costs to inland steel plants, which are increasinglyuncompetitive with ocean freight costs to coastal steel mills. Although atleast a partial phase-out of the Lorraine iron ore mines will be inevitable,the analysis in this report assumes that for socio/political reasons only aslight reduction in the volume of domestic iron ore volume supply will occurthrough 1985.

4.11 The demand forecast for seaborne iron ore in other industrializedcountries, and steel producing LDCs which are not iron ore exporters, aredetailed in Annexes 4-4 and 4-5. The total demand for seaborne iron orecorresponding to the three cases of world steel demand/production detailedabove, is projected below:

1/ Recent market studies of SNIM, IRSID, CVRD and Ecole des Mines (Paris)have been used to estimate domestic iron ore supply.

- 25 -

World: Total DemarLd for Seaborne Iron Ore(In Million Tons)

1975 1980 1985(Actual) Case Case

la laBC A - BC A B-

US, Japan, EEC 323 317 336 346 378 386 408

Other DCs 10 19 21 23 31 34 34

LDCs 4 14 15 15 43 47 53

CPEs - 12 12 12 18 18 18

Total World 337 362 384 396 470 485 513

/a Cases of world steel demand described in para 4.03.

While the major steel producing countries (US, Japan and the EEC) will continueto dominate world iron ore demand in the foreseeable future, other markets, par-ticularly in LDCs, will grow faster, albeit from a very low base. Thus, theshare of the seaborne trade in iron ore going to the major steel producing coun-tries is expected to shrink from 90-95% in the mid-70s, to about 80% by 1985.At the same time, demand for seaborne iron ore in developing countries is pro-jected to increase from less than 5 million tons per annum in the mid-70s, toabout 15 million tons in 1980 and 43-53 million tons in 1985. In addition,recently initiated exports to CPEs are expected to grow, tespecially to main-land China.

D. Supply and Demand Balance for Seaborne Iron Ore

4.12 The projected supply and demand for seaborne iron ore are comparedbelow:

Supply and Demand - Seaborne Iron Ore Trade(In Million Tons)

1975 1980 1985(Actual) Case Case

BC A B BC A B

Total Supply 330 374 374 374 476 476 476Total Demand 337 362 384 396 470 485 513

Excess (Deficit) (7) 12 (10) (22) 6 (9) (37)

- 26 -

4.13 The supply/demand base case for seaborne iron ore shows in a rela-tively small oversupply in both 1980 and 1985. But the 12 million tons ofexcess iron ore in 1980 could easily diminish, or entirely disappear, if:(i) US domestic production turns out to be lower than assumed, because ofinsufficient investments in mine expansions or new mines in the near future;(ii) production of low-grade ore in Europe is further decreased due to dec-lining grades and increasing operating costs; (iii) ore to steel conversionratios in LDCs are worse than assumed, because of less efficient operationsthan those of traditional steel producers; and (iv) the USSR productionavailable for export to other CPEs is lower, due to emerging problems of lowergrades, deeper pits and exhaustion of reserves, particularly at mines locatednear existing steel centers (Ural, Krivoi-Rog). On the other hand, shouldthe iron ore supply become potentially tight due to one, or a combination, ofthe above factors, it can reasonably be assumed that capacity utilization atexisting mines could be increased, at least over the short term, so that asupply/demand balance would be forthcoming without necessitating additionalinvestments.

4.14 As indicated, the supply/demand balance for 1985 could turn outto be tight. In practice, however, the projected shortfall of iron ore sup-ply, as derived under cases A and B, is unlikely to occur as existing mineshave sufficient flexibility to rapidly expand production temporarily. Also,it can be assumed that there would be some advance warning of such strongdemand for iron ore, and that this would, in the first instance, spur rela-tively cheap and quick expansions in mining capacity in the period 1980-85.The overall effect is expected to be a fairly balanced supply/demand situationthrough the mid-1980s, with the possibility of oversupply developing once moretowards the end of the period 1985-90, when new mine investments, such asCarajas in Brazil, will start production. It should also be noted that theGuelbs Project should not experience substantial marketing problems, since theincrement in iron-ore supply which the project will introduce on to the worldmarket is rather small (3-4 million tpy, or less than 1% of total net exports).

E. Pricing of Iron Ore

1. International Prices

4.15 Like most major commodities, iron ore prices fluctuate between highand low cycles of about five years. Although many major cornmodities havegained in real terms over the past 25-years, iron ore prices have remainedgenerally constant. Thus iron ore prices of the late 1950s compare to thoseof the late 1960's and, although abnormally high prices were experienced in1974 and 1975, prices are now back on the flat trend line that has prevailedthroughout the past 25 years.

4.16 World market prices for iron ore are generally quoted CIF Rotterdam,and are calculated on the basis of iron units contained. Price differencesare related to the types of ore, which are generally categorized as fines,run-of-mine (R-0-M), lumpy, and pellets. Historical Rotterdam prices havebeen as follows:

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Iron Ore Price - CIF Rotterdam(US$ per ironi unit per ton)

Fines R-O-M Lumpy Pellets

1967 0.127 - 0.135 0.14 - 0.155 0.16 - 0.185 0.225 - 0.2351968 0.12 - 0.135 0.14 - 0.155 0.165 - 0.18 0.22 - 0.231969 0.12 - 0.135 0.14 - 0.155 0.165 - 0.175 0.21 - 0.231970 0.135 - 0.148 0.15 - 0.165 0.18 - 0.195 0.23 - 0.251971 0.16 - 0.17 0.185 - 0.195 0.20 - 0.21 0.265 - 0.2751972 0.145 - 0.165 0.16 - 0.18 0.19 - 0.20 0.25 - 0.271973 0.16 - 0.17 0.17 - C0.19 0.20 - 0.21 0.27 - 0.291974 0.23 - 0.24 0.255 - C'.265 0.29 - 0.30 0.35 - 0.361975 0.32 - 0.33 0.34 - 0.35 0.40 - 0.41 0.53 - 0.541976 0.275 - 0.285 0.30 - 0.31 0.34 - 0.345 0.48 - 0.491977 0.28 - 0.285 0.29 - 0.30 0.33 - 0.335 0.47 - 0.481978 0.25 - 0.265 0.255 - 0.265 0.28 - 0.29 0.40 - 0.405

Sinter feed, such as the concentrates to be produced by the Guelbs, wouldgenerally fall under "Fines." However, since sufficient lumpy high-gradeores and run-of-mine material are increasingly hard to come by, fine orewith a predictable granularity, such as the Guelbs concentrates, is likely tobe increasingly used as a replacement. This process of (gradual) replacementis expected to be accompanied by an increase in prices for "Fines," but theprice forecast presented in this report ignores such a possibility.

4.17 Since most of the seaborne-traded iron ores are similar in theirrespective grade categories, FOB prices tend to be comparable as well. Whatthen becomes important are the freight rates. These fluctuate greatly butalso clearly favor ores close to major markets, such as Mauritanian ores forWestern Europe, as indicated in the following table.

Freight Rates for Iron Ores from DifferentDestination to Rotterdam

(US$ per metric ton)

Country and Ports 1973 1974 1975 1976 1977of Embarkation

AFRICANouadhibou 2.02 3.55 3.23 1.82 2.00Monrovia 2.60 4.04 4.08 2.71 3.15Lower Buchanan 2.60 4.14 4.13 2.76 3.20

BRAZILTubarao 3.50 5.90 5.40 2.76 3.40

CANADAPort Cartier-Sept Iles 2.32 3.94 3.80 1.86 2.32

SCANDINAVIANarvik 1.40 2.32 2.24 1.50 1.80

Kirkenes 1.86 2.49 2.90 1.81 2.23Lulea 2.10 3.70 3.53 3.00 3.55

- /8 -

2. Prices for the Kedia and Guelbs Ores

4.18 Total production costs (inclusive of depreciation and financialcharges) and returns on equity for existing efficient mining operations areimportant yardsticks for future price levels, as it can be assumed that salesprices will generally allow reasonable returns to efficient producers overthe longer term. The following are indicative costs for some major existingmines:

1977 Iron Ore Costs of Selected Mines(US$/ton)

Total F.O.B. Cost Freight RotterdamFOB CIF

Mt. Wright (Canada) 12.8 /a 3.2 16.0Sishen (S. Africa) 13.0 5.0 18.0Kedia (Mauritania) 13.0 /b 2.0 15.0

/a Adjusted for pellet feed./b Break-even cost.

4.19 CIF costs (in 1977 terms) of some major new iron ore projectsare estimated to be the following: US$15/ton for Mt. Nimba; US$16/ton forMt. Klahoyo, and about US$17/ton for Carajas--all expected to come on streamby 1985, or somewhat later. This would compare to a projected average ofUS$15/ton (mix of Kedia and Guelbs products) in 1983, and US$14/ton in 1991,for Guelbs concentrates, also in 1977 terms . As shown in the above table,the competitiveness of Kedia/Guelbs material is further enhanced by a freightadvantage in the European market, over the Australian, Brazilian and otherWest African producers. This plays an important role in a buyer's marketsituation such as exists at present, and such as is expected to redevelop inthe late 1980s.

4.20 For the purposes of financial projections, the FOB Nouadhibou pricein 1977, of US$15.2/ton, has been taken as a base, around which the actualsales price for Kedia ore is expected to fluctuate year-by-year, accordingto the projected market cycles (para. 4.15). After a drop in 1978 and 1979due to poor short-term prospects and to the high silica content of the orewhich SNIM is marketing at the requests of its clients, prices have beenassumed to gradually recover and again to reach the 1977 level of US$15.2/tonin constant 1977 terms in 1982. In line with the projected balanced supplyand demand situation after 1981, prices have been assumed to rise to pre-1977levels (in constant terms) in the 1984-85 period. Thereafter, they wouldgradually decline again during the next low cycle. By 1990/91, prices areassumed to have recovered to the 1981 levels. The resulting price variationsare as follows:

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Average Kedia Ore Sales Price(US$/ton, FOB Noadhibou)

1977 1978 1979 1980 1981 1982 1984k 1986 1989 1991

Current terms 15.2 14.1 13.8 16.4 19.0 21.7 25.4 28.5 29.9 39.9

Constant1977 terms 15.2 13.1 11.8 13.1 14.2 15.2 15.5 15.2 13.1 15.2

4.21 For the Guelbs ore, a similar pattern of price changes has beenretained, but around a base price of US$16.9/ton in constant 1977 terms. Thisprice is about 10% higher than that of the Kedia ores because of a higher Fecontent (65% instead of an average of 55% for Kedia). The Guelbs ore is alsolikely to command an additional premium in view of the magnetic characteris-tics of two-thirds of the output. This, however, has not been taken intoaccount.

4.22 It should be noted that, with the iron ore prices as forecastabove, new mines such as Mt. Klahoyo and Carajas with their projected higherFOB costs, might be expected to be financially marginal. ODn the other hand,this could perhaps indicate that a real increase in prices ought to be forth-coming after 1990, once a larger proportion of these new, more expensive, ironore mines are in operation, requiring higher prices to achieve a reasonableoperating profit.

F. Market Prospects for Guelbs Sinter Feed

1. Testing of Guelbs Concentrates

4.23 Laboratory testing of the Guelbs ore qualities, magnetite andhematite has been completed. In gerneral, the results show that Guelbs sinter,when mixed 20:80 with a known, accepted sinter base feed, will have thefollowing results in blast furnace operations:

(i) increase productivity;

(ii) decrease overall fuel consuumption; and

(iii) slightly increase the mechanical resistance of thesinter.

The table on page 30 summarizes the laboratory test findings carried out withmagnetite ore in Japan, in order to determine the sinter efficiency of theore.

- 30 -

Guelbs Sinter Efficiency(Magnetite A) Increase (Decrease) in Blast Furnace Productivity

with varying Percentages of Guelbs Ore in Total Feed

% of Guelbs Ore in Total Feed

Japanese Companies 5% la 10% /a 20% /awhich executed tests

% Increase (Decrease) in BlastFurnace Productivity

Kawasaki 2% 10% 17%Kobe 1% 3% (4%)Nippon-Kokan - - (4%)Nippon Steel - - (13%)Sumitomo 2% - 7%Nisshen - - 25%

/a Indicates percentage of Guelbs ore in total feed.

Similarly, commercial tests in Europe demonstrated that a 20% to 30% replacementof various feeds (such as Morro Agudo base Feed, Venezuelan fines, and normalCockeril base feed) with each of the Guelbs qualities brought about productivitygains in the blast furnace of up to 11% (with an average of 6.2%), and fuelsavings of up to 6.6% (with an average of 4.9%). This confirms that theGuelbs material is a prime sinter feed, which permits a reduction of sintercosts when mixed with various well-known European and Japanese base feeds.

2. Future Sinter Demand

4.24 The cost of coke and iron units constitutes, on average, 80 to 85%of the production cost of iron making. For this reason great efforts arebeing made to decrease these cost items. A reduction in the cost of coke mayperhaps be achieved in the long run by way of "form coke", which is a blend ofdifferent coals of poor, or non-coking quality, treated to form a high-qualitycoke briquette. However, while several techniques exist to produce form coke,this has not yet resulted in any substantial cost savings. A major concernof the iron and steel industry is, therefore, to optimize coke and iron unitconsumption, as well as general blast furnace productivity. Competition inthis respect between the various iron ore feeds, such as pellets, lumpy ores,natural fines, and concentrates, is thus likely to become more severe in thefuture. A premium demand may therefore be assumed for: (i) a high iron con-tent feed; (ii) a feed with high thermal efficiency, to minimize fuel andreductants consumption; and (iii) good physical resistivity in the blastfurnace, for optimal productivity.

4.25 In terms of iron units, pellets or sinter feed concentrates arenormally of equally high grade. The advantage of sinter, however, liesin the fact that it can be self-fluxing, thus reducing coke consumption,whilst pellets can only be made self-fluxing at additional cost, and are notsuitable for transportation thereafter. A recent SOFRESID study indicatesthat, theoretically, cost savings of US$8 per ton of pig iron could be achieved

- 31 -

by using 100% sinter in the feed, instead of 100% pellets. This is primarilydue to: (i) savings in the grinding required for pellets; (ii) smallerinitial capital outlays; and (iii) overall reduction in thermal requirements.

4.26 In addition, the SOFRESID comparison does not take into accountthe fact that the coking plants attached to normal blast furnace (BF) oper-ations in Europe and Japan produce coke breeze of the order of 60 kg per tonof pig iron. This coke breeze - which can seldom be sold, even at low prices--is recycled into the sinter strand, and thereby results in an added thermicbenefit not found with the pellet route. In terms of mechanical properties,the pellet is perhaps superior to the finer sinter, but only to a very limitedextent.

4.27 It has become general practice in the EEC and Japan to feed theblast furnace with a charge of agglomerated feeds (sinter and pellets) varyingfrom a minimum of 60% to a maximum of 100%. Within these parameters, theblast furnace operator accepts no more than 20% (acid) pellets and 20% gradedore (lumps). The steady historical growth of the use of agglomerated feeds,at the expense of natural lumpy ores and fines, is illustrated below:

Composition of Iron Ore Consumption in Steel Plant Operations(%)

Direct Iron Ore Consumption Iron Ore Consumptionin Blast Furnaces in Sinter Plants

EEC Japan EEC Japan /a

1960 74 43 25 571965 44 29 57 711970 38 12 61 871974 18 9 81 91.1975 21 7 77 931976 20 6 79 94

/a Includes pellets which contribuited 4% of total BF charge in 1969, 15%in 1970, and 12% in 1976.

Source: Iron Ore Manual; Tex Report.

4.28 The present tendency in Europe and Japan is to use increasinglylarger percentages of self-fluxing sinter in the blast furnace (at least 70%).The scarcity of natural high-grade :Lumpy ores of the non-decrepitating kindwill result in a growing use of agglomerated feeds as a substitute. Withinthis framework, however, pellets will be used in BF operations only as far asnecessary, as pellets are more expensive and their acidity poses problems forthe burden preparation. The growth of pellet use is expected to level off in

- 32 -

both Japan and the EEC, perhaps not only for cost reasons, but also due tothe fact that sintering installations with sufficient capacity to handle feedrequirements corresponding to the projected growth of steel production untilthe mid-80s are already available. This will enhance the market prospects ofgood sinter feed.

3. Conclusion

4.29 The Kedia hematite ores, in the form of both natural fines andlumpy material, constitute well-established sinter and direct BF feeds inEurope and, more recently, in Japan. This production will be graduallyreplaced by the Guelbs self-fluxing magnetic sinter feed, which shows com-parable, if not superior, properties when compared to currently used Europeanand Japanese ore feeds in terms of: (i) fuel savings on the sinter strand;and (ii) productivity gains in the BF. As it is now foreseeable that thedemand for prime sinter will grow in the EEC and Japan, the relative dis-advantage for COMINOR of marketing a new product should be more than com-pensated for by the good characteristics of the Guelbs concentrates. SNIM'smarketing efforts will be facilitated by the good relationship SNIM hasmaintained with its traditional clients, particularly the reputation forreliability which SNIM enjoys among iron ore producers. Letters of intentor expression of interest covering more than 50% of SNIM's production havealready been obtained, and the Government has agreed not to authorize anyentity other than SNIM to market SNIM's products.

G. Local Sales

4.30 Samia, a Mauritanian company with a participation of KFTCIC, iscurrently considering the possibility of erecting a pellet plant of about 2million tpy capacity to supply Quatar, Iraq and, at a later date, Saudi Arabiawith Direct Reduction (DR) pellets. This plant has been engineered to useGuelbs magnetite as feed. However, since Samia's ore requirements wouldrepresent a large proportion of the Guelbs magnetite production the feedrequirement of the pellet plant might affect the marketing of SNIM's ore. Ithas been recommended by the Bank that discussions should be held betweenSamia, SNIM and Kobe Steel who has engineered the plant and who would be incharge of the construction, to ensure coordination with SNIM's marketingstrategy. In any event, it has been agreed with the Government and SNIM thatSNIM will always sell its ore at world market prices and for convertibleforeign exchange and that it will not enter into any contract or marketingarrangement which would preclude SNIM from maximizing its sales revenues andits profits.

V. THE PROJECT

A. Scope and Objective

5.01 The Guelbs project consists of opening new mines and constructingbeneficiation facilities, in order to replace the declining production ofthe current Kedia ore bodies, which will be exhausted by 1991. The project

- 33 -

will be implemented in two phases, and will increase production capacity from11.5 million tons to about 14 million tons per year by 1984. hne first phasewill bring a new ore body, El Rhein (located 22 km northeast of Zouerate),into production in 1983. This ore bcdy is of a lower grade than that of theKedia Mountain and has different physical characteristics. Major capitalexpenditures are therefore required, in the form of beneficiation facilities,in order to upgrade the ore to acceptable market levels. The second phasewill open mines at Oum Arwagen (12 kmi east of El Rhein). These arze to comeinto production in 1988, to replace the final ores from Kedia. The grantingof the mining concession for both El Rhein and Oum Arwagen is a condition ofloan effectiveness. This report deals primarily with the first phase.

B. Technical Description

5.02 The geology of the region has undergone severe movements of theearth's crust. The resultant formations have been attacked by erosion andreduced to a peneplain from which a ifew "Guelbs" (mountain remnlants) and"Kedias" (mountain chains) still emerge. These remnants are often iron-bearing. In the case of the Kedia mountains near Zouerate, the concentra-tion of iron is as high as 55 to 65% Fe, which has given rise to the presentiron ore operations. The Guelbs on the other hand, contain a lower concen-tration of iron, averaging about 30 to 40% Fe.

5.03 The El Rhein deposit is triangular in shape, extending 1,600 m in anorth-south direction, with the peak of the triangle to the south. The wholestructure forms a syncline, the axis of which dives 300 to the north. Thedeposit continues below the plain where, in fact, most of the ore reserves arelocated. Oum Arwagen is a mountain chain of 14 km in length. Only a smallpart of this area has been drilled out and added to the ore reserve of theproject (Map IBRD 13584 page 13).

5.04 Proven ore reserves at El Rhein and Oum Arwagen are 285 and 101million tons, respectively. To this must be added the remaining 95 millionton reserve of the Kedia, to yield a total proven reserve inventory of 481million tons. Probable extensions of these ore bodies could add another 180million tons. Furthermore, in the general area of Zouerate, more than a dozenmineralized Guelbs are known to exist, indicating a substantial long-runpotential.

5.05 The overall mineralogy of the Guelbs ore is simple. It consistsof a facies of coarse and fine magnetite, as well as coarsc and fine hematite(referred to by SNIM as oxidised ore), with a ratio between the two of 2:1respectively. The mean mining grade has been established as being about 38%Fe. The mineralogical studies undertaken to establish the first parametersfor the pilot plant flow sheet were extensive. During the period 1971 through1975, both laboratory-type and semi-industrial tests, were carried out inFrance, the US, the UK, Canada, Germany and Japan. Due to the lack of ex-tensive water resources at the prospective mining site, a dry milling processhas been chosen for which successful tests were obtained from Aerofall MillsLtd of Canada. Also, Swedish and French tests established that lc>w-intensity,magnetic separators were probably the best route toward developing a successful

flow sheet.

- 34 -

5.06 To supplement the earlier laboratory work, a pilot plant was erectedin Zouerate in June 1974, to: (i) separately treat ail major ore types; (ii)determine the permissible mixtures between magnetic and oxidized ores, so asto arrive at an optimum recovery level, and (iii) produce sufficient concen-trates for a testing campaign in Europe and Japan, in order to ascertain thesuitability of Guelbs sinter feed for the blast furnace (para. 4.23).

5.07 Mining at El Rhein, as in the existing Kedia operations, will be donein open pits, using 9-inch drills for blast hole preparation, 8 to 13 cubicyard shovels for loading, and 85 to 120-ton dump trucks for dispensing the oreinto the primary crusher. The entire mining machinery will work in threeeight-hour shifts, 18 shifts per week, assuming a 300-day per year workcycle. The benches will be 15 m high. The design of the final pit is basedon an optimized computer design, given the economic cut-off point of 28%Fe, and a mean 38% Fe of crude ore. The final pit slope has been somewhatarbitrarily fixed at 500, which appears conservative, as the slopes at Kediaare considerably steeper. The waste to ore ratio is 2:1. Mining operationsat Oum Arwagen (Phase 2) are identical, with the exception that the benchheight will be 12 m, and the cut-off grade somewhat lower, at 26% Fe, dueto a slightly lower waste to ore ratio.

5.08 Primary crushing will be done at the El Rhein crushing yard to pro-vide greater flexibility of operation. Ore from the Oum Arwagen mine willbe loaded on railwagons at several loading points (in order to cut down onexpensive truck haulage), and brought to the primary crusher at El Rhein.Concentrates from the El Rhein plant will be transported to F'Derik, on a new45 km railway line linking the new operation to the existing rail system.

5.09 SOCOMINE first proposed magnetic dry pre-concentration at the ElRhein plant, to be followed by wet concentration near Nouadhibou. Afterconsiderable trials, they now propose a new flow sheet (TSR 1/), which essen-tially involves a finer grinding of the preconcentrate (to 400 microns) atthe mine, and eliminates the proposed beneficiation at the port. This TSRalternative results in satisfactory metal recoveries of 82% and a Fe contentof about 65%. This new flowsheet results in: : (i) savings in transport;(ii) having all treatment facilities at one location for better control; and(iii) removal of difficulties connected with treating concentrates withseawater (contamination, corrosion). The flow sheet for the ore concentration/beneficiation is shown on the page 36 (Chart 5-1). The crushed ore (200 mm)is homogenized at the mine dump, and conveyed to the semi-autogenous mill.The dry dust overflow is caught in the baghouse and discharged to the tailingsarea. The mill discharge and classifier underflow are sent through a 1.6 mmmesh screen, with the underflow being directed to the magnetic separators.The overflow is sent to the aerofall mill. The preconcentrates, or middlingproducts of the oxide are ground and treated in the oxide plant and crushed to400 micron. Fine concentrates are also ground and treated in the oxide plant.Two products are recovered: (i) magnetic concentrates; and (ii) oxidized

1/ Tout a sec au Rhein.

- 35 -

concentrates. They are conveyed to load-out bins to be transferred to the orewagons. A general layout of the El Rhein industrial plant is given in Chart5-2. _/

5.10 The bulk of the new power will be consumed by the grinding (aerofallmills) operation, and the benefication plant. In addition, power must be gen-erated for the electric shovels, for workshops and services and for the town-ship. Since the generator station at Zouerate is worn out and cannot beexpected to supply adequate reliable power, a new power station with asso-ciated standby facilities is required. Peak power during the first phase willbe 34 IW. This will increase to 63 MW at the beginning of the second phase.

5.11 A new road linking Zouerate with El Rhein will be constructed duringPhase 1. Due to the excellent topographical conditions, very little embank-ment will be necessary. The access rcad from El Rhein to Oum Arwagen will notbe constructed until Phase 2. This will be 11.5 km long, and of more rudi-mentary design, in line with requirements of normal mining traffic.

5.12 An additional 528 housing units will be necessary in the miningtown of Zouerate, in order to accommocLate the additional manpower needed forthe project.

5.13 During Phase 1 (1979-82), transport requirements will increase toupwards of 14 million tons of ore per year. This will require three trainsper day in each direction, and will necessitate the purchase of four addi-tional main locomotives and 293 x 100 ton ore wagons, as well as the con-struction of additional minor maintenance facilities in Nouadhibou. DuringPhase 2 (1986-89), COMINOR will also construct a new single access linebetween El Rhein and Oum Arwagen, to be operated by trains of 32 ore wagons,pulled by one locomotive each. The total additional equipment requirement forthis line will be 4 diesel electric locomotives, and 159 x 77 tons ore wagonswith rotating couplings and side openings for lateral tipping. Maintenancefacilities at Zouerate will remain unchanged. Total additional personnel re-quirements will be 114 employees for El Rhein/Oum Arwagen, and 162 employeesfor the main line.

5.14 The existing port handling and loading system described in para.3.16 and Chart 3-4 will be retained. Nevertheless, in order to bring theloading capacity up to 14 million tons per year, a number of modificationswill be made. Reclaiming facilities will be strengthened by adding a crawler-mounted bucket wheel, and the capacity of the shiploading conveyor line willbe upgraded by 40%. The main acquisition, however, will be a new shiploader,as the old one, now rated at 5,200 tph, has already undergone several modifi-cations and had to be partially rebuilt after a serious accident in 1973.The new shiploader, with a longer boom length of 25 m and a loading capacityof 7,500 tph, will give the necessary capacity, whilst the old equipment willbe used as standby. If the pellet plant project (para. 4.30) were to be

1/ The second half of the plant, designated as line B, will be needed forthe second phase only, which starts up in 1988.

> 0 MO

10 _

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, l~~~~~SG~ 1 | 1FRE r,~ ~ ~ ~ ~ ~~~AE DEPT_________ATR_L___ ___~

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WORK SHEOPS E

STATSIONM MAURITANIA~~SER,CESTATION i1 ~~~~~~~~~EATONGUELBS IRON ORE PRtOJECT

rAERVrCESTA ON ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~EL RHEIN INflUSTRiAL SITESHOPS ~ ~ ~ N

EEATERODEPOT -

j POWEER PLANT

F AERIK 17

- 38 -

implemented, the loading angle of the shiploader would have to be modified,which should not pose any technical problems. In any event, this will bethe only modification required for the totality of SNIM's industrial plantat Nouadhibou.

C. Water

5.15 The supply of water for social as well as industrial purposesis of great importance in the eastern Sahara. At present, Nouadhibou issupplied with water by pipeline from a strong aquifer at Boulanouar, which islocated some 80 km to the east of the railway line. Zouerate, on the otherhand, gets its water from a number of producing wells along the Kedia moun-tains. These tap fossil, and, to a lesser extent, renewable water resources.An adequate and continuous drilling program will be necessary in order todevelop the requisite water resources during the Guelbs exploitation period.While the industrial use of water will not have to be appreciably increased,the increase in manpower will mean a higher overall water consumption. Thus,the total water consumption of 850,000 cubic meters (cum) in 1977 is projectedto increase as follows:

Guelbs Water Requirements(In cum Per Year)

Uses SupplySocial Industrial Total Sweet Brackish

Phase 1 775,000 332,000 1,107,000 857,000 250,000Phase 2 869,000 372,000 1,241,000 991,000 250,000

5.16 Such a detailed drilling program has already been initiated, and thefollowing potential sources of water supply are currently under development orexploration: (i) the north border of the Kedia mountains - under production;(ii) the Breccia zone of d'Idjill - one promising, new operating well; (iii)the border of the Taoudeni Basin near the Kedia - contains both sweet andbrackish water; and (iv) the Boulanouar aquifer - where new wells will bedeveloped, and water wagons could supply Zouerate in case of an extremely hotyear. Currently proven reserves will cover the Guelbs operation's require-ments for a period of 30 years. Additional reserves will, however, have tobe developed thereafter. The Company will furnish the Bank with annualreports on the status of water reserves and prospecting efforts.

D. Ecology

5.17 The pollution generated by COMINOR's iron ore operations is notsignificant. Dust generation at the port can be at times severe, but prevail-ing winds tend to blow the dust towards the open sea. Dust generation at thecrusher station at Rouessa has, however, been observed to be very severewhenever the waterspraying system is out of order. There is therefore acovenant in the loan agreement to the effect that COMINOR will continue tooperate its installations with due regard to ecological and environmentalsafety standards, and to carry out a long-term study on the effects of dust

- 39 -

inhalation by the workers in order to determine whether adequate protectionexists. The Company will report annually to the Bank on dust levels, andif needed, suitable equipment will be installed to protect the workers.

VI. CAPITAL COST AND FINANCING PLAN

A. Capital Cost

6.01 Total financing required for Phase 1 of the Guelbs project isestimated at US$500.7 million equivalent, of which US$456.1 million is inforeign exchange, as shown below. A more detailed breakdown of capital costsis provided in Annex 6-1.

Guelbs Project - Phase 1Summary of Cap:Ltal Cost Estimates

(US$ Million)

Foreign /a Local Total %

Mining and Mechanical Equipmentfor Beneficiation Plant /b 87.2 1.8 89.0 31.6

Port and Railroad Equipment /b /c 35.0 0.7 35.7 12.7Power Plant and Main Electrical Equipment /b 30.3 0.6 30.9 11.0Miscellaneous Plant, Water Supply and

Auxiliary Electrical Equipment /b 4.0 - 4.0 1.4Civil Works, Buildings and Housing 48.6 9.0 57.6 20.5Erection and Installation /d 22.4 10.9 33.3 11.8Engineering and Project Management 20.4 1.1 21.5 7.6Preliminary Works and Training /e 7.0 2.7 9.7 3.4

Base Cost Estimate (mid-1977 prices) 254.9 26.8 281.7 100.0

Physical Contingencies 24.9 2.7 27.6Price Contingencies 99.7 10.4 110.1

Installed Costs 379.5 39.9 419.4Incremental Working Capital 30.0 3.5 33.5Interest During Construction 26.6 1.2 27.8Extraordinary Contingencies 20.0 - 20.0

Total Financing Requirements 456.1 44.6 500.7

/a Including indirect foreign exchange./b CIF values./c Including US$1.0 million of rails purchased before 1978./d Including handling and transport in Mauritania./e Including laying of track for railway connection by COMINOR.

- 40 -

In addition to the above, approximately IJS$10 million 1/ was expended over theperiod 1970-77, in geological investigations, pilot plant testing, feasibilitystudies, and preliminary engineering studies.

6.02 The equipment costs used here have been derived from estimatesprepared by SOCOMINE, with the assistance of SNIM. The original estimateswere prepared in early 1976, and were updated in late 1977 on the basis ofmid-1977 quotations or SNIM's current replacement costs for its ongoingoperations. Cost estimates for mining and other equipment have been pre-pared on the basis of detailed equipment lists and are considered adequate.Those for civil works, transportation and erection are estimates based oncontract prices for the Segazou expansion of the Kedia deposit, or on thecost of other works recently or currently carried out by SNIM. They, also,are considered reliable. It should be noted that the foundation character-istics are well known, and that soil conditions for the port components mayreadily be established since these works are a simple extension of the exist-ing installations. Construction costs for the railway extension are estimatedon the basis of COMINOR's ongoing experience in track replacement, and recentrealignment works of some sections of the main line.

6.03 The project will be totally exempt from import duties. Freightestimates, including transport from the port of Nouadhibou to Zouerate, arebased on COMINOR's current experience, and amount to about 10% of the FOBvalue for mining equipment, 4% for other equipment, and 15% for structuralsteel and railway stock. Engineering, procurement and project management havebeen estimated separately for the various project components, at 15% of thetotal cost of the beneficiation plant, 6 to 10% for other fixed plant andinfrastructure, and 3% for mining equipment and railway stock. Physical con-tingencies amount to 15% for the beneficiation plant, material handling andstorage and power plants, 10% for the port installation, and 3% for the otherproject components. In view of the fact that the design and specifications ofthe different project components are already well defined, and that the overallworking conditions are very familiar to both SNIM and SOCOMINE, these physicalcontingencies--amounting to a total of about 10% of base costs--are consideredreasonable. Price contingencies have been estimated on the basis of averageescalation rates of 8% per annum for 1977-79, and 7% thereafter. An additionalextraordinary contingency of US$20 million (4.4% of total project cost) has,however, been added to reflect the particular problems which may affect theimplementation of this project. Total contingencies are, therefore, estimatedat US$137.7 million, or 27% of total project costs. These are not out of linewith total contingencies on similar mining projects in other countries.

6.04 Incremental working capital requirements--estimated at US$33.5million--have been calculated on the basis of COMINOR's historical needs,and the anticipated operating schedule. Detailed calculations are providedin Annex 6-2.

1/ SNTM has treated these as sunk costs for the purpose of future investmentdecisions. In the financial statements they have either been chargedoff during the year of expenditure, or capitalized (and are in theprocess of being amortized), according to their potential impact onfuture operations.

- 41 -

6.05 For Phase 2 of the Guelbs, to be constructed over the period1986-89, capital costs have been estimated on the same basis. The totalestimate amounts to US$436.9 million in current terms, and is detailed below:

Guelbs Project - Phase 2Summary of Capital Cost Estimates

(US$ Million)

Foreign Local Total

Mining Equipinent and Beneficiation Plant 111.2 2.2 113.4Railroad and Rolling Stock 19.7 0.7 20.4Power Plant 17.1 0.7 17.8Miscellaneous Plant, Services and Housing 8.6 2.5 11.1Engineering and Project Management 16.4 0.9 17.3Preliminary Works 6.5 2.4 8.9

Total Base Cost (mid-1977 prices) 179.5 9.4 188.9Physical Contingencies 17.8 0.8 18.6Price Contingencies 212.2 11.2 223.4

Total Fixed Assets 409.5 21.4 430.9Incremental Working Capital 5.4 0.6 6.0

414.9 22.0 436.9

In addition, during the period of transition between Phases 1 and 2, SNIMwill purchase about US$36.8 million of additional mining equipment, in orderto handle the large amounts of overburden that will have to be cleared formining to evolve from hill into pit exploitation.

6.06 Based on the capital cost estimates presented above, the totalfixed asset cost (i.e. base cost plus physical contingencies) for Phases 1and 2 would be approximately US$517 million in mid-1977 terms. This repre-sents a cost per annual ton of about US$37 which, as shown below, comparesfavorably with other iron ore projects under construction, or recentlycompleted):

Investment Cost per Ton of Annual Capacity /a

Country US$

Goldworthy, Mara-Bamba, Deepdale Australia 40 to 42Hammersley, Mount Newman Australia 47 to 50Sishen S. Africa 46Guelbs (Phases 1 and 2) Mauritania 37

/a Mid-1977 US$, excluding working capital and interest during con-struction, but including infrastructure.

- 42 -

The Guelbs project cost is probably lower than that of the other projectsbecause of the limited infrastructure required. If a new railroad and portwere needed, and particularly if a new greenfield pellet plant was essential,the above cost would be increased by 100-150%.

B. Financing Plan for Phase 1

6.07 The total financing required for Phase 1, of US$500.7 million, willbe provided by equity and loans from foreign sources, and by SNIM/COMINOR'scash generation, as shown below:

Guelbs - Proposed Financing Plan for Phase 1(US$ Million)

Equity %Additional Share Capital:Kuwait Foreign Trading, Contracting and

Investment Company 40 8Arab Mining Company 28 6Irak 22 4Bureau de Recherche et Prospection Miniere(Morocco) 20 4

Islamic Development Bank 10 2COMINOR Retained Cash Generation 42.7 9

Total Equity 162.7 33

LoansSaudi Fund 65 13IBRD 60 12Caisse Centrale 50 10Kuwait Fund 45 9AFESD 35 7EIB 30 6Abu Dhabi Fund 20 4Japan OECF 16 3African Development Bank 12 2OPEC Special Fund 5 1

Total Loans 338 67

Total Financing 500.7 100

6.08 The proposed foreign contributions, amounting to US$458 million(or 91% of financing requirements), would cover 100% of the foreign exchangecost of the project. However, SNIM's financial effort will still have tobe substantial, as during the period 1979-82 SNIM will have to expendsome US$38.6 million on new investments and replacements for the Kedia

- 43 -

operation, as well as repay about US$48 million of existing debt, 1/ mostlyin foreign exchange. Annex 6-3 gives a year by year breakdown of SNIM's totalinvestment expenditures. COMINOR's internal cash generation during thisperiod is therefore, critical to the successful financing of the project.Equity financing will amount to US$120 million, which is expected to resultin a debt/equity ratio of 50:50 at the SNIM consolidated level, at the end ofconstruction of Phase 1.

6.09 The capital increase of US$120 million will be subscribed by theKFTCIC, ARMICO, the Iraqi Government, BRPM of Morocco and the Islamic Develop-ment Bank. About US$77 million comprised of 25% of the nominal price of theshares newly issued plus the capital contributed as a premium in excess of parvalue is expected to be paid in very shortly. The remaining capital will bepaid in, according to the project's expected requirement timetable. Thesubmission to the Bank of an acceptable calendar is a condition of loaneffectiveness. The share capital of the foreign shareholders will represent28% of SNIM's recently reconstituted capital.

6.10 The proposed Bank loan of US$60 million equivalent, will be madedirectly to SNIM for 15 years, including 5 years of grace, at the prevailinginterest rate (7.9% p.a. at present), plus a guarantee fee (2.1% p.a.) payableto the Government of Mauritania, to bring SNIM's total financing charges to10% p.a. Such a Bank loan would cover 13% of the project's foreign exchangecost. The foreign exchange risk would be borne by SNIM.

6.11 The terms and conditions of the other foreign loans are detailedin Annex 6-4. The loans of the Saudi Fund and the OPEC Special Fund are madedirectly to the Government, which will relend them to SNIM. The Kuwait Fund,AFESD and the Abu Dhabi Fund will lend directly to SNIM. The weighted averageinterest rate is about 3.3%, with an average maturity of 17 years, includingover 4 years of grace. The EIB loan will be made directly to SNIM, at aninterest rate of between 5.25% and 6% p.a., with an associated maturity of15 years (including 5 years of grace). The Caisse Centrale loan will alsobe made directly to SNIM, and will consist of a blend of a direct loan andsuppliers' credits, guaranteed by the French Government, at an averageinterest rate of 9% p.a. for an average period of about 15 years, includ-ing 3 years of grace. The Japanese DECF contribution will be a loan of Yen36 billion (US$16 million equivalent) to SNIM at 4%, for 25 years, including7 years of grace. Finally, the African Development Bank loan will consist oftwo loans of US$6 million each, both to be made to the Government, at 8% p.a.for 15 years, including 5 years of grace. In the financial projections ithas been assumed that all of the above loans which are to be made to theGovernment will be onlent to SNIM in foreign exchange and under the sameterms. Effectiveness of foreign loans totalling at least 80% of the totalexternal loans financing for the project and satisfactory assurance that theloans representing the remaining 20% will be forthcoming will be a conditionof loan effectiveness.

1/ This does not include US$30 million of outstanding compensation paymentsdue to the former shareholders of MIFERMA, since assumption of thisliability by the Government has been confirmed.

- 44 -

6.12 US$20 million of additional equity (para. 6.03) has been added tothe basic financing, as a minimum contingency to provide a measure of securityagainst the extraordinary risks of this project. In addition, it must beconsidered possible that slippage and/or cost overruns could increase thefinancing requirement substantially, even though the estimates presentedabove (para 6.01) are thought to be reasonable and the implementation schedule(para 7.05) attainable. In similar projects elsewhere, financially strongshareholders have been asked to provide unlimited overrun commitments or,where unlimited commitments have not been forthcoming, the committed overrunfinancing has been at least 30-40% of the base cost. In this case, however,it is proposed only that the Government provide a full project completionguarantee. There is, nonetheless, thought to be satisfactory assurance ofadequate financing for project completion since (i) SNIM's consolidated cashsurplus should amount to over US$44 million by 1981 and US$69 million by 1982(para. 8.18); (ii) the Company's debt:equity ratio is not expected to fallbelow 50:50 or its current ratio below 2:1 after 1981, which should permit theCompany to raise additional long-term debt (estimated at up to US$30 million)should the bank deem such borrowings appropriate; and (iii) the commitment ofcertain of the shareholders and of the colenders to the project and toMauritania is such, that even without a formal commitment, they would considerthemselves obligated to maintain the financial viability of SNIM, on which theMauritanian economy depends.

6.13 To ensure that SNIM will generate the cash necessary for its contribu-tion to the project financing and for other recurrent needs, the Governmentwill grant a reduction in royalties, whereby the export levy on iron ore willbe reduced from 10% of FOB iron ore exports, to an average of 6.5% (as detailedin para. 8.07), during the construction period of the project. These rateswill however be reviewed on an annual basis in light of the company's actualfinancial situation and will need the approval of the Bank (para 8.07). Inaddition, in order to further ensure project completion, tihe Goverament basagreed to defer SNIM's royalty payments, and so increase the company's retainedearnings, should cost overruns require additional funds (para 8.07).

VII. PROJECT IMPLEMENTATION

A. Project Organization and Management

7.01 The project organization chart is shown on the following page(Clhart 7-1). SOCOMINE, a French consulting firm, has been contracted bySNIM to be responsible for overall design, construction supervision, start-upand commissioning of the project, and to assist SNIM during the first years ofoperation. Considering the project's size and SOCOMINE's relatively smallmanpower of 18 professionals, the consultant and SNIM have been led to seekassistance from various other well-known French consultant groups, namelySOFRESID, SGTE (Societe Generale de Techniques et d'Etudes) and FCB (FivesCaiL, Babcock). In addition, SOCOMINE will utilize the capabilities alreadyavaîlable within SNIM for preliminary mine development, laying of railroadtracks, and erecting railroad stations. Specifically, SOCOMINE will sub-contract to the consultants the following tasks:

- 45 -

Chart 7-1

MAURITANIA: THE GUELBS IRON ORE PROJECTPROJECT ORGANIZATION CHART

GENERAL MANAGER OF SNIM(Nouakchott or Nouadhibou)

MII FINANCIAL DIRECTORINouakchott)

ADMINISTRATIVE DIRECTOR(PARIS>

General Engineering

++ f ~~SOCOMINE

Suppliersr *. .......... '''''~ Detail Engineering

.~~~~ nConstruction Site Contractors

............. a.....

Stocks CONTROLLER\ / <(Nouadhibou)

............ .... ......

. 7. J ~~~~~Stocks and Supplies

........... .....

Procurement

J \ (~~Nouadhibou)

Production Department

LJ ( Zouerate and~~~~Nouadhibou)

Induistrial Projects Department, May 1978

World Bank - 18972

- 46 -

(i) engineering and technical specification - SOFRESID, SGTE,FCB;

(ii) procurement and sea freight - SNIM, SOFRESID, SGTE;

(iii) project design and follow-up - SOFRESID and SGTE;

(iv) expediting and inspection - SOFRESID;

(v) scheduling and cost follow-up (partly) - SOFRESID and SGTE; and

(vi) supervision of construction - COMINOR assisted by SOFRESID andSGTE.

7.02 Once the go-ahead decision has been taken, the SOCOMINE team willbe attached to the project as full time consultants, and organized as shownon the following page (Chart 7-2). Although it might appear that SOCOMINE'smanpower base is small, the fact that SOCOMINE'S senior management are allformer MIFERMA managers who were involved in both the implementation and thesubsequent operations of this company, has reassured the Bank that SOCOMINEwill be up to the task. Specifically SOCOMINE has moved decisively to (i)better distinguish the lines of responsibility between SOCOMINE, SNIM and allother entities participating in the project implementation; (ii) study anddevelop the total manpower requirements and appropriate organization for thetasks to be performed; (iii) improve the procedures for, and thus speed up,bid evaluation and procurement; and (iv) better define the methodology andsystems used in the area of scheduling and cost control. The estimated costper man-month for SOCOMINE's consultants is US$6,500 and the total cost ofSOCOMINE's services, including the cost of subcontracts to SOFRESID, SGTE andFCB, will amount to approximately US$6.7 million p.a. In order to guaranteethat the fullest attention is given to the project it has been agreed thatSNIM shall ensure that SOCOMINE will not take on any additional major engage-ments which might be detrimental to the project implementation.

7.03 SOCOMINE's responsibilities include overall design and layout,preparation of bid documents and vendors lists, bid evaluation, and contractpreparation, overall control and coordination of equipment supply and erectionat site, and daily planning and coordination. Detailed engineering will beprovided by the consultant firms. Under the guidance of SOCOMINE, COMINOR'sproject group will closely coordinate activities at the construction site.

7.04 Problems which need highly technical know-how will be referred toan expert committee which will act as a periodic review board. The committeewill consist of Mr. Coursin (senior engineer of SOCOMINE), representativesof the Institute de Recherche de la Siderurgie (IRSID), and Mineral ServicesIncorporated (MSI), and Mr. A. Dor, an independent consultant. All have beenclosely involved in the feasibility study of the Guelbs project, particularlyin designing the pilot plant at Zouerate. As the most critical equipmentitems in the project are the Aerofall Mills, and as FCB has no experience inbuilding equipment of the size needed in the concentration plant, detailedengineering will be checked at regular intervals, and will be subject to

- 47 -Chart 7-2

MAURITANIA: THE GUELBS IRON ORE PROJECTSOCOMINE'S PROJECT MANAGEMENT ORGANIZATION

Project Director

Coursin

BENEFICIATION PLANT Enieer1TchncalAsista

A. de Maistre r

EQUIPMENT Engineer

I Collardav

MINING EQUIPMENT Mech. Engineer Technical AssistantORE HANDLING r Y1

Elect. Engineer Tech. Assistant

X2 _ Y2

CIVIL ENGINEERING Engineer Tech. AssistantINFfRASTRFUCTURE - L t

PORT Y

. ~~~~~~~~~~EngineerTehAsitn................................ .. PLANN ING _ A

A. Phillippe r Y4

Adm. AssistantOffice Chief zi

SDIITRATIONAnne Mme Basta

Mme Riant

N E eDESIGN OFFICEMINE Engineer Project Officers

Bastid Boussarie

Grandjean

Engineer

Maillot X, Y, Z Personnel to be hired Draftsman

RAILROAD | E 1|

N Nicolas r

Industrial Proipc'tç l)orusr1-mpni Mnx7 1 Q7R

- 48 -

approval by MSI and/or Mr. Dor, as they have both been intimately involvedin the original design of the system for Aerofall Mills in Canada. Adequatearrangements for the functioning of the expert committee and the extent ofits review/approval responsibilities have been agreed upon. Although relativelycomplex, the package of all the above arrangements is expected to result inadequate project management.

B. Implementation

7.05 The project management contract between SOCOMINE and SNIM hasalready been signed. The foreseen date of completion of all physical work anddelivery is January 1, 1983, which is reasonable. However, the official dateof completion of Phase 1 is the date on which the El Rhein iron ore mine shallhave produced 3.1 million tons of concentrate during a period of 6 months andis expected to be end 1983. The dates above are imposed by the long construc-tion and erection time of the Aerofall Mills, and suppose that orders forthis critical item as well as for the generating sets can be placed by earlySeptember 1979. A definitive implementation plan, and detailed critical pathschedule are being worked out by SOCOMINE, and will be presented to the Bankshortly. A summary schedule is illustrated in Chart 7-3.

C. Procurement, Disbursement and Allocation of Bank Loan

1. Procurement

7.06 Procurement for the project will be carried out in accordance withthe rules of the lending agencies, which generally require international com-petitive bidding (ICB). Preparation of the bid documents is being carried outby SOCOMINE and the other consultants, who will assist SNIM both in selectingcontractors and in contract negotiations. Procurement has been divided into18 packages, separating supply of imported equipments from construction workin Mauritania. These arrangements, previously used by SNIM on other works,appear best-suited for this kind of project in Mauritariia. A detailed pro-curement schedule is given in Chart 7-4.

7.07 The Bank loan will finance the following equipment items, all inforeign exchange and all to be procured under ICB or international shoppingprocedures in line with the Bank's Procurement Guidelines: (i) all ore-handling equipment in the beneficiation plant; (ii) miscellaneous equipmentin the beneficiation plant; (iii) railroad ore wagons to transport ore overthe main line; and (iv) the civil works contract. The proportion of the Bankloan allocated to the latter has been estimated to cover the total foreigncost of the contractor's equipment and back-up maintenance personnel. Localcosts will be born by SNIM. International shopping for Bank financed items isnot expected to surpass some US$2.0 million (or about 10% of the total valueof items) under categories (i) and (ii) above. There will be no internationalshopping under category (iii); and the list of items to which internationalshopping will apply, has been agreed with the Bank. None of the equipmentitems in the project are produced locally and, therefore, no local supplierswill be prequalified for such items on the Bank list. For the civil works

-49- Chart 7-3

MAURITANIA: THE GUELBS IRON ORE PROJECTGENERAL IMPLEMENTATION SCHEDULE

1979 1980 1981 1982

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

MineEcquipment - --

Preliminary Works . _ _ -_ _

Treatment PlantEquipment . _ _ _ _ _ _ _Civil Works _ _ _Electrical Equipment Erection _ _ _ _Steel Framework and Mechanical Erection _ _ - = =

Power PlantEquipment - _ _ _ _Civil WorksElectrical Equipment ErectionSteel Framework and Mechanical Erection

PortEquipment _Civil VVorks Erection

Industrial BuildingEquipmentCivil Works _ _ _ _ _ _ _

Industrial Infrastructural (Power, Water Supply)Equipment - -M

Erection

Housing _ _ _ _ _ _

Steel Frameworks

Earth Moving

* Start-up after Completion Tests

Industrial ProjectsApril 1979 World Bank - 20296

-50-

Chart 7-4

MAURITANIA: THE GUELBS IRON ORE PROJECTPROCUREMENT SCHEDULE

1979 1980 1981 1982

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

LOT 1 - Beneficiation _ ;_ LCrusher . ...Aerofalls .*.,_ J ......Screens and Separators m ...-

Conveyors . ......- -

Miscellaneous _ .....

LOT 2 - Mining EquipmentDrills - - ....Shovels _t _ ID umpers LDozers, Graders and Other Automotive ,,.! _

LOT 3 - Port Equipment and Erection

Ore Handling ...Shipl oader ,,_,__,_r

Bucket Wheel Reclaimer ,_..

LOT 4 - Rail RoadLocomotives 2.......Wagons ......Rails and Other Track Equipment , ,,_, ...

LOT 5 - Power Plant Equipment and ErectionGenerating Sets . . .....Auxilaries

LOT 6 - Treatment Plant Electrical Equipment and Erection _,- .,

LOT 8 - Steel Framework _

LOT 9 - Housing _ ,_ ,

LOT 10 - Equipment for Industrial Buildings '. _, ,_M - -.

LOT il - Pipe, Power, Gat, Substation Equipment * -

LOT 12 - Engineering _ 7 LOT 13a - Civil Works _

Treatment PlantIndustrial Building . _ _Port FacilitiesPower Plant

LOT 13b - Earth Moving

LOT 14 - ErectionTreatment Plant Framework and Mechanical _ .Power Plant FrameworkPort

LOT 15 - Pipes, Power Lines, Substation Erection * V

* Mail Tender DocumentsV Bid Closing* Placement of Orders

_,_Bidding Procedure_Manufacturing or Contracting....... Transport- . _Mobilization

Industrial Projects VUorid Bank - 20297April 1979

- 51. -

contract there might be a local contractor interested in bidding. However,

because of the large size of the contract, it is likely that the local contrac-

tor would participate through a joint venture with established foreign entre-

prises. Depending on the terms of the venture, it will have to be established,

following Bank guidelines, whether the joint contractors would be entitled to

the normal 7-1/2% preference granted to local contractors in the evaluation of

bids.

7.08 Financing of the railroad ore wagons will be shared between the

OECF (Japan) under untied financing, and the Bank. Since the OECF procure-

ment guidelines require that the bid price, as well as the final contract,

be quoted in Yen, the wagons will be financed in parallel. This may easily be

achieved since the cars are to be procured in several lots (starting in 1979

through 1981), according to a standard design, and the lots can be structured

so as to accommodate the earmarked amoints of the two institutions. The

tentative allocation of procurement packages between the Bank and the other

sources of financing is detailed on the following page.

2. Allocation of Bank Loan and D)isbursement

7.09 The allocation of the Bank loan will cover the following foreign

exchange items:

Allocation of Bank LoanAmount of

Category Loan Allocated(US$ Million)

1. Ore-handling Equipment in Beneficiation Plant 13.5

(Lot 1-7) Primary Crusher/Screening Magnetic

Separation/Concentrates/Waste (including spareparts and foreign freight)

2. Miscellaneous Equipment in Beneficzation Plant (Lot 1-8) 7.4

Dust Control/Sampling/Ventilation/Filtration(including spare parts and foreign freight)

3. Railroad Ore Wagons (Lot 3-4) 11.4

(including spare parts and foreign freight)4. Civil Works (Lot 13a) 18.0

5. Interest During Construction 9.7

Total 60.0

7.10 The financing of interest during construction is justified, as it

relieves Mauritania of the burden of p.aying hard currency (of which it finds

itself desperately short at this time), during project implementation.

7.11 As noted above, the Bank loan is expected to be disbursed against

100% of foreign expenditures, except for the civil works contract should it be

won by a Mauritanian firm, according to the following schedule:

-52-

hAURITANIA, GUELBS IRON ORE PROJECT

ALIOCATION OF FINAd1CING AND PACKAGES BY CO-LENDERS

(0S$ Thou nde)

JOINT ANA8 FUNDS (165) SNIM'.CATEGORY CCCE EIB IBRD 0EOF BAD OPEC KOWAIT/SAODI/?ADES/AU DIIABI Shene- TOTAL

__________ 50 30 60 15 12 5 45 65 35 20 h.1dev.

FOREIGN EXCRMGE

LOT 1 - Benefici.ti..1-1 Primtsr Croer

)1-2 Aerof-ll Mili.1-3 B.11 Mii. 24,033 3,000 2,000 29,0331-4 Semons 2,1-5 Megoxetie Oepevetete

15,509 11,7581-6 C-nvny-vn 21,233

21,2~331-7 HOndling Equipnent I1-O 2i0ceii0neeee <le0t collet- 20,900 24,651

tien, Ornce., etc. )

SU3-TOTAL LOT I 86,675

LOT 2 - Mlni"e Epeinnient )2-1 Pviery Bhast Hoie Drille2-2 S..e.de-y BlNet Hel. Dciii. J 4,578 4,378

2-3 Eleetticel Sh-el nd Recleieee 22,709 22,709 A/

2-5 Despote (120 tee).2-6 6De-ere (80 tces) | 21,630 21,630 */

2-4 Wheel Ledets) 2,423 2,4232-7 Creoin- D..ee j2-8 Wheei D ee. 5,646 5,6462-9 Metetgredece J)2-10 Autective (v-cice.) 2,294 ) 2,294

SUB-TOTAL LOT 2 59,080

LOT 3 - Pert

3-1 OhepHeeden S 10,798 10.7983-3 Bucket Wheel Reeleicet

LOT 4 - Raliroed4-1 ihenting Loecmeti-ee 1,334 1,3344-2 Main Leccortice. ) 6,000 2,221 8,221

4-3 O-e Wege.e 11,356 5,179 2,301 18,916

4-4 Reili, Tneck Eqiîp.nntl4-5 Teieceevunieciec J 2,000 8,502 10,502

SiB-TOTAL LOT 4 38,973

LOTS 5 & 6 - Pewer Pleut5-1, 5-2, 6-1, 6-2, 6-3 44,727 4,355 49,082

LOT 7 - Miceleneee Mechic 388 88

LOT 8 - Sttel F-ework0-1, 0-2 Plant, Indeeccini B-3 Neiidi-nt, Pewer Plent J 25,508 1,786 27,294

LOT 9 - hou ine9-1, 9-2, 9-3 Zoeer-te, Ne..dhibee 12,635 2,941 15.576 hi

LOT 10_- Ecuip3ee fer Beildinne 1,758 1,756

LOT il - Piping, Water Supply,P.enn Line, Sebettieun 3,019 250 3,269

LOT 12 - Snuic..nine 25,898 1,376 27,274

LOT 13 - (e) Civil W-eke 18,024 18,024<b) Iertb Marine 8,347 8,347

S00-TOTAL LOT 13 26,371

LOT 14 - irectiec--PceeerkM.ehec.ie1 E.in.tent 19,387 1,895 21.202

LOT 15 - Oceetien--Ele-tnic-l_ Pe-r Line.. Piping 13,649 949 14,598

LOTS 16 & 17 - Develement COMLNOR 6,193 6.193

LOT 10 - Prefeeeien.1 Tr-inino 3,705 273 3.978

0UB-TOTAL LOTS 1-18 53.636 3 215,9 77 1 0 00 62,61 392,589

ChANGE IN WOfIN01 CAPITAL 6l,910 16i9îo

INTEREST DURING CONSTRUCTION 9.740 3,680 13.140 26,560

sUB-TOTAL FOREIGN EXC8ANGE 3,j36J 33,527 60,20 15.977 12,672 2.000 165,296 92 931 436.059

LOCAL 00ST1 (Fied Reset., Workitgeitel. mEntent devine Cen..tvetiee) 3,000 1,090 40 510 44,600

TOTAL ALLOCATION 53. 30 33.527 60.020 19 12672 s5ooo 166,j1 6 U T 4800659

TOTAL CONTRIBUTION 50,000 30,000 60,000 16,000 12,000 5,000 165,000 142,059 48 5

l/ Eeiedoe CS$34,767 thoeeeede On mLining qeip.nt; US$1,339 illien On engin_ning npe nee ond Up$705 thouemnd On Inetolætion «enene ever 1903/88._/ Heueing .p..onent hae been -ede..d by US$1,223 million, e£ chinh US$0.924 m7illion Os le feeigne otte.

S/ Opar- veqeironen included in total co.t cf individuel peekege.

Indeetriel Proiert- Dneertemer

- 53 -

Estimated Disbursement Schedule for Bank Loan(US$ Millon)

Calendar 1980 1981 1982 1983Quarters I-II III-IV I-II III-IV I-II III-IV I-II

Semi AnnualDisburse-ments 3.0 5.0 12.0 13.0 15.0 10.0 2.0

VIII. FINANCIAL ANALYSIS

A. Methodology Used in Financial Projections

8.01 Separate projections have been made for COMINOR and for the restof SNIM. Since COMINOR exports all of its production at prices set in USdollars, and since all capital and operating costs for the Guelbs project(which primarily involve imported items in any case) have been estimated inUS$, the financial projections for COMINOR have also been prepared in US$.The remaining entities comprising SNIM on the other hand, consist primarilyof existing operations, geared largely towards the local market, for whichbudgets are therefore prepared by SNIM in local currency terms. Hence, thecorresponding financial projections have also been made in UM. Finally,consolidated statements for SNIM as a whole have also been generated in UM,using an exchange rate of US$1.00 = UM 45. The projections have been ex-pressed in current terms, through the application on mid 1977 prices of anaverage rate of inflation of 8% p.a. for 1978-79, and 7% p.a. thereafter.The main assumptions used in the financial projections are summarized below,with more details provided in Annex 8-1.

B. Production Build-up and Sales

8.02 The production build-up assumed for both the Kedia and the Guelbsores is based on SNIM's short-term sales forecasts and a recently revised mineexploitation program prepared by SNIM/SOCOMINE. This assumes a reduction inore exports in some years, in line with the market developments projected inthe market chapter of this report. COMINOR's sales, assumed equal toproduction, would evolve as follows:

- 54 -

COMINOR's Projected Ore Sales(Million Tons)

1978 1979 1980 1981 1982 1984 1986 1988 1990(Actual)

6.5 /a 9.3 10.0 10.7 10.7 14.0 13.0 12.0 13.0

/a The low sales volume of 6.5 million tons of ore for 1978 resultsfrom both the cumulative impact of inadequate maintenance andproduction disruption which were due to guerilla activity in thatyear.

These projected sales reflect a cyclical pattern comparable to that experi-enced historically in the international iron ore market, and include a slowimprovement up to 1980 (due to a gradual recovery of the steel industrystarting in the late seventies), with a simultaneous increase in COMINOR'sproduction capacity as Phase 1 starts up. This is followed by a high level ofsales between 1983-85 when world market demand and supply are expected to bein balance. After 1985, however, when many new iron ore mines might possiblycome on stream, another low cycle in the market is projected, with reducedsales as a consequence.

C. Operating Costs

8.03 Operating cost projections for the iron ore operation were firstprepared by SNIM/SOCOMINE in 1976, but were revised in mid-1977, and againupdated in early 1979. This updating included a revision of operating costsof the beneficiation plant and adjustments to the costs of mining, handlingtransport and overheads, to take actual 1976-78 data into account. Also,the detailed budget prepared by SNIM for 1979 was taken into account. In thiscontext it should be noted that following a general improvement in operationsand cost control in the recent past, combined with some reduction in expatriatemanpower and a general commitment to austerity, some costs are presently lowerin real terms than they have been during the last three years. However,should there be resumption of Polisario activity, which in late 1977 and thefirst half of 1978 had a negative effect particularly on maintenance costs,operating costs would have to be expected to return to their higher 1978levels and, more importantly, production and exports could be expected todrop below projected levels. For the purpose of the projections, it has beenassumed that operations which returned to normal by end 1978 will remain undersuch condition.

8.04 Fuel is an important component of COMINOR's operating costs, rep-resenting 4 to 6% of the total. Currently, SNIM imports fuel through DCPP(its petroleum products distribution organization) and sells it to COMINORat approximately international prices. However, the Government has recentlytaken the decision to separate DCPP from SNIM and has allowed SNIM to importits fuel directly, without having to purchase it from an independent Govern-ment fuel distribution organization. At the same time, the Government has

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agreed not to require SNIM to purchase its fuel from the newly-built refineryat a price higher than the world market price. Indeed, because of its uneco-nomical size, the refinery would require a much higher sales price if it is tobe financially viable, and COMINOR would be unfairly handicapped if it wererequired to purchase its fuel at such a price in the future.

8.05 Depreciation on existing and new assets has been calculated inaccordance with SNIM's normal accounting practices. This involves straightline depreciation over a period of 20 years for civil works, 10 to 14 yearsfor railway stock and facilities, and 3 to 5 years for fixed and mobile equip-ment respectively. This appears to be excessively rapid in some cases and SNIMwill therefore review its depreciation practices during the course of 1979.

D. Dividends

8.06 No dividend policy has yet been specified for SNIM, and discussionsbetween the Mauritanian Government and the new shareholders on the subjectare still on-going. For the purpose of the financial projections, the dis-tribution of dividends has been assumed equivalent to an annual return of 10%on all new shares, except during the construction periods for both Phase 1 andPhase 2. In any event, SNIM will not be allowed to declare or pay dividendsunless (i) certain specific financial ratios are met (para 8.20); and (ii) SNIMhas accumulated the retained earnings necessary to ensure sound financing ofPhase 2 (paras. 8.08 and 8.16).

E. Royalties

8.07 In recent years COMINOR has not paid income tax, but has been sub-ject to a royalty of 10% on FOB ore sales instead; while SNIM's other unitshave been charged taxes proportional to sales. Under the draft of a ConventionParticuliere, detailing the conditiorLs of establishment and operation of thereconstituted SNIM, all these charges will be replaced by a single royalty onore exports for a period of 20 years. For the period 1978-83 this royaltywill be equal to a certain percentage that increases with the volume ofexports, according to a series of simple formulae. Basically, these implya levy of about 5% of FOB value on exports of up to six million tons p.a.,roughly 5.5-6% on total exports of up to 10 million tons, and 6.5-7.0% onexports of up to 14 million tons p.a. These rates will, however, be subjectto an annual review carried out in the light of the actual financial situationof the company and with the approval of the Bank (para 6.13). For the year1984 and thereafter this will be rep:Laced by a single rcyalty rate of 10% ofFOB value, regardless of sales volume. The Government has, however, agreedto defer SNIM's royalty obligation in order to enable the company to meetpossible cash shortfalls (para 6.13). SNIM is not subject to import dutiesbut does pay miscellaneous indirect taxes on goods, personnel and services,which together amount to roughly 3% of FOB ore export value. The signing ofa Convention Particuliere satisfactory to the Bank between the Governmentand SNIM detailing the fiscal provisions mentioned here above as well asother economic and juridic conditions under which SNIM will operate, is acondition of loan effectiveness.

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F. Financing of Phase 2

8.08 It is anticipated that Phase 2 of the project will be financed byUS$250 million in new loans, the balance (US$187 million) being derived fromSNIM's cumulated cash surplus. The anticipated composition of these loans isas follows: (i) US$100 million from international institutions for 14 years,including 4 years of grace, at an interest rate of 10% p.a.; and (ii) US$150million of suppliers' credits, bearing an interest of 8% p.a. with reimburse-ment over 8 years, commencing as of the commissioning of Phase 2.

G. Other SNIM Units and Head Office

8.09 The financial projections for SNIM's other operating units arebased on data submitted by SNIM--essentially the actual operating resultsof the existing units, the feasibility study for the new mini-steel plant,and detailed sales projections for each of the different units. Steel milloutput--primarily reinforcement bars for construction--is projected to in-crease gradually from 1,500 tons during the first quarter of 1979, to 10,000tons in 1980. Except for the period 1981-83, when 20-30% of production isto be sold in Senegal, the output is expected to be for the local marketalone, at a price corresponding to the current price of imported steel (in-cluding about 20% of CIF value in import duties). Production and sales ofSNIMEX, the explosives factory, are projected in line with COMINOR's explo-sives requirements. Gypsum production, for export to Senegal, is projectedat about 17,000 tpy until end-1979. Starting in 1980, an additional 26,000tpy will be extracted for sale at cost to a new plaster project, in whichSNIM is to have a minority holding. Sales of petroleum products by DCPP areexpected to increase at about 4% per annum until the late 1980s, while theproportion of its total sales going to other SNIM units--currently 55%--isexpected to decrease as the local market outside SNIM develops. As alreadymentioned in para. 3.02, these last two units will, however, eventually bedivested from SNIM.

8.10 Operating costs of SNIM's central organization in Nouakchott areprojected on the basis of budgets prepared by SNIM, which assume a gradualbut substantial reduction below 1976-77 levels following the implementationof the reorganization and streamlining program which SNIM has recentlyprepared (para. 3.09). This program, the details of which have been reviewedby the Bank, is expected to be implemented over 4 years gradually generating,by the end of this period, recurrent cost savings in the central organizationof 30%-40% compared to 1977-78 levels. SNIM committed itself to implementthis program and to review its results with the Bank from time to time. Costsother than operating costs consist primarily of additional expenditures forthe completion of the Head Office building and expenditures on special studies,research, exploration and training. The possibility of transferring theheadquarters from Nouakchott to Nouadhibou is currently being discussed bythe Government and SNIM. The costs of this transfer would be to some extentcompensated by the recurrent savings resulting from a simultaneous reductionin all overhead costs not directly related to the iron ore operations. Before

- 7

implementing the decision, a detailed cost/benefit analysis wiil be undertaken

to ensure that the transfer would not jeopardize the progranr of overhead costsreduction to which SNIM is committed.

8.11 Repayment of loans pertaining to SNIM units other than COMINOR, re-late primarily to a US$2 million loan for the office building, loans totalling

FF 17.6 million (US$3.6 million) for the training centers, a IJS$2,4 millionequivalent soft-term loan from Abu Dhabi, and a FF 27 million (USS5).5 million)suppliers' credit for the steel project. In addition, other miscellaneousloans totalling about US$5 million were oustanding at the end of 1978. Afurther US$4.2 million of committed loans is expected to be disbursed to theother SNIM units in 1979, whilst a US$5 million revolving credit from theUnion des Banques Suisses (UBS) is ex,ected to be renewed îri 1980.

8.12 In early August 1978, the Government and SNIM reached agreement onthe financial separation of SOMIMA and the liquidation of the miscellaneousdebts (comprised of advances made by SNIM in favor of the treasury, advancesmade for the refinery, plus compensation payments made, or ialling due, tothe former shareholders of MIFERMA, less taxes owed by SNIM to the State).The terms of this agreement constitute a significant effort by the Governmentto put SNIM on a sound financial footing, and may be summar:Lzed as follows:(i) the undisbursed portion as of January 1, 1978 of the long term debtscontracted by SNIM on SOMIMA's behalf and SOMINA's current expenses paid bySNIM on the State's behalf after the separation of SOMIMA w-ill be taken overby the State; and (ii) UM 1,383 million (US$30.8 million-representing thebalance as of January 1, 1978 of the net State debt to SNIM referred to aboveincluding the outstanding amounts of the long term debts contracted on SOMIMA'sbehalf - ) will be paid back by the Government in the form of a credit overthe period 1978-85, according to a specific repayment schedule, whereby prin-cipal and interest 1/ payments would correspond to a rebate of about 25% onprojected royalties. This has been confirmed with the Government.

8.13 Following the separation of SOMIMA, SNIM's negative working capital(excluding that of COMINOR), increased to about UM 1,393 million (LJS$31.0million) by the end of 1979 of which UM 3,068 million (US$68 million) wascomprised of payables and bank overdrafts, essentially reflecting SOMIMA'scumulated cash losses. It has now been agreed that the UM 1,780 million(US$39.5) that SNIM has outstanding in the form of overdrafts witt, a consor-tium of local banks will be repaid in 1979, with the additional equlity paidin. Effective repayment of these bank overdrafts or conclusion of a satis-factory agreement to this effect will be a condition of effectiveness of theBank loan.

1/ Equivalent to about 5.5% p.a.

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8.14 The Government has agreed that SNIM will not have to cover any ofthe compensation payments pertaining to the nationalization of MIFERMA,either directly to the shareholders or as repayment of loans contracted bythe Government to cover previous payments. This is implicit in the amountsof the rebate of royalties referred to above (para. 8.12).

H. Future Profitability and Financial Position

1. COMINOR

8.15 COMINOR's projected production, sales and financial data aresummarized below from Annex 8-2.

C0"-.3Cr 5u s. -v. P H.x*ct_6 F -. :Cc1d 3i:&_to

591.; '_ t~ - 2_'re ;t ?rc' cs

i 99 195 3 19 31 I: S31 3 - 5 1993 299

.055ea " ;ffi9V S,*s) 9,33U 19,030' 13,/~, 93J7I 1 2, -J :,G0 12,333 32,020 1 ,C3,

6_s J 'S 3 1 202.S 2R331 296.9 373.4 13 2. 324.13-.

7cti3<> Cost C nood-- Sold 61.1 76.. 50.9 86.1 119.3 159.0 13.4,i 193.0 263.2

,;et ?rSf!t After Tax 2.6 12.3 35.0 .6 22.2 3S.9 59 .7 10. 7

3 ' 7-~er-. Des 3C.9 91. 0 2,6.0 213.z. 325.6 333.4 233.7 57 3 6

1 7 1 59.7 r34.7 '7 57.9 1.7.9 1i-97.3 1' .c

1;53.7 166.0 219.0 2!9.8 230.5 317.0 422,4 62.3 37..3

Ci:: Su=3:: 3.9 4.5 C0 62.1 312.9 4. 5 35. 20 1, 3

A`-'S7 CS e 2.0 7.5 18.7 20.4 7.5 1r. 4 15.3 5., (5.99

X-.t -- _ T %.,%.o 17:83 ^':63 .':49 3:417 CJ 47 43 51 37: , 42:6 49 :S1

.z;re; R:_ c /.97 1.24 3.21 4.57 4.59 4.87 5. `9 5.14 2 7-

Je'- S7cvice Cove._ôg Ttatio 1. 4 3.'.2 4.77 '.49 4.58 3.89 3.22 1.52 1.92

While COMINOR's projected results fluctuate widely, on the whole, performanceis expected to be satisfactory. COMINOR is projected to have generated acumulated cash surplus of about US$62 million by the end of 1982 and aboutUS$103 million by the end of 1983. This cash surplus remains a major potentialsource of financing for any cost overruns not covered by the basic financingplan.

8.16 Similarly, COMINOR's cumulated cash surplus is projected to increaseby a further US$118 million (current terms) over the period 1983-90, even afterhaving contributed some US$187 million to the financing of Phase 2. Duringthe same period, COMINOR's debt:equity ratio is not expected to exceed 55:45or its debt service coverage ratio to fall below 1.8. It must be recognized,

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however, that the projected cumulative cash surplus for the entire period1979-90, of US$180 million, would be wiped out if revenues from iron ore saleswere to fall below the levels assumed for the period, by a mere 5% on average.However, given the conservative export prices and cyclical sales volumes assumedin the projections, this is thought unlikely, and the expectation that Phase 2of the Guelbs project can be implemented without major financial difficultiesappears, therefore, to be reasonably good. Finally, if worst came to worst,COMINOR's financial situation could be remedied by deferring the export royaltyobligations for some years.

2. Other SNIM Units Excluding COMINOR

8.17 Although COMINOR dominates SNIM, the latter's financial situationis also greatly affected by the results of its other units. Combined finan-cial projections for all these other units are given in Annex 8-3. Excludingthe equity, the net cash shortfall of these units, for the critical period1978-82, would amount to about UM 2,5'90 million (US$57.6 million). Thereforeof the total new equity, US$65 million will be used in 1979 and 1980 to coverthe losses of the other units and to restructure their working capital. Inparticular the reimbursement of the overdrafts SNIM has with local banksas a result of the losses incurred by SOMIMA (para 8.12) is one of the maincauses of the large cash shortfall of the other units during the first year.It implies a cash drain on the company of about UM 1,780 million in 1979 whichwill not be fully compensated during the period 1979-82 by the tax rebateswhich are to compensate SNIM for the SOMIMA losses which the Government hasagreed to assume. However, even excluding these the net cash shortfalldirectly attributable to the other units is still substantial as it amounts toabout UM 1,700 million (US$38 million). DCPP, SNIMEX and the gypsum plant allhave a positive contribution margin. That of the steel plant on the otherhand is negative during its first 4 years of operation until 1983, as thenormal losses of the learning process are compounded by the heavy repaymentburden of the suppliers credits (up to 1982-83) for which the original loanperiod was too short in relation to the nature of the project. However, as isindicated by the data for 1983-85, even with a positive contribution from thesteel plant, the consolidated margin is inadequate to cover the head officeand support services expenditures generated by these very same units. In thiscontext, however, it should also be rnoted that there is some contention as tothe proportion of these expenditures which may rightfully be attributed toCOMINOR. In the financial projections COMINOR has been allocated as generaloverheads only the costs of the overseas offices (Annex 8-1, page 4), or about16% of the net total, whilst in the financial and economic rate of returncalculations (for maximum conservatism), all those overheads pertaining evenvery indirectly to the iron ore operations have been included (Annex 8-5,page 1). This means that the overhead cost allocated to COMINOR in this caseamounts to 70% of the total for SNIM as a whole. In any case, past overheadexpenditures have been excessive (in relation to SNIM's requirements) and havetherefore been tabulated separately in Annex 8-3 in order to show the signif-icance of the assumptions that SNIM' s planned overhead reduLction programme(para 3.09) will prove successful, and thus allow maintaining such costsrelatively constant in real terms, despite an increase in the volume ofCOMINOR's annual operations of the o-rder of 65%.

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3 SNIM

8.18 Consolidated financial data for SNIM as a whole are summarized belowfrom Annex 8-4.

SNIM: Summary of Projected Consolidated Financial Indicators(UM million)

1979 1980 1982 1984 1986 1988 1990

Total Revenues 7,497 9,603 13,357 20,263 21,705 22,453 28,348

Net Profit After Royalties(NPAR) (421) 203 1,975 1,681 2,700 975 (848)

Cumulated Cash Surplus /a 368 690 3,125 7,959 9,250 10,064 9,326

Cumulated Cash Surplus(US$ million) 8.2 15.3 69.5 176.9 205.6 223.7 207.2

Long-Term Debt 1,913 5,033 14,475 13,727 11,453 16,672 16,466

Total Equity 8,912 9,791 14,481 15,993 20,708 24,261 18,875

NPAR as % of Revenues (5.6) 2.1 14.8 8.3 12.4 4.3 (3.0)Debt/Equity Ratio 18:82 34:66 50:50 46:54 36:64 41:59 47:53Current Ratio 1.58 2.44 4.50 5.10 5.00 4.87 3.12Debt Service Coverage 0.5 1.6 3.8 3.4 3.3 1.9 1.6

/a After deduction of SNIM's contribution to the financing of Phase 1 andPhase 2 of the Project.

Except during 1978-82, when the cash losses of other units have a negativeeffect, SNIM's financial situation is generally similar to that of COMINOR.SNIM's net consolidated, cumulative cash surplus for the period 1979-82 isprojected to amount to US$69 million and US$138 million for the period 1983-90.With an overall debt service coverage ratio which will be on average above2.0, and a projected maximum debt/equity ratio of 50:50, throughout theperiod 1979-92, SNIM should be able to borrow some additional funds ifrequired. The conclusions drawn above (para. 8.16) at the level of COMINOR,with respect to the financial viability of the operation, and the expectationthat Phase 2 will be adequately financed, therefore, remain valid at theconsolidated level. In order to ensure that SNIM's cash generation willbe preserved for Phase 2 (and for Phase 1 overruns if necessary), SNIM hascommitted itself: (i) not to distribute any dividends, unless retained

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earnings accrue according to a schedule agreed upon with thes Bank 1/; and (ii)to place the cumulated cash in a special account at the Central Bank. Simi-

larly, the Government will guarantee that any foreign exchange deposited in

this account will be made available to SNIM, as and when required for the

purposes of Phase 1 cost overruns and of Phase 2 financing.

I. Break-Even Point

8.19 In 1986, at full production of Phase 1, the profit break-even point

for COMINOR would be about 66% of production capacity. Altiernatively, average

export prices of ore at full production could fall by 19% before COMINOR would

show a loss. The cash break-even point would be only 57% oF capacity due tothe favorable lending terms.

J. Financial Covenants

8.20 SNIM has agreed to the following financial covenants: (i) to main-

tain at all times, unless the Bank should agree otherwise, a debt/equity ratio

not exceeding 60:40, a current ratio of at least 1.3:1 and a debt serviceratio of at least 1.5:1; (ii) until completion of Phase 2 of the project, not

to contract any additional loans above US$5 million annually without prior

consent of the Bank; (iii) not to undertake--without prior consent of theBank--any new projects, either on its own behalf, or through subsidiaries, orany capital expenditures outside the project aggregating to more than US$5million annually; and (iv) not to invest in any other corporate entity more

than US$2 million annually without prior approval of the Bank. SNIM will not

distribute any dividends unless the above financial ratios are met and theretained earnings are accumulated as cash up to the amounts required for the

financing of Phase 2 (para. 8.18).

K. Trust Arrangement and SNIM Operational Account

1. Purpose

8.21 To provide the Bank and certain other lenders with an adequate debtservice payment mechanism as well as with some additional, albeit limited,security, and to help maintain SNIM on a sound financial footing and minimize

its dependence on the Government with respect to the foreign exchange it needs

for its operations, the Bank has sought to obtain agreement that:

(i) proceeds from the sale of iron ore will be allocated as amatter of priority to debt service payment, and not divertedfor other purposes; and

(ii) sufficient foreign exchange for SNIM's day-to-day operationof its mine related facilities will be at its disposal at all

times.

1/ US$25, 75, 125 million, respectively, by 1983, 1984 anil 1985.

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2. Description

8.22 Under normal Mauritanian foreign exchange procedures, all proceedsfrom exports must be repatriated. By derogation thereto, part of the ironore export sales proceeds will be kept abroad as follows.

8.23 SNIM will covenant that SNIM's purchasers will be instructed tomake all payments of sales of proceeds directly to a designated account atits bank, the Societe Generale of Paris (SG Paris). SNIM will be underan obligation to put into all its sales contracts a provision to that effect.As a condition of effectiveness, such payment instructions shall have beengiven with respect to the existing sales contracts.

8.24 A Set-Aside Agreement will be entered into between SNIM, the CentralBank of Mauritania, the lenders and the SG Paris, and a Trust Deed will beentered into between SNIM, the Central Bank, the lenders and the Law DebentureCorporation of London, the latter acting as trustee. SG Paris, as recipientof all iron ore sales proceeds will be under permanent irrevocable instruc-tions to transfer monthly (with priority over any other allocations or trans-fers of proceeds received) to a trust account in London such amounts as willbe required to (i) accumulate therein the necessary amounts for the nextsemiannual debt service payment due (through equal monthly deposits of 1/6 ofthe next semiannual payment due and (ii) accumulate and maintain therein apermanent cushion equivalent to the next semi-annual payment due. The tableon the following page details year by year what amounts are affected by thetrust arrangement.

8.25 Societe Generale of Paris will further be under permanent instructionsin the Set-Aside Agreement to transfer monthly out of the remaining funds,certain minimum balances to a "SNIM Operational Account". Such amounts willbe determined on the basis of annual budgets for COMINOR's anticipated foreignexchange operating expenses which will have received prior approval fromthe Central Bank. The remaining funds will then be repatriated to Mauritaniaand credited to SNIM's account at the Central Bank.

8.26 In addition to the above, as security for their loans SNIM willprovide the participating lenders collectively under a Security Agreementwith (i) an unconditional global assignment of all future sales proceeds fromthe sale of iron ore and (ii) specific assignments of sales proceeds undercontracts covering at all times 50% of the iron ore production. SNIM alsocovenants in the Loan Agreement not to assign sales proceeds to any otherparty, unless agreed by the Bank. The lenders have agreed not to notify thepurchasers of these assignments except in the event that:

(i) SNIM fails to instruct any purchaser as provided inparagraph 8.24 and such default shall continue for aperiod of 30 days after notice from one of the lendersto SNIM;

(ii) SNIM changes existing payment instructions to its buyers;

MAURITANIA - GUELBS IRON ORE PROJECTFLOWS OF FOREIGN EXCHANGE UNDER THE PROPOSED TRUSTEE ARRANGEMENT

(US$ Million - Current Terms)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

IRON ORE SALES 128.8 164.1 202.8 233.1 297.0 373.4 399.6 390.7 387.6 384.1 391.2 498.7 616.0 659.2

TRUSTEE ARRANCEMENT

1. Debt Se SvicePhase 1 a l'O 6.5 10.8 17.3 22.0 32.0 39.9 40.3 40.5 39.7 38.7 37.0 35 9 36.3Phase 2 - - - - - 2.3 9.1 18.2 20.6 51.2 48.7

TOTAL 1.0 6.5 10.8 17.3 22.0 32.0 39.9 40.3 42,8 48.8 56.9 37.6 87.1 85.0

2. Annual rncrement (Decrease) in DebtService Cushion - - - 11.0 5.0 3.9 .2 .1 3.0 4.0 .4 14.7 (1.0) (1.8)

3. Total Foreign Exchange forDebt Service (1+2) 1.0 6.5 10.8 28.3 27.0 35.9 40.1 40.4 45.3 52.8 57.3 72.3 86.1 83.2 w

es % of iron on sales 1.0 4.0 5.3 12.1 9.1 9.6 10.0 11.3 11.7 13.7 14.7 14.5 14.0 7.9

4. Average Amount in Trustee Account .2 1.6 2.7 8.4 21.4 27.5 30.1 30.9 34.9 40.2 44.8 55.9 64.2 62.5

For all loans excluding interest payment for IBRD loan during period of construction and including 1/5 of SNIM's existing debt outstanding.Includes spares, fuel and supplies plus expatriate salaries estimated at 70% of COMINOR's total operating costs.

dustrial Projects Departmentiy 1979

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(iii) SNIM fails to provide the lenders with assignments withrespect to ore sales contracts together with a copy ofsuch contracts within 30 days after notice from one ofthe lenders to SNIM;

(iv) SNIM assigns sales proceeds under any contract in amanner inconsistent with the above requirements; and

(v) the funds transferred during any given month to the trustaccount are inferior to the monthly debt service deposit as aresult of a deliberate action by SNIM, or as a result of anattachment by third parties of funds in the domiciliatoryaccount in Paris or of sales proceeds due to SNIM.

The right to notify the assignments to the purchasers and instruct thepurchasers to pay into a collective account at the SG Paris may be exercisedindependently by two representatives of the lenders designated by the lenders.However, a majority of two-thirds of the lenders could veto the decision ofnotification. Therefore, before notification, all other lenders will have tobe informed and will have seven working days to respond. As a condition ofloan effectiveness, the global assignment and specific assignments coveringexisting contracts shall have been provided to the lenders.

8.27 The above arrangements will protect the lending institutions par-ticipating in the arrangement without penalizing the Government unduly as itdeals only with obligations related to the Guelbs project. The table onthe previous page details year by year what annual amounts would be affectedby the trust arrangement, should all the colenders participate. Theseamounts vary over the next 14 years from 4 to 14% of annual sales proceedsand average 11%. 1/ At the same time the "SNIM Operational Account" willstrengthen the company by assuring that foreign exchange will be availablefor its day-to-day operations. Agreement on the principle of these variousarrangements has now been reached. Together with payment instructions forall existing contracts and specific assignments covering 50% of the produc-tion, the conclusion of the Set-Aside Agreement, of the Trust Agreement andof the Security Agreement will be conditions of effectiveness.

L. Financial Rate of Return

8.28 The incremental financial rate of return for the combined Phases 1and 2 is 5.4% before royalties, and 1.39% after royalties. If the US$20million of extraordinary contingencies are not included, the rates of returnare 5.8% and 1.7% respectively. These returns have been calculated by com-paring the situation "with" the Guelbs project with a situation "without" theproject; in the latter case COMINOR would maintain production at the Kedia at

1/ Assuming also the participation of one third of SNIM's existingcreditors exercising their rights of negative pledge.

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an average rate of 8 million tpy, which would assure a reasonable profit,

until exhaustion of the deposit in 1990. Details on the incremental financial

cost and benefit streams are given in Annex 8-5 1/.

Incremental Financial Rates of Return - Sensitivity Analysis(in %)

Base Case (before royalties) 5.4

10% Increase in Investment Costs 4.310% Increase in Operating Costs 2.910% Decrease in Revenues 1.6

10% Increase in Revenues 8.8

Slippage 1 year in start-up 4.8Base Case (after royalties) 1.3

US$20 million contingency eKcluded 5.8

The incremental rate of return does not provide a good indi.cation of COMINOR's

financial situation, as it is compensated for by the higher returns accruingto the existing operation. Also, no adjustment has been made in the calcula-tions for the costs that would be incurred on closure in 1990-91, if the proj-

ect were not to proceed, such as for resettlement and welfare payments, sincethese are not, strictly speaking, SNIM costs. Furthermore, the overwhelmingconcern of the major shareholder, the Mauritanian Government, is the higheconomic benefit of the project, extending the life of the mine, and thusdeveloping in the long term, the major productive sector of the country's

economy and the only sustainable activity in the northern part of Mauritania.

M. Auditing and Reporting

8.29 SNIM has its 1978 accounts audited by the French firm Helios andhas agreed to have its future accounts audited annually, by auditors accept-able to the Bank and to submit these to the Bank within four months after the

end of the year.

N. Major Risks

8.30 The major risk faced by SNIM/COMINOR is related to the recentPolisario guerrilla activity which could be very damaging to the future of theentire mining venture. Were such activity to resume at the level attained inlate 1977 and early 1978, it is possible that the company would not be able tomaintain a financially viable operation. In any case, it would have to beexpected that the contribution the -existing operations are assumed to make tothe financing of the project would decrease. The financial projections assumecontinued cessation of such guerrilla activity or at least a substantialreduction from the levels reached in 1977-78.

1/ A proportion of SNIM's head office costs that are indirectly related toCOMINOR, has been added to the financial cost streams derived from thefinancial projections, resulting in an aggregate allocation to COMINORof about 70% of the total head office and support service expendituresgenerated by SNIM's as a whole.

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8.31 The risk related to project implementation is two-fold: the qualityof project management itself and the possible damaging effect of guerrillaactivity during implementation:

(a) While SOCOMINE, the project manager, is a relatively smallconcern, it is staffed with experienced people many of whomoccupied management positions during the implementation andoperation of the original MIFERMA project, and it will inaddition be reinforced by qualified people from several largeconsulting organizations. To ensure that the entire SOCOMINEstaff will be assigned to the project full-time during imple-mentation, a covenant precludes SOCOMINE from taking on anyoutside activities which might be detrimental to the projectimplementation. With this restriction, overall project manage-ment during implementation is expected to be satisfactory; and

(b) Implementation could be adversely affected by a renewalof guerrilla activity, damaging essential equipment andseriously delaying project completion. Therefore, to provideCOMINOR with access to the financial resources which might insuch a case be needed, an additional US$20 million in the formof equity has been included as an extraordinary contingency inthe financing plan.

8.32 While the Government will guarantee repayment of the Bank loan toSNIM, a direct debt service payment mechanism will also be set up (paras. 8.21-8.27), to be built up and replenished by the Company's receipts from its ironore exports. This will assure automatic repayment of debt for a period of atleast 6-12 months, thereby providing the lenders with an opportunity to seek asolution in the event of difficulties. At the same time the Government willallow SNIM to open an operating account to be maintained outside Mauritaniaand to be replenished directly from iron-ore sales revenues. This shouldensure that SNIM has sufficient foreign exchange to meet its operationalrequirements at all times. Furthermore, to safeguard the Company's financialresources and ability to properly execute and operate the project, and toavoid any management diversion from other tasks, SNIM will not proceed withany investments that are unrelated to its iron ore operation without theprior consent of the Bank.

8.33 Another potential risk is that Phase 2 would not be implementedas scheduled, with the consequence that, after exhaustion of the Kediareserves, COMINOR would only be able to count on a production of 6 milliontpy from Phase 1, and would therefore operate below the break-even point.To counter this threat, the financing plan for Phase 1 has been designed sothat implementation of Phase 2 would not, under reasonably foreseeable cir-cumstances, be retarded because of financing problems. The proposed financingshould put SNIM on such a footing, that even a financing plan for Phase 2including a somewhat larger amount of debt, or a larger proportion of commer-cial loans than is proposed here (para. 8.08) would still be acceptable.Furthermore, it can be expected that many of the Phase l lenders and investors

- 657 -

would be willing to contribute to the financing of Phase 2. The financialprojections also indicate that, over the period 1983-90 (i.e., the yearspresently envisaged for completion of Phases 1 and 2, respectively) inclusive,SNIM will generate cash in excess of the US$187 million projected as theirown contribution to the Phase 2 financing. Finally, the covenant limitingdividends distribution should cause SNIM to retain the necessary cash genera-tion, whilst that on the Government (para. 8.18) should ensure that theassociated foreign exchange is also available.

8.34 The project faces the normal market risk of any iron ore exportproject. Nevertheless, SNIM is expected to produce a good quality iron oreat internationally competitive costs, and any marketing difficulties shouldtherefore, at most, be temporary. Also, the incremental amount of iron orewhich the project will introduce ontc the world market is relatively small.In any event, letters of intent amounting to about 50% of its production havealready been obtained, and the general response from the ore purchasers tothe sales campaign initiated by SNIM for the Guelbs production is quitefavorable.

8.35 Finally, the project is not expected to face any particular risksas regards mining and transportation, since these are merely an extensionof activities presently being carriecl out. Operations of the concentration/benefication plant, on the other hand, will constitute a new activity forthe Company. However, since the process to be employed is relatively simpleand well-proven commercially, and adequate training of operators is envisaged,no extraordinary difficulties are expected in running this plant satisfactorily.

IX. ECON041C ANALYSIS

A. Economic Rate of Return

9.01 In calculating the incremental economic rate of return (for whichthe major assumptions are given in Annex 9-1), the financial cost streamshave been amended by excluding payment of all taxes (export royalty andall indirect taxes), and shadow pricing Mauritanian labor costs. Indirecttaxes represent, on average, about 3% of FOB ore export value. The costs ofMauritanian laborers and foremen have been shadow priced at, respectively,30% and 50% of the financial costs. The corresponding reduction in operatingcosts is about 7%. Similarly, the local components of project constructionwork by contractors, and by SNIM's own force, have been reduced to take intoaccount indirect taxes and shadow-priced labor. The corresponding reductionis about 3% of capital costs. These assumptions are conservative for incomparing the "with" and "without" project situations, the shadow price oflabor in 1990 at the time the Kedia deposits would otherwise be exhausted,would be very much lower, due to the lack of alternative sources of employ-ment and the financially satisfactory nature of the project. All costs andbenefits in the return calculations are expressed in 1977 real terms.

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9.02 The benefit streams have been amended to take into account thecost of closing the mine, the town site of Zouerate, the communities alongthe railway line, and the Nouadhibou facilities, should the project not beimplemented. Few alternative means of employment or subsistence are avail-able in Nouadhibou, and none exist in the desert. Once the existing Kediadeposit is exhausted, all mining of iron ore would come to a halt and mostof the population - estimated at 40,000 - would have to be resettled in otherparts of the country (near the capital Nouakchott or in the agriculture landsalong the Senegal river). Because of the shortage of adequate infrastructureand the high cost of building in Mauritania, as well as of creating alter-native urban or agricultural employment, the resettlement cost is expectedto be high. On the basis of new or on-going projects with comparable compo-nents in Mauritania and neighboring Senegal, the resettlement cost has beenestimated at a minimum of US$2,000 per person.

9.03 The results of the incremental rate-of-return calculations are shownin the following table, indicating a "Base Case" economic rate of return forthe combined Phases 1 and 2 of 11.8%. If the US$20 million of extraordinarycontingencies are not included, this rate of return increases to 12.4%.The detailed calculations and sensitivity tests are shown in Annex 9-1.

Incremental Economic Ratesof Return - Sensitivity Analysis(in %)

Base Case 11.8Capital Cost Increase 10% 10.3Operating Cost Increase 10% 10.2Sales Revenue Decrease 10% 8.6Sales Revenue Increase 10% 14.71 Year Delay in Start-up 10.3Base Case with Pre-1978 Exploration and StudyExpenditures Considered as Sunk Costs 12.6

US$20 million contingency excluded 12.4

The economic rate of return is relatively high compared to the financial rateof return, because of the important indirect taxes paid by COMINOR and thehigh labor content of the operating costs. The sensitivity tests indicatethat there is little likelihood that the project would have an unsatisfactoryeconomic rate of return.

B. Foreign Exchange Effects

9.04 One of the most important benefits that Mauritania will receive fromthe project is its foreign exchange earnings. At full production, Phases 1and 2 are expected to yield incremental net foreign exchange earnings afterdebt service of US$14.0 million and US$51.0 million p.a. on average (in realterms) respectively. The payback period for the total foreign exchange com-ponents of the two phases is estimated to be about 3 years from startup ofPhase 2. Combining the existing mining operation with the two Phases of the

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project, COMINOR is projected to yield total net foreign exchange earningsof US$60 million p.a. in real terms, on average, over the period 1979-92.Further details on the foreign exchange effects are contained in Annex 9-2.

C. Other Benefits

9.05 Implementation of the project will maintain the mining operationsin existence, as well as further deve]op them. This, as outiined in ChapterII, is crucial to Mauritania in order to sustain Government revenues andforeign exchange inflows, and to create direct and indirect employment effects.In addition, the project will ensure the continuing existence of SNIM, whichthrough its training programs, geological research and project promotion, isthe main instrument for future development of mining activities and industryin Mauritania.

X. SUMMARY OF RECOMMENDATIONS

10.01 The following major assurances or agreements have been obtained.

(a) From SNIM

(i) to implement the Second Phase of the Project (paras. 1.04and 8.33);

(ii) to (a) strengthen its financial department, (b) keepseparate accounts for all its operating units and (c) notcommit itself to new projects without the prior consentof the Bank (paras. 3.08, 8.21 and 8.32);

(iii) to seek external financial support for those aspects ofits research and training activities which are primarilyof benefit to Mauritania rather than SNIM itself, and toperiodically report to the Bank on the progress of thiseffort (para. 3.12);

(iv) to sell its iron ore at world market prices and in returnfor convertible foreign exchange and to adopt a salesstrategy which shall maximize its sales revenues andprofits (para. 4.30);

(v) to report on the effort to develop the necessary new waterresources on an annual basis (para. 5.16);

(vi) to operate its iron ore installations with due regardto ecological and environmental safety standards and carryon a long term study c,n the effects of dust inhalation byworkers (para. 5.17);

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(vii) to obtain binding assurances from SOCOMINE not toenter into any other major engagement during projectimplementation which could hamper the execution of theproject (paras 7.02 and 8.31);

(viii) to establish and implement adequate arrangements forthe functioning of the expert committee and its reviewresponsibilities (para 7.04);

(ix) to review its depreciation practices (para. 8.05);

(x) to restrict dividend payments under certain financialconditions, and place the accumulated cash in a specialaccount in order to preserve it for the financing ofPhase 2 (paras. 8.06, 8.18 and 8.33);

(xi) to implement the central organization and overheadreduction program, and regularly review its resultswith the Bank (para. 8.10);

(xii) to meet certain financial covenants (para. 8.20);

(xiii) to contract additional loans only under specific con-ditions (para 8.20);

(xiv) to restrict expenditures and investments outside theproject (paras. 8.20 and 8.32);

(xv) to comply with its obligations under the Set Aside andSecurity Agreements and Trust Deed, to instruct allpayments to be made in the Domiciliatory account andto assign to the lenders the proceeds of a certainproportion of its long-term sales contracts (paras. 8.21through 8.27); and

(xvi) to maintain satisfactory auditing and reportingpractices (para. 8.29).

(b) From the Government

(i) to free SNIM of any payments for compensation of theMIFERMA nationalization (paras. 3.01 and 8.14);

(ii) not to allow SNIM to become involved in any new projector any other entity within SNIM to become involved innon-iron ore related investments, without the priorconsent of the Bank (paras. 3.08, 8.20 and 8.32);

(iii) not to authorize any entity other than SNIM to marketSNIM's iron ore without the prior approval of the Bank(para. 4.29);

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(iv) to guarantee SNIM's right to sell its iron ore both at

world market prices and in return for convertible

foreign exchange (para. 4.30);

(v) to onlend to SNIM, all loans made to the Government for

the purpose of the project (para. 6.11);

(vi) to provide a project completion guarantee (para. 6.12);

(vii) to grant to SNIM the new proposed royalty system, and,

agree in the Convention Particuliere to defer, if neces-

sary,a certain proportion of SNIM's royalty obligations,

in order to enable the company to meet possible cash

shortfalls (paras. 6.13, 8.07 and 8.16);

(viii) to guarantee to SNIM the right to import fuel directly

and at prices in line with international market prices

(para. 8.04);

(ix) to assume repayment of the debt of SOMIMA vis-a-vis its

external creditors, and to repay to SNIM the US$30.8

million equivalent balance outstanding of SOMIMA and

state debts vis-a-vis SNIM, according to a specified

time schedule and terms as well as to reimburse SNIM

for any expenditure incurred on account of the State

(para. 8.12);

(x) to undertake that any foreign exchange deposited by

SNIM in the special account at the central bank, will

be made available to SNIM, as and when required, for

the purposes of financing both Phase 2 and possible

Phase 1 cost overruns (para. 8.18); and

(xi) to take all measures necessary for the establishment

and operation of the arrangements detailed in the Set

Aside Agreement, Security Agreement and Trust Deed

(paras. 8.21 through 8.27).

10.02 The following items will be conditions of effectiveness:

(i) granting of the El Rhein and Oum Arwagen miningconcession (para. 5.01);

(ii) establishment of a calendar satisfactory to the Bank

for the paying in of the remaining new capital (para.

6.09);

(iii) effectiveness of foreign loans totalling at least 80%

of total external loan financing for the project, and (at

least) satisfactory assurances that the loans representing

the remaining 20% will be forthcoming (para. 6.11);

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(iv) signing of a Convention Particuliere between SNIM andthe Government satisfactory to the Bank (para 8.07);

(v) repayment of the bank overdrafts amounting to US$39.5million or conclusion of an alternative arrangementsatisfactory to the Bank transforming the overdraftsinto a long-term loan (para. 8.13); and

(vi) entering the Set Aside and Security Agreements and theTrust Deed, submission of satisfactory insurance thatadequate payment instructions have been given to theore purchasers and the assignnent to the lenders of theproceeds of a certain proportion of SNIM's long-termsales contracts (paras. 8.21 through 8.27).

10.03 Subject to the foregoing commitments and agreements, the projectprovides a sound basis for a loan to SNIM, of US$60 milliDn for a period of15 years, including 5 years of grace.

Industrial Projects DepartmentMay 1979

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ANNEX 3-1Page 1 of 8

MAURITANIA--GUEI,BS IRON ORE PROJECTSNIM UNITS OTEHER THAN COMINOR

A. Introduction

1. Besides COMINOR, SNIM includes the following units or departments:

(i) Departement de Commercialisation des Produits Petroliers (DCPP)--

an organization for the distribution of petroleum products.

(ii) a gypsum mining and sales operation.

(iii) SNIM Explosifs (SNIMEX)--an explosives factory

(iv) SNIMACIER--a new mini-steel plant (due to commence production).

(v) The "Siege", a central organization, comprising the head office,

training and research units.

Up until early 1978, SNIM also included SOMIMA, the copper mining

operation, and was responsible for supervising the implementation of a new

oil-refinery in Nouadhibou. In March 1978, SOMIMA was divested from SNIM and

it was decided that the refinery wou:Ld not be incorporated into SNIM if and

when it should be made operational.

B. DCPP

2. DCPP was first created under the name UCPP in 1973, when the

Government gave SNIM the authority to set up an organization for refining

and distributing oil products. The main reasons for this course of action

was: dissatisfaction with foreign companies (who had handled imports and

distribution up to that time) due to their erratic supply, rising prices and

above all lack of interest in expanding their networks. SNIM was viewed as

being the only Mauritanian organization capable of handling the logistics of

such an enterprise and, in addition, oil was critical to SNIM's own mining

activities.

3. Since 1975, DCPP has been the sole importer for the Mauritanian

market; it supplies its own distribution system as well as those of its

remaining private competitors, BP and Mobil. It has expanded its network by

buying out Shell Senegal (in Mauritania) in 1975 and Texas Mauritania in

1976 and by building new stations such that, in 1978, the DCPP network was

comprised of: (i) main depots in Nouadhibou, Nouakchott and Dakh la; (ii)

29 filling stations; (iii) 4 airport depots; and (iv) about: 30 tank trucks.

The stations are maintained and supplied by DCPP, while the manager pays rent

and receives a salary on a commission basis. DCPP's work force consists of

about 60 persons, including 4 expatriates. Maintenance of the truck fleet

is carried out separately in the wor-kshops of SNIM's central organization.

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ANNEX 3-1Page 2 of 8

4. DCPP has a clear marketing advantage through its import functionand its role as supplier to captive markets in the form of both SNIM and theGovernment. Consumption of oil products in the Mauritanian market has beenestimated at 200,000 cubic meters in 1978 with a share of 82% going to DCPP(in 1975 its share was 36%) and the remainder to Mobil and BP. SNIMNs needsalone account for 45% of the total market whilst Gas-oil constitutes thelargest proportion of sales volume of around 2/3 of total demand.

5. The sales prices of oil products are fixed by the Government accord-ing to a complex formula at levels varying according to location within thecountry. These prices include miscellaneous taxes plus a reasonable marginabove import cost for the importer/distributor and are regularly revised. Inlate 1977, for example, the sales price, ex-depot Nouakchott, for gas-oilwas computed as follows:

Price per lOOL(UM)

CIF price 694Taxes 788Import/Distribution Margin 95

Total 1,427 (US$31.7)

SNIM is exempted from taxes on fuel for its own internal consumption require-ments. The import/distribution margin is sufficient, both to cover operatingcosts and to provide an adequate return on investment and DCPP is therefore aprofitable operation. Net profit in 1977, for example, reached UM 66 millionon net sales (excluding taxes) of UM 1,153 million (or 6%).

6. As already mentioned in para. 3.02 of the text, the decision hasbeen taken to separate DCPP from SNIM. Because of the positive cash flowgenerated by DCPP, this separation will imply a net loss for SNIM, which theGovernment has nonetheless agreed to compensate. The compensation level willbe discussed and approved by the Bank. A preliminary study based on thefinancial projections indicates that SNIM's cumulative net loss would amountto US$130 million by 1992 in current terms.

C. Gypsum Operation

7. Since 1973, SNIM has mined the gypsum contained in a high-qualitydune deposit about 60 km from Nouakchott, which currently has reserves of some14 million tons. Mining is a very simple quarry operation with trucks andshovels and involves about 10 people. Production is currently roughly 17,000tons per year, all of which is sold to the Rufisque cement plant near Dakar inSenegal at a delivered price of UM 1,640/ton (US$36.4). SNIM trucks trans-port the gypsum to the Senegalese border and, on their return trip, carrySenegalese cargo back to Nouakchott.

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ANNEX 3-1Page 3 of 8

8. Although small, this venture is profitable. On the basis of sales

of 17,000 tons, 1978 net revenues (after deduction of the expensive trans-

port within Senegal's border) are projected at UM 16 million and net profit at

UM 6 million (US$133,333), or 38%.

9. The export market in Senegal is fairly secure since the closest

competing sources are in Morocco. However, miere exportation does not fully

exploit the local value added potential of the gypsum, while at the same

time Mauritania is destitute of indigenous building materials. A project is

therefore under consideration to build a 22,000 tpy plaster plant, producing

both materials for plastering and components, such as blocks and panels. This

output would substitute about 2 for 1 for imported cement and reduce foreign

exchange outflows, which for cement are currently the order of US$3 million

p.a. (60,000 tpy at a cost of about US$50/ton CIF Nouakchott). The technical

feasibility of the project has been studied by Pfeiffer/Belgochaux of Germany

and Belgium, but neither a market study nor a comprehensive feasibility study

has yet been undertaken. Capital costs are estimated at UM 253 million

(US$5.6 million). The project would be established as a private company,

primarily by private interests but with a minority participation by SNIM. To

this end, SNIM plans to use UM 27 million (US$600,000) from a line of credit

provided by Caisse Centrale specifically for such small-scale projects. At

full production the plaster plant would require an input of 26,400 tpy of

gypsum; this would be sold to them by SNIM, at cost.

10. Gypsum could also be used in clinker-grinding to produce cement from

imported clinker. Preliminary proposals for such a plant, with a capacity of

100,000 tpy of cement have been made to SNIM. It is unlikely, however, that

this project will go ahead in the near future.

il. A Government-level decision has also been taken to divest SNIM of

its gypsum operation (para. 3.02 of the text). Because of the small size of

the operation, the financial implication on SNIM will be minimal, especially

since the Government has agreed to compensate SNIM for any present or future

losses resulting from separation activities (para. 3.02.).

D. SNIMEX

12. SNIMEX was started by SNIM; in 1975 near Nouadhibou in order to

produce the explosives required by COMINOR and SOMIMA. It is a small plant,

mixing and packing the imported components for resale as two explosive prod-

ucts, SNIMEX (a mixture of TNT and nitrates) and ANFO (a mixture of ammonium

nitrates and fuel oil). In the past, production has averaged 1,700 tpy of

SNIMEX for COMINOR and 400 tpy of ANFO for SOMIMA, but capacity is suffi-

cient to supply the 2,600 tpy peak requirement of COMINOR during the first

years of Guelbs operation. About 50 persons work at the plant, of which only

one is an expatriate. The UM 90 million (US$2 million) initial investments

were financed by a UM 33.5 million boan from Caisse Centrale (fully repaid

by early 1978) and by SNIM's cash generation. SNIMEX sells its production at

a price equivalent to those of imported explosives i.e. UM 47.7/kg (US$1.06)

in 1977/78. At these prices, SNIMEX more or less breaks even. However, in

1978, it incurred losses of UM 36 million on sales of 52 million because of the

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ANNEX 3-1Page 4 of 8

low level of production of explosives due to the slowdown of COMINOR's activi-

ties. In 1979, a slight profit of about UM 1 million (US$22,000) on sales ofUM 90 million (US$2 million) is projected. SNIMEX is, therefore, a viablealternative to the import of ready-to-use explosives.

E. SNIM/ACIER--THE STEEL PROJECT

13. SNIM has just completed construction of a small steel plant in

Nouadhibou, for which the projected output is 10,000 tpy of reinforcementbars. Essentially, the plant consists of an electric arc furnace and arolling mill. Production will be based on the high-grade steel scrap gene-rated by COMINOR (through the continuous replacement of the railtrack andwheels of the ore wagons). Previously, COMINOR's rate of generation averaged

between 6,000 and 9,000 tpy; this is projected to increase to about 10,000tpy during the 1980's. In addition, in anticipation of project start-up,some 16,000 tons have been accumulated at Nouadhibou over the past 2 years.

14. The purpose of the plant is to supply rebars to the domestic con-

struction industry, whose demand is currently estimated at about 5,000 to6,000 tpy 1/ and is projected to increase at about 10% p.a. During the firstfour years or so of full production, SNIM/ACIER will, therefore, have toexport to Senegal. Prospects for such exports are reasonable: the quantitiesinvolved are small; Senegal has no domestic source of supply; several dam andirrigation projects requiring such steel are to be constructed in the border

areas of Senegal and Mauritania in the near future; and SNIM has in factalready received a letter of intent from a trading company, DAVOB in Dakar.Production and exports are projected as follows:

Production and Sales of SNIM/ACIER(tons)

1979 1980 1981 1982 1983 1984 1985

Production 5,000 10,000 10,000 10,000 10,000 10,000 10,000

LocalConsumption 5,000 10,000/a 6,610 7,270 8,000 8,800 10,000

Exports - - 3,390 2,730 2,000 1,200 -

/a Peak during the construction of the Guelbs.

SNIM expects to sell the steel at an average wholesale price of UM 25,700/ton

(US$555) in 1977 terms, which is equivalent to the current price of imported

steel, determined as follows:

1/ Excluding the exceptional surge in consumption in 1975/77 when several

public buildings and mosques were constructed simultaneously.

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ANNEX 3-1Page 5 of 8

UM/ton

Cost CIF Nouakchott 16,750Custom Duties 3,500Port Charges 2,850Miscellaneous Costs 800Importer Margin 1,800

25,700

On the basis of a current import price CIF Dakar of UM 16,000/ton, and in viewof the major rebate on custom duties allowed within the framework of agree-ments between the two countries, SNIM expects to sell to Senegal at about UMUM 16,500/ton ex-factory.

15. The project engineering, construction and staff training have beencarried out by the French firm, STEG, under a turnkey contract, with theassistance of Italian steel producers, OMAV, of the Brescia area who special-ize in mini-steel plants. Construction was completed in the second half of1978 and production is expected to commence during the first quarter of 1979.The key components of the plant are the electric furnace with a capacity of12,000 tpy (on the basis of 3 shifts) and the rolling mill with a capacity of18,000 tpy (on a 1-shift basis). The plant will employ about: 130 persons, ofwhom about 20 will be expatriates. Total project cost including interestduring construction and working capital was UM 505 million (US$11.2 million).External financing consisted of: (i) a UM 190 million loan at 4.5% p.a. for12 years from Abu Dhabi and (ii) a UM 291.4 million loan bearing an interestrate of 7.2% p.a., plus a COFACE insurance premium from the Credit Commercialde France, for about 7 years including 2 years of grace. This second loan,has a repayment period that is too short for this kind of investment and willtherefore penalize SNIM/ACIER heavily during its first few years of production.

16. The transfer cost for COMINOR scrap is estimated at UN 2,500/ton(US$55) in line with the price that such unprepared scrap could fetch (FOBNouadhibou) on the world market. This transfer price is very favorable toSNIM/ACIER. On the other hand, the cost of imported refractories and power(UM 4.5/kWh) will be high. SNIM projects total operating costs at IJM 21,100/ton and UM 19,500/ton (1977 terms) for production levels of 7,800 tpy and10,000 tpy, respectively. When compared with the projected sales price ofUM 16,000 to 25,000/ton, this leaves cnly a small margin to cover capitalcharges. As a result, as shown in the projections of Annex 8-3, SNIM/ACIERis expected to experience average cash losses of about UM 50 million p.a. incurrent terms during the first 4 years of operation.

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ANNEX 3-1Page 6 of 8

F. SNIM/SIEGE

17. The central organization, "Siege" includes the Company's headquarters;the support services and research and technical department in Nouakchott, thetraining units; and the European offices. In early 1978 its personnel con-sisted of about 600, 1/ of which some 150 were expatriates including about 80in the European offices. This heavy central organization was developed alongthe lines proposed in 1974-75 by SEMA, a French management consulting firm, ata time when it was envisaged that SNIM would develop into a 10,000-man group.

18. The headquarters in Nouakchott include the general management depart-ment, the "secretariat general" (which deals with new works, buildings, publicrelations and supplies), the financial department, the personnel departmentand the technical department. The technical department consists of a geo-logical research unit and a group dealing with general technical studies;it is also responsible for supervising the gypsum mine. The financial depart-ment is still incomplete as it does not yet have an internal audit unit or acorporate planning capability.

19. The personnel department handles personnel planning and training.It controls the CAFM training school in Nouadhibou and the CAPAT trainingschool in Nouakchott. It also controls training programs abroad. On thewhole, there is some duplication between this department, the personnel unitof COMINOR and the administrative office in Paris. The support servicesinclude workshops, stores and a procurement unit. The workshop maintains theservice vehicles as well as the trucks used for the transport of gypsum andDCPP's equipment.

20. The European offices include the marketing office and the adminis-trative office in Paris and the purchasing office in Zurich. The marketingoffice basically handles all of SNIM's iron ore (and formerly copper concen-trate) marketing aspects. The administrative service deals with the recruit-ment and general administrative questions relating to expatriates. TheZurich office handles procurement on the basis of instructions from SNIM inMauritania.

21. The capital expenditures and operating costs of this large organiza-tion have been high. Total operating costs reached UM 654 million (US$14.5million) in 1977. Of this, UM 156 million was for the European offices,UM 117 million for the CAFM training center and UM 146 million for SOMIMA andthe refinery. The capital cost of the CAFIM amounted to about UM 300 million(US$6.7 million), representing an investment per student of US$33,500. Thisis extremely high. Operating costs at Nouakchott are worsened by the highcost of rented housing and other benefits provided to staff and of the

1/ Some of this personnel was dealing essentially with transport and othersupport services for SOMIMA.

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ANNEX 3-1Page 7 of 8

rented office scattered through the town as SNIM has only recently acquired abuilding of its own. This building is still under construction and its highcost (UM 340 million, for the building, plus UM 180 million for equipment andfurniture) will heavily burden SNIM's future cash flow.

22. SNIM now plans to reduce the costs of its central organizationsubstantially by narrowing the scope of its activities, consolidating servicescurrently spread between the different central departments and the operatingunits and reducing staff and manpower at many levels. The proposed reductionprogram would primarily consist of:

(i) consolidating personnel services between Nouakchott,Nouadhibou and Paris;

(ii) eliminating positions in Nouadhibou which duplicatethose in Nouakchott;

(iii) reducing the number of expatriate teachers and technicalassistants in the training centers;

(iv) reducing general training abroad for Mauritanians, whereverthis is not directly required for some specific function;

(v) consolidating the procurement department in Zurich with theMauritanian office;

(vi) eventually consolidating the remaining departments of the threeEuropean offices into one;

(vii) reducing geological researc:h and technical studies;

(viii) reducing the units handlingr public relations, purchasingnew works, etc.; and

(ix) generally eliminating any activities which were previouslyneeded for SOMIMA and/or the refinery.

This program should lead to a 30%-40% recurrent reduction as compared with1978 operating costs and a drastic reduction in capital expenditures,as is illustrated in the financial projections in Annex 8-3.

G. PARTICIPATIONS

23. SNIM also holds participations in the following ventures:

(i) a 52% participation in SAMMA (Societe d'Acconage et deManutention) a trading and investment company which generatedrevenues of UM 194 million in 1977;

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ANNEX 3-1Page 8

(ii) a 33-1/3% participation in MEPP (Compagnie Mauritanienned'Entreposage des produits Petroliens), an oil productsstorage tank facility in Nouadhibou, which SNIM owns togetherwith Mobil and BP;

(iii) a 51% participation in COMETE (Compagnie Mauritanienned'Etudes Techniques et Economiques), a small engineeringfirm in Nouakchott, which generated revenues of UM 66million in 1977;

(iv) an 81.2% share in SIRCA (Societe de Fabrication et de Commercial-isation de Produits pour le Batiment), a tile manufacturingplant with sales of UM Il million in 1977; and

(v) a 20% share in SOMAR (Societe de Representation et de Services),a trading firm in Dakar, which represents SNIM in Senegal.

SNIM also holds 30% of the shares of a geological research consortium forphosphates with BRGM, GEOMIN and SSPT (Senegal), which has a total capital ofFF 1.5 million. It also holds 50% of the geological research consortium withBRGM for uranium prospecting in the Diaguili region.

Industrial Projects DepartmentMay 1979

- 81--

ANNEX 3-2Page 1 of 5

MAURITANIA - GUELBS IRON ORE PROJECT

SNIM - HISTORICAL CON'SOLIDATED INCOME STATEMENTS(UM Billion)

SNIM Conso]idated1976 1977 1978

I. Revenue 8.49 7.54 5.39

II. Cost of Goods Sold

Salaries and wages 2.48 1.99 1.67

Materials 2.96 2.61 1.88External services 0.42 0.50 0.30

Transport 0.12 0.06 0.05Stock variation 0.00 0.48 (0.39)

Subtotal 5.98 5.64 3.51

III. Gross Profit 2.51 1.90 1.88

IV. Operating Expenses

Administration 0.0411 0.59 0.66Duties and taxes 0.82 0.69 0.22

Depreciation and provisions 1.40 1.32 1.13Exept. & previous profit and losses 0.09 0.04 0.26

Subtotal 2.35 2.64 2.27

V. O _erating Profit 0.16 (0.74) (0.39)

VI. Financial Charges 0.19 0.29 .31

VII. Net Profit (0.03) (1.03) (0.70)

Net profit/revenue (%) o (13.7) 0

Net profit/gross fixed assets (%) o (4.6) 0

/l In 1976, headquarters' expenses are included in the costs of goods sold.

Industrial Projects DepartmentMay 1979

-82-

ANNEX 3-2Page 2 of 5

MAURITANIA: GUELBS IRON ORE PROJECT

SNIM - HISTORICAL CONSOLIDATED BALANCE SHEET(UM Billion)

SNIMSNIM Consolidated excluding SOMIMA

1975 1976 1977 1977 1978

ASSETS

Current Assets

Cash and Banks 0.22 0.08 0.18 0.18 0.27Receivables a/ 3.14 2.74 2.98 4.32 1.70Inventories 2.47 2.43 2.19 1.87 1.91

Subtotal 5.83 5.25 5.35 6.37 3.88

Fixed Assets

Gross Fixed Assets 20.78 22.28 22.53 18.13 18.93Less depreciation 12.01 13.14 13.55 10.54 11.25

Net Fixed Assets 8.77 9.14 8.98 7.59 7.68

Other Assets 0.42 1.54 0.98 1.07 2.09/

Total Assets 15.02 15.93 15.31 15.03 13.65

LIABILITIES

Current Liabilities

Payables 0.90 1.41 1.80 1.80 1.29Current portion of LT debt/short-term

borrowings 2.35 1.01 0.59 0.59 0.71

Overdraft 0.65 1.61 1.71 1.71 1.78Others 2.03 1.18 1.88 1.82 2.09

Subtotal 5.93 5.21 5.98 5.92 5.87.

Long-Term Debt b/ 2.24 2.51 2.54 2.49 1.91

Equity

Contributed capital 6.62 7.16 7.06 6.03 6.44Treasury grants 0.10 0.35 0.07 0.04 -Ret,trned savings and reserves (0.52) 0.43 (0.60) 0.32 (0.70)Provisions 0.65 0.27 0.26 0.23 0.13

Subtotal 6.85 8.21 6.79 6.62 5.87

Total Liabilities 15.02 15.93 15.31 15.03 13.65

Debt/Equity 25:75 23:77 27:73 27:73 24:76

Current Ratio 0.98 1.01 0.89 1.08 0.66

Quick Ratio 0.57 0.54 0.53 0.76 0.33

Debt Service Coverage n.a. 0.61 0.58 n.a. n.a

a/ Includes UM 0.45 billion paid by SNIM to MIFERMA's former shareholders for which Govern-ment reimbursement was due.

b/ Including notes payable to MIFERMA's shareholders for which SNIM is to be reimbursedby the State, as due. These totalled UM 1.35 billion in 1976 and UM 0.9 billion in 1977and UM 0.45 billion in 1978.

c/ The net debt of the State due to SNIM is included and amounts UM 1.59 billion end 1978.

Industrial Projects Department

-83-

ANNEX 3-2Page 3 of 5

MAURITANIA: GUELB'i IRON ORE PROJECT

COMINOR - EVOLUTION 0F OPERATING COSTS/TN

(UN')

1971 1972. 1973 1974 197. 1976 1921 1978

Production (Million tns)/ 8.5 9.1 10.2 11.8 8.7 9.4 7.2 7.1

Operating Costs/tn (UM)

DirectMining 87.16 84.05 84.61 96.48 152.42 159.53 170.0 132.0Railway 51.98 49.64 55.02 62.73 99.53 101.76 121.0 111.2Port 20.06 18.35 19.39 22.16 37.05 35.23 41.0 41.1

Sub-total 159.20 152.04 159.02 181.37 289.00 296.52 332.0 284.3

IndirectZouerate 24.89 23.,'4 26.10 32.12 60.14 51.91 64.0 57.4Nouadhibou 33.09 31.10 31.90 45.96 69.60 57.65 74.0 80.5

Sub-total 57.98 54.84 58.00 78.08 129.74 109.56 138.0 137.9

Total Operating Costs/tn 217.18 206.88 217.02 259.45 418.74 406.08 470.0 L22.

Total Operating Costs US$/ton 4.82 4.59 4.82 5.76 9.31L3 9.02 10.4 9.38

/l At the end of November

/2 Average between amounts mined, transported by rail and exported

/3 Fuel oil increase and doubling of salaries

Industrial Projects DepartmentMay 1979

-84-

ANNEX 3-2Page 4 of 5

MAURITANIA - GUELBS IRON ORE PROJECT

COMINOR - HISTORICAL INCOME STATEMENT(UM Billion)

1971 1972 1973 1974 1975 1976 1977 1978il mos 13 mos

I. Sales Volume (million tn) 8.60 8.62 10.33 10.69 9.65 9.66 8.42 6.5

II. Revenue

Iron ore sales 4.45 3.94 4.42 5.58 6.77 7.03 5.91 4.26Others 0.36 0.51 0.49 0.73 0.84 0.54 0.46 .35

Total Revenue 4.81 4.45 4.91 6.31 7.61 7.57 6.37 4.61

III. Cost of Goods Sold

Salaries and wages 0.95 1.06 1.24 1.44 2.10 1.92 1.73 1.62Materials 1.13 1.06 1.25 1.45 2.51 2.14 1.92 1.45External services 0.28 0.15 0.20 0.36 0.41 0.32 0.34 0.26Transport 0.02 0.02 0.03 0.04 0.06 0.05 0.04 0.03Stock variation (0.22) (0.08) 0.03 (0.05) (0.85) 0.10 0.41 (.39)

Subtotal 2.17 2.21 2.75 3.24 4.23 4.53 4.44 2.97

IV. Gross Profit 2.64 2.24 2.19 3.07 3.38 3.04 1.93 1.64

V. Operating Expenses

Administration and Selling 0.44 0.32 0.47 0.45 0.23 0.42 0.49 .59Duties and taxes 0.39 0.36 0.40 0.04 0.45 0.71 0.59 .19Depreciation and provisions 1.34 1.14 0.86 1.25 1.03 0.96 0.93 .94Except & previous profit & losses 0.09 0.03 (0.01) 0.05 0.36 (0.10) (0.07) .14Others - - - - 0.10 - - -

Subtotal 2.26 1.85 1.72 1.84 2.17 1.99 1.94 1.86

VI. Operating Profit 0.40 0.39 0.47 1.23 1.21 1.05 (0.01) (0.22)

VII. Financial Charges 0.22 0.22 0.28 0.26 0.22 0.21 0.19 0.22

VIII. Net Profit After Taxes 0.16 0.17 0.19 0.97 0.99 0.84 (0.20) (0.44)

Net Profit/Iron Ore Sales (%) 3.6 4.3 4.3 17.3 14.6 11.95 (3.4) (10.0)

Net Profit/Gross Fixed Assets (%) 1.3 1.2 1.3 6.4 6.2 5.1 (1.2) (2.6)

Dividends (UM Billion) 0.15 0.16 0.18 - - -

Dividends/Capital (%) 4.1 4.2 4.5 - - -

Industrial Projects Department

May 1979

-85-

ANNEX 3-2

MAURITANIA - GUELBS IRON ORE PROJECT Page 5 of 5

COMINOR - HISTORICAL BALANCE SHEETS(UM Billion)

1971 1972 1973 1974 1975 1976 1977 1978

ASSETS

Current Assets

Cash and Banks 0.15 0.14 C.04 0.61 0.35 0.02 0.07 0.01Receivables 0.61 0.74 0.93 1.06 1.87 1.26 1.00 0.79Inventories 0.91 0.90 0.97 1.03 1.89 1.78 1.65 1.72

Subtotal 1.67 1.78 1.94 2.70 4.11 3.06 2.72 2.52

Fixed Assets

Gross Fixed Assets 12.70 13.78 14.63 14.95 15.93 16.45 16.59/a 17.22Less Depreciation 6.73 7.52 8.19 8.88 9.160 10.27 10.23 10.90

Net Fixed Assets 5.97 6.26 6.44 6.07 6.23 6.18 6.36 6.32

Other Assets 0.04 0.04 0.12 0.10 0.11 0.03 0.02 0.01

Total Assets 7.68 8.08 8.50 8.87 10.45 9.27 9.10 8.85

LIABILITIES

Current Liabilities

Payables 0.24 0.20 0.32 0.53 0.55 0.60 1.08 .83Inter-unit accounts - - - - 0.62 0.44 0.62 .41

Current portion of LT debt/short-term borrowings 0.32 0.50 0.60 1.76 0.74 0.61 0.66 .30

Overdraft - - 0.24 0.03 0.07 - - -

Others 0.47 0.58 0.69 0.54 1.68 0.38 - 1.03

Subtotal 1.03 1.28 1.85 2.86 3.66 2.03 2.36 2.57

Long-Term Debt 3.02 3.02 2.90 1.52 1.27 0.98 0.83 .68

Equity

Share Capital 2.66 2.66 2.66 2.66 2..66 2.66 4.57/ 5.98Retained Earnings plus Reserves 0.33 0.40 0.48 1.37 2.53 3.36 1.16 (.44)Provisions 0.64 0.72 0.61 0.46 0.33 0.24 - .06

Subtotal 3.63 3.78 3.75 4.49 5.52 6.26 5.91 5.60

Total Liabilities 7.68 8.08 8.50 8.87 10.45 9.27 9.10 8.85

Debt equity ratio 45:55 44:56 44:56 25:75 19:81 14:86 12:88 11:89

Current ratio 1.62 1.39 1.04 0.94 1.12 1.51 1.15 .98

Quick ratio 0.74 0.68 0.52 0.58 0.60 0.63 0.45 .31

/a From 1976 to 1977, geological research and other research expenses on project wh-ch have notmaterialized have been written off.

/b Reflects capitalization of excess reserves.

Industrial Projects DepartmentMay 1979

-86- ANNEX 4-1

MAURITANIA: GUELBS IRON ORE PROJECT

IRON ORE EXPORTS - INDUSTRIALIZED COUNTRIES

(Million Tons of Ore)

1975 1980 1980 1983 1985Canada (Implemented) (Planned) (Possible)

Ore production 47 70 70 70 83Steel production 13 17 - - 21Ore requirements 13 19 - - 23Ore exports (net) 33 51 - - 60

Australia

Ore production 99.4 121 136 138 148Steel production 8 10 - - 13Ore requirements 14.1 12 - - 15Ore exports (net) 85.3 109 - - 133

Sweden

Ore production 32.6 36 38 33 40Steel production 5.6 6 - - 7Ore requirements 5.3 6 - - 7Ore exports (net) 27.3 30 - - 33

Norway

Ore production 4.0 4 4 4 7Steel production 0.9 1 - - 1Ore requirements 0.7 1 - - 1Ore exports (net) 3.3 3 - - 6

South Africa

Ore production 12 27 27 27 41Steel production 6 7 7 7 7Ore requirements 6 7 - - 7Ore exports (net) 6 20 - - 34

TOTAL: Ore Exports (net) 154.9 213 - 266

Industrial Projects Department

May 1979

-87- ANNEX 4- 2

MAURITANIA: GUELBS IKON ORE PROJECT

IRON ORE EXPORTS - DEVELOPING COUNTRIES

(Million Tons of Ore)

1975 1980 1980 1983 1985

Brazil (Implemented) (P1anned) (Possible)

Ore production 80 103 108 115 127

Steel production 8.4 16 16 21 26

Ore requirements il 20 20 26 32

Ore exports (net) 69 83 88 95 95

Venezuela

Ore production 26 26 26 24 20

Steel production 1 6 6 6 7.5

Ore requirements 1.2 7 7 7 9

Ore exports (net) 24.8 19 19 17 il

Chile

Ore production 11.2 12 12 12 14.5

Steel production 0.7 1.6 1.6 1.6 1.6

Ore requirements 1.4 2 2 2 2

Ore exports (net) 9.8 10 10 10 12.5

Peru

Ore production 10.5 10.5 10.5 10.5 14

Steel production .5 1.4 1.4 1.4 1.4

Ore requirements 1.0 2 2 2 2

Ore exports (net) 9.5 8.5 8.5 8.5 12

India

Ore production 40.3 56 56 56 66

Steel production 8 9 9 12 12

Ore requirements 15 17.5 17.5 18 22

Ore exports (net) 25.3 38.5 38.5 38 44

SUBTOTAL: Ore exports 138.4 159.0 164.0 168.5 174.5

(net)

Liberia 18.8 25.5 25.5 25.5 39

Mauritania 11.5 11.4 12 13 14

Angola 3.9 - - - -

Gabon - -- - 10

Ivory Coast - - - - 10

Guinea - - - - 15

Othersl/ 2.0 - - - -

TOTAL: Ore exports (net) 174.6 195.9 201.5 207.0 262.5

/1 Algeria, Morocco, Tunisia, etc.

Industrial Projects Department

May 1979

-88- ANNEX 4-3

MAURITANIA: THE GUELBS IRON ORE PROJECT

STEEL PRODUCTION AND IRON ORE DEMAND - MAJOR STEEL PRODUCERS

(Million Tons of Ore)

1975 1980 1985

Japan1/

Ore Demand 132 138 161

Steel Production 102 115 134

Domestic Ore 1 1 1

Ore Imports 131 137 160

EEC1/

Ore Demand 176 166 194

Steel Production 124 138 162

Domestic Ore (Gross) 62 50.5 47.2

2/Domestic Ore (Net) 35 28 26

Ore Imports 141 138 168

us2/

Ore Demand 132 137 152

Steel Production 106 127 141

Domestic Ore 81 95 102

Ore Imports 51 42 50

TOTAL: Ore Imports 323 317 378

1/ Ore to crude steel ratio of 1.2.

2/ Low grade Loraine ore converted to generally marketed ore.

3/ Ore to crude steel ratio of 1.08.

Industrial Projects Department

May 1979

-89- ANNEX 4-4

MAURITANIA: THE GUELBS IRON ORE PROJECT

STEEL PRODUCTION AND IRON ORE DEMAND - OTHER DEVELOPED COUNTRIES

1975 1980 1985

Ore Demand 12.8 16.8 20.2Steel Production 11.8 16.0 19.0

Domestic Ore 8.2 6.3 6.1Ore Imports 4.6 10.5 14.1

Portugal

Ore Demand - 0.8 1.4Steel Production 0.4 0.9 1.2Ore imports - 0.8 1.4

Austria

Ore Demand 4.2 5.0 5.0

Steel Production 5.7 6.9 7.3Domnestic Ore 3.8 3.8 4,0Ore Inmports 1.9 3.1 3.3

Finland

Ore Demand 1.6 2.3 2.5Steel Production 2.5 3.8 4.1Domestic & Russian Ore 0.9 2.5 2.8Ore Inmports 1.6 1.3 1.3

Turkey

Ore Demand 1.5 2.9 7.5Steel Production 1.9 2.5 7.6Domnestic Ore 1.9 1.7 3.9Ore Imports - 0.7 3.7

Greece

Ore Demand 0.9 1.2 1.4Steel Production 1.0 1.0 1.2Ore Import 1.0 1.2 1.4

Yugo slavia

Ore Demand 5.8 9.2 13.6Steel Production 2.9 5.3 5.3Domestic Ore 5.2 7.5 8.0Oie îI,,ppets O (6 1.7 5.6

TOTAL: Ore Imports 9.7 19.3 30.8

Industrial Projects Department

May 1979

-90- ANNEX 4-5Page 1 of 2

MAURITANIA: THE GUELBS IRON ORE PROJECT

STEEL PRODUCTION AND IRON ORE DEMAND - NON-IRON ORE EXPORTINGSTEEL PRODUCING DEVELOPING COUNTRIES (1)

1975 1980 1985

Ar-Bc tina

Ore Demand 1.7 4.0 9.4Steel Production 2.2 5.0 8.0Domestic Ore 0.2 1.5 3.0Ore Imports 1.5 2.5 6.4

Trinidad

Steel Production - 0.4 0.5Ore Importe . 0.5 0.7

Algeria

Ore Demand 0.8 1.7 3.0Steel Production 0.5 1.4 2.5Domestic Ore 1/ - 3.0 3.0 -Ore Imports-(Exports) (1.6) <1.3)

- Tunisia

Steel Production 0.2 0.2 0.2Ore Imports--(Exports) (0.3) - -

Morocco

Ore Demand - - 0.9Steel Production - - 1.1Domestic Ore 0.4 - 1.0Ore Imports-(Exports) (0.1> - 0.3

Mexico

Steel Production 5.1 6.7 6.7Ore Imports - - -

Libya

Steel Production - - 0.8Ore Imports - - -

Egvpt

Ore Demand 1.1 2.0 4.0Stsel Production 0.5 1.0 2.5Domestic Ore 1.1 2.0 4.0Ore Imports - - -

Nigeria

Ore Desnand - 0.5 1.0Steel Production - 0.4 0.8Domestic Ore - - 0.2Ore Imports - 0.5 0.8

SUBTOTIAL: Ore hIqorts- 1.5 3.5 8.2(Exports) (2.0) (1.3) -

1/ Some Il ore exporter:; are expectrd. to eanse exports or 1,eùr,me letf "'1 '' u ' r ':.

Industrial Projects Department

May 1979

-91- ANNEX 4-5Page 2 of 2

MAURITANIA: THE GUELES IRON ORE PROJECT

STEEL PRODUCTION AND IRON ORE DEMAND - NON-IRON ORE EXPORTINGSTEEL PRODUCING DEVELOPING COUNTRIES (2)

1975 1980 1985Ir.an

Ore Demand 7.4 - 15.0Steel Production 0.8 5.9 11.0Domestic Ore 5.0 - 5.0Ore Importe 2.4 - 10.0

Saudi Arabia

Steel Production - - 0.9Ore Imports - - 1.3

Quatar

Steel Production - 0.4 0.tOre Imports - 0.6 1.2

Abu Dhabi/Kuwait

Steel Production - - 0.8Ore Imports - - 1.2

lraq

Steel Production - 1.0 2.0Ore Importa - 1.5 3.0

Pakis tan

Steel Production - 0.4 1.0Ore Importe - 0.6 1.5

Indonesia

Steel Production 0.2 0.5 1.5Ore br,parts - 0.7 2.3

China

Steel Production 0.7 1.5 2.4Ore Importe - 1.8 3.0

South Korea

Ore Demiiand - 6.0 9.5Steel Production 2.0 5.0 8.0Domcstie Ore - 0.5 0.5Ore Importa - 5.5 9.0

Pailipplnes

Stecl Production 0.1 0.5 2.0Ore Imports - 0.6 2.4

Culo,ob ia

Ore Demand 0.6 - 1.2Steel Production 0.3 0.4 0.8Doo,ustic OreOr. Imports _- -

SU8TCTAL: Ore Imports 2.4 11.3 34.9

iOTAL: Ore Importa 13.5 43.1Pdgt s (1> al-d (2)

Industlial Projects DepartmentMay 1979

ANNEX 6-1

MAURITANIA: GUELBS IRON ORE PROJECT

CAPITAL COST BREAKDOWN

1978-82 Expenditures(US$000)

Base Cost Physical PriceForeign Local Total Contingency Escalation TOTAL

1. Beneficiation 50,958 1,040 51,998 7,330 30,269 89,597

2. Mining 36,266 740 37,006 1,480 22,031 60,517

3. Port 7,480 152 7,632 229 3,146 11,007

4. Railroad /1 27,457 616 28,073 1,452 10,322 39,847

5. Power Plant 17,768 360 18,128 2,822 8,715 29,665

6. GeneralElectrical Equipment 12,520 256 12,776 1,960 5,679 20,415

7. MiscellaneousMechanical Equipment 239 5 244 7 94 345

8. Steel Structure 18,280 370 18,650 2,725 6,472 27,847

9. Housing 10,080 3,269 13,349 430 -5,523 19,302

10. Equipmentfor Building 1,262 - 1,262 38 458 1,758

11. Water Supply 2,520 - 2,520 76 673 3,269

12. Engineering 20,425 1,075 21,500 665 6,502 28,667

13. Civil Works 20,202 5,402 25,604 3,311 4,507 33,422

14. Mechanical Erection 13,180 5,644 18,824 2,763 8,808 30,395

15. Electrical Erection 9,260 5,212 14,472 1,838 6,503 22,813

16. Work by COMINOR 4,145 1,533 5,678 397 2,028 8,103

17. Preliminary Work 186 69 255 8 49 312

18. Training 2,720 1,006 3,726 112 1,610 5,448

TOTAL 254,948 26,749 281,697 27,643 123,389 432,729

of which spares 13,357

/1 Including about US$1.0 million of rails purchased prior to 1978.

Industrial Projects DepartmentMay 1979

868Ltl616989 6NSEX 6-2

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(USS 000)

i979 1<49 91 'R 91' l'p iF 1984 1 9B5 1986 1987 1 991 1 91_ 1999 9991 9927 199.3 1994

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7S9 187911899 3JF 1191491.E'i <29425.39< 342.21( 12 49.74 < .' . <999,910.06 (1539Y,5) (81 212.34> (587,811 94985.,3 ?2291 .20 0122,8, 916.93 539,56 2257.43 (986.56)

INI`R. 9N 81J. 'I` . 22497.94 2991.9' ..8-' , 993,43'f 110913.' 2549.86 <i5915,44) 1776-9)44 .1318,55> 2044.5 ,''4l.S3 8.11 .:1> D253.75 999.66 1221.65 '5903.44)

'l' IwLI) twtf-t r)~ n11+FRAlINm O:il9s to 1)111NI-H r- E:

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REf'lR FI> 9 f(l

-. 94-AMMER6-3

R3400R163346OURSES3 IRON ORR PROJET

COINORE PROJECTED 3INVRTRSNTS

1929 19130 1993 93(2 153(73 3334 I le," 3933 <W ` 1 3<34 3990) 3491 1992 1993 1994

NEW IN4EST3ENTS

DUEL3 a1 03 434. 2733 4.33 .3 3 1 sEo. 2766.44 4314000 333.4 3904.00

KERIA LI9 ,43C . 0, 9,3 2 .,. , . 3,4 , 03,.04

TR3 93. 32344.40 ,4434.00<) ,t35o34,43 3443<3,04)t 3924,3)t.44 5904.04> 343,3,40 40003,4 5.0 3, 4333,4<4 4/344 2.0 5 54.313 1<345,04 :`00.440( 3144.00 1116.00 3067.00

RENEWALT_ N45s.00T,10 .4 43 .5L 4.>4 1. 3 10<.0 0 134 3.30 12:04 <.0 35304. 0 5343 .4(4 [020, 4476.0 4404,0 5051.00 11406.00 19110.00 9430.00

roTAL INVEsTMHNTF. <CRNST. 44S33 23-95.4,4 ,<34<3344 3,33<3 .195<,<3,3.4 332,, 1<. 13,43.3,0 : 4<1o4,<3,<>l 3.;7v3 ,44 3.400 30434.50 12o13.044 14554.00 20226.40 333SS.00

PRI0E CUNOINRENCRFS 35 91 3.3 13043.43 40 .41 4.43 1 35.43<3 . 43. ; 1i< 4 .i/ .4,'5.44 413:2.25 H441,.30 34405-,40 < .3.34 32504. 04 26340.98 405s4.90 24297.49

NEW INUEsrHENTrs AN RENEWAL S (CUR3 . U343

0335039 36454.313301354,433332392,94 ^ 3 4310», 4 32e X .ofi :0.)43,4< -`4i.',Y ' 44,34,<3 34z91394,.: n 133472 3< 34553,5 5452J 5v:3 .42 39444,4 <::4,0 095, L94 3 31ss.343544

95356439 «34.33 6 97t.04 03325,S4 5442 <<3 34473.431 o35.0< 223<30 2-

3 3 4 4, n- 49,5/.5 225,49 43<225,,3 23234.91 21142.37 32049.43 52455.27 29936.29

4 3 9AL INEVEsIENrs (CU3 2.ENI U5s9.4.?p ' .3'3 .3.. 17 544.4<3 13,44 j: 34 4i 1 544312..4 4 14Y41. 44 15 605 39463 46 423226.4S 29406.04 404244.9 9240.00 889339.40

ANNULI4 LEPRECIAI ION t l 51. 00) SS(.3 j r.t.. .o./ (.4b>< fi,h.)l .?100 54él82 .01l 4.,814.)0 4i)..0 1<o0A1 -o¢ ;?.O 93492.O0 96,70.00 92076.00 sY.0

INDUSTRhAL 83ROSlsCTS DEPARTNRNTREPORT PREPARED - 05/15/79

MAURITANIA-GUELBS IRON ORE PROJECTEXTERNAL FINANCING

(US$ Million)

SOURCES AMOUN'7S TERME

1. Saudi Pund 65 (SR 210 million) 3Z. p.a. interest rate; 20 years including 4 years'grace; constant principal repayments.2, IBRD 60 7. 9% p.a. interest rate charged to SNIM, plus 2. 1% p.a., guarantee fee payable by SNrM

to the Government, commitment fee of 0.75%,15 years including 5 years of grace; constantprincipal repayments.

3. Caisse Centrale 50 Blend of $30 million direct loan and $20 million suppliers' credits guaranteed bythe French Government; 8.5 to 9% p.a. interest rate; 0.5% commitment fee onundisbursed proportion of $30 million; average 15 years including 3 years ofgrace, constant annuity repayments.

4 Kmeait Fund 45 3% p.a. interest rate for 25 years including 7 years of grace; constant principal

repayments.

5. Kr1'0lt 40 Equity.6. E,I.B, 30 (25 million units of account) 5.25 to 6% p.a. interest rate; 0.75% comritment fee on undisbursed amount; 15 years

including 5 years oa grace; constant annuity repayments.7 AFESD 35 (KD 10 million) 4% p.a. interest rate; 15 years including 5 years of grace; constant annuity

repayments. w8. Arab Mining Company 28 Equity.9. Irak 22 Equity.10. Moroccan 20 Equity.I1. Abu Dabi Fund 20 (DH 80 million) 4Z p.a. interest rate; 15 years including 5 years of grace; constant annuity repayaents.

12. OECF of Japan 16 (Yen 36 billion) 4% p.a. interest rate, 25 years including 7 years of grace; constant annuityrepayments,

13. Africanl Development Bank 12 (2x5 million units of account) 8% p.a. intereat rate; 15 years including 5 years of grace; 0.757 commitment feeon undisbursed amount; constant annuity repayments.

14. Islamic Develpment Bank 10 Equity

15. OPEC Fund 5 No interest; 0.5% commitment fee an undisbursed amount; 20 years including 5 yearsof grace.

Industrial Projects DepartmentMay 1979 a,

- 9à -~

ANNEX 8-1Page 1 of 7

MAURITANIA - GUELBS IRON ORE PROJECT

ASSUMPTIONS AND OTHER BASES OF THE FINANCIAL PROJECTIONS

1. Financial projections have been prepared separately for (i) COMINOR(i.e. SNDI's Iron Ore Operations) and (ii) SNIM's other units (both opera-tional and administrative). These have then been consolidated to producepro-forma statements for SNIM as a whole.

Assumptions employed in common are as follows:

(a) The projections have been made in current terms with aninflation factor of 8% p.a. for 1979, and 7% p.a. thereafter.The term constant refers to mid-1977 prices throughout;

(b) no interest on cumulative cash surpluses has been imputed;

(c) of the US$120 million new equity included in the financing planUS$55 million have been added to that of COMINOR, (Annex 8-2,page 2) and US$65 million to the other units in order to covertheir cash shortfalls in 1979 and 1980 (Annex 8.4, page 1).In 1979 US$76.8 million has already been paied in (para 6.09)whilst the remaining US$43.2 million has been assumed to becontributed by end 1982, date of project completion; US$15million in 1980 and 1981 and US$13.2 million in 1982.

(d) dividends on both new equity elements have been estimated to yielda nominal equivalent annual rate of return of 4% p.a. up to1992. Under the assumption that payments will be made onlyin 1983-85 and 1989-92 inclusive, this yields a payment of10% of share capital in each of the years dividends are paid.

(e) it has been assumed that SNIM units other than COMINOR willnot pay any income taxes throughout the period of 1978-99and that during this period returns to the Government willaccrue in the form of royalties on ore exports alone. 1/

(f) depreciation for all units has been estimated on the basisof prevailing accounting practices within SNIM, i.e. straightline over 20 years for civil works, 10 to 14 years for railwaystock and facilities, and 3 to 5 years for mobile and fixedequipment.

1/ See draft Convention Particuliere pages 14-19 in Project Files.Section 2.4 Financial Statements - Taxation.

- 97 -ANNEX 8-1Page 2 of 7

2. Iron-Ore Operations (COMINOR)

(a) The sales volumes for both Kedia and Guelbs ores have been assumedequal to production, and are forecasted as follows:

Iron-Ore SalesTons Millions

1979 1980 1981 1982 1983 1984 1985

Kedia 9.30 10.00 10.70 10.70 9.30 7.80 7.80Guelbs - - - - 3.10 6.20 6.20

Total 9.30 10.00 10.70 10.70 12.40 14.00 14.00

1986 1987 1988 1989 1990 1991 1992

Kedia 6.80 5.80 5.80 2.60 0.50 1.50 1.50Guelbs _ 6.20 6.20 6.20 9.40 12.50 12.50 12.50

Total 13.00 12.00 12.00 12.00 13.00 14.00 14.00

These projections 1/ were devised by SNIM/SOCOMINE on the basis of (i) exist-ing long term contracts; (ii) letters of intent already signed; (iii) thefavorable outcome of the Guelbs concentrates testing campaign-executed bythe existing consumers; and (iv) the Bank's Market analysis as outlinedin Chapter IV.

(b) The corresponding prices of iron ore are based on the Bank's worldmarket projections, combined with the 1977 FOB Houadhibou price of US$15.20/tonfor Kedia ore, and a projected base price of US$16.90/ton for Guelbs ore (allin constant 1977 terms). 2/ The latter is some 11% greater than the formerdue to an average Fe content of 65% in the case of Guelbs ore, as against 55%for Kedia ore. Although a premium for Guelbs Sinter, due to its magneticqualities could be expected, this has not been taken into account. For 1979and 1980 the price projections also take into account the fact that, as aresult of specific demands from the cre purchasers, ore with a high silicacontent will be marketed during these years at a price slightly lower thanthe price initially forecasted. The resultant estimates of ore pricesfor indicative years are tabulated below:

1/ See SNIM "Projections Financieres 1978-88" and Project Files Section 7.Project costs and Financial proiections.

2/ See Project Files Section 6.1 Sales Volume - IBRD revised estimates.

ANNEX 8-1Page 3 of 7

Average Ore Sales Prices(US$/ton FOB Nouadhibou)

1977 1979 1982 1984 1986 1989 1991

Constant 1977

Guelbs - - - 17.2 16.9 14.5 16.9Kedia 15.2 11.8 15.2 15.5 15.2 13.1 15.2

Current Terms

Guelbs - - - 28.2 31.6 33.2 44.4

Kedia 15.2 13.8 21.7 25.4 28.5 29.9 39.9

(c) Operating costs have been derived from two sources: (i) with respectto the continuation/expansion of existing activities, i.e., the Kedia miningoperations, rail transport, ship-loading activities, etc., current actual datahave been used as the base and the common inflation factor applied (para. 1-a)above, (ii) with respect to new activities, recurrent costs have been pro-jected as per detailed studies undertaken by SOCOMINE, e.g., in the case ofthe beneficiation plant a breakdown has been provided, item by item, in termsof fuel and power consumption, manpower and spare parts requirements, etc. 1/Similarly both Guelbs and Kedia running costs have been estimated on a detailedbasis, in which costs are projected to vary from year to year, according tothe cumulative total mined at that date, and so the stripping ratio, depth ofmining etc. involved. 2/ For 1979 the detailed budget prepared by SNIM wastaken into account and was verified to be consistent with the operating costsprojections.

In addition manpower costs have been assumed to decline as a resultof the gradual Mauritanization of foremen and low level technicians' postsat the mine. This has been estimated on the basis of 1.25 Mauritanians toreplace 1 expatriate over the period 1979-86 in the case of the existingoperations, and 1987-94 in the case of the new El Rhein activities.

1/ See Project Files: SNIM/SOCOMINE "Guelbs Project (TSR Alternative)Financial Report" dated July 1976 Chapter III and Appendix II.

2/ See Project Files: "Guelbs Project (TSR Alternative) Appendicesto Technical Report "Appendix II; Technical Report Chapter II, andFinancial Report Appendix Il all dated July 1976.

- 99 -ANNEX 8-1Page 4 of 7

Details on the precise numbers and levels of posts involved are not

available, but on the basis of rough estimates--in terms of constant 1977US$--this policy is expected to yield operating costs reduct:ions of thefollowing orders of magnitude, on an annual basis. 1/

Operating Cost Reductions due to Assumed Maur-itanization(US$ 000's)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1999 1990 1991 1992

0.21 0.42 1.19 1.73 2.85 3.42 4.58 5.16 5.33 5.50 5.67 5.84 6.00 6.18

Finally, that proportion of SNIM's total overhead costs that pertainsto COMINOR has been set equal to the projected costs of the Zurich and Parisoffices (para 3.09) in the tabulations, 2/ and to 70% of total overhead costsin the rate of return analysis. Remaining overhead charges are accounted forin the projections made for SNIM units other than COMINOR.

3. SNIM Units Other than COMINOR:

(a) Overhead Costs:

For the purpose of financiaL projections, the "siege" (head-office/central organization) has been treated as a separate unit, with the exceptionof the costs of the overseas offices which have been allocated as operatingcosts to COMINOR. As outlined in Annex 3-1, pages 6 and 7, SNIM is currentlyimplementing the overhead cost reduction program; using the 1977 historiccost as the basis for deductions for all items, SNIM have arrived at thefollowing estimated 3/ cost savings:

During the first phase of this program, the Zurich and Parisoffices will be cut back, yielding net benefits of UM 9.5 million in 1979,and UM 42.0 million in 1980 onwards. In addition, there will be a furtherreduction of UM 5 million during 1979, as a result of the ,-losure of SOMIMA.These reductions are reflected in COMINOR's operating costs (Annex 8-2page 1).

1/ See Project Files: Mauritania Guelbs Project Data.Visite Bourguet, page 1.

2/ See Project Files: SNIM Projections Financieres 1978-88Section D-VI-4, dated August 1978.

3/ See Project Files: SNIM "Projections Financieres" dated August 1978,Section D-VI-2 and D-VI-4 on Services communs and associated tables.

- 100 -

ANNEX 8-1Page 5 of 7

During the Second Phase (i) àll the external offices will be re-grouped into one, in an as yet unspecified location, whilst all purchasingfunctions are co be repatriated to Mauritania. This should yield a furthercost reduction, of UM 25.4 million p.a.; (ii) external training will be reducedto the minimum yielding cost reductions of UM 20 million p.a. from 1979-83and UM 15 million thereafter; (iii) domestic training costs will be reducedby UM 5 million in 1979 and UM 25 million in 1980 and thereafter; (iv) theopening of the new building and resultant physical consolidation of officespace, equipment and recurrent expenditures is expected to reduce operatingcosts by UM 20 million in 1979 and UM 30 million in 1980 and thereafter,whilst the cutback in related expatriate staff will yield an additionalUM 5 million per annum from 1979 onwards; (v) as a result of the divestitureof SOMIMA, expenditures on purchasing services have been reduced by UM 5million in 1978, and will be further reduced by UM 8 million in 1979 and UM 10million per annum thereafter, (vi) the units handling new works and publicrelations will be cut back, reducing annual costs by UM 4 million and UM 15million respectively from 1979 onwards; (vii) the transport costs will bereduced by UM 5 million per annum from 1979 onwards--largely as a result ofthe phasing out of SOMIMA's transport requirements--and finally (viii)certain geological and other research activities will be reduced to a minimum,yielding a cost reduction of UM 40 million per annum for 1979 onwards. Thefinancial projections assume that all of these objectives will, in fact, beattained.

(b) SNIM Other Operating Units:

Detailed operating costs and sales programs have been forecast bySNIM for each of the individual operating units: 1/

(i) DCPP costs and revenues are projections from a historicbase, according to the specific projected fuel needs of theGuelbs and Kedia and the state-owned power plants, combinedwith a general rate of growth of 4% per annum appliedto the rest of the market. The current real prices andconditions of purchase and sale of petroleum productshave been assumed to remain unchanged;

(ii) Similarly, the projections for SNIMEX are derived fromhistoric costs, in the light of detailed projectionsof the explosives requirements of COMINOR, and atransfer price based on the 1978 import cost, net ofduties;

1/ See Project Files: SNILM "Projections Financieres" dated August 1978Sections C and D-I, II, III, IV, V and VIII.

- 10X1 -

ANNEX 8-1Page 6 of 7

(iii) In view of their relative insignificance, costs andrevenues for the Gypsum operations have been projectedto continue at 1977 levels (in real terms) until 1982,and to double thereafter as the plaster plant comesinto operation. It has been assumed that Gypsum willbe supplied to this plant at cost;

(iv) The costs/revenues for SNIM/ACIER are based on detailedprojections included in a feasibility study prepared bySTEG--the consultants. The sales price is assumedequal to the current import price including duties,of US$571/ton;

(v) Working capital requirements have been estimated by SNIMon a detailed basis for each of the operating units,starting from the assumption that such requirementswill return to normal levels for all units during thecourse of 1979;

(vi) SOMIMA was divested from SNIM on March 31, 1978, and thecopper company's outstandirig debts, including thosevis-a-vis the rest of SNIM, have been taken over bythe Government. It has been assumed that the latterwill be repaid (as outlinecl by the Government) 1/ aspart of a royalty rebate package over the period1978-84 (para 8.12) as follows:

1979 1980 1981 1982 1983 1984(US$ millions)

Forecast RoyaltyLiability 19.79 /a 10.13 12.83 14.75 20.43 37.25

Reimbursement 14.02 /b 2.53 3.21 3.87 5.11 5.03

Net due to the State 5.77 7.60 9.62 10.88 15.32 31.95

/a Includes taxes which have not been payed in 1978 and a forecast ofroyalties payable in 1979.

/b 100% of 1978 taxes plus 25% of 1979 royalties.

1/ "Memorandum sur le Bilan D'Entree de la SNIM S.E.M.," undated documentsubmitted to the Bank in August 1978.

- 102 -

ANNEX 8-1Page 7 of 7

(vii) Loan disbursements and debt service for these units have beenprojected on the basis of a detailed schedule prepared bySNIM; 1/ and

(viii) Similarly SNIM has calculated detailed replacement costsfor each of these operating units. These are included underinvestments in the financial projections.

(c) Additional Assumptions are as follows:

(i) that the net returns accruing to SNIM through itsparticipation in various entities (Annex 3-1) willbe zero throughout, and that its total involvementin such participations will remain unchanged. Inview of the relative insignificance of the sumsinvolved, this assumption is justified;

(ii) the SNIM's outstanding overdrafts with a consortiumof local banks (para. 8.13) totalling US$39.5 mil-lion will be repaid in 1979; and

(iii) that SNIM will roll over a US$5 million loan fromUBS at the beginning of 1980, for a further 5 years.

Finally, tabulated projected investments for SNIM Siege includethe remaining outlays for the head office building, plus extraordinary train-ing expenditures (since the latter are not recurrent and reflect investmentin human capital).

1/ See project file Section 7.

Industrial Projects DepartmentMay 1979

IBS MIROUIU PRJC

0080.81~~~~~~~~~~~~~~~~~~~~~~~~~~4 010 000 483080804 IST 8-2N(US$ MI~~~~~~~~~~~~~~~ION)- CURRM ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ of8-

1979 1980 19Sl 1982 1983 0984 0005 0986 1987 1988 1989 1990 1991 1992 1993 1994

SALES VOLUME (MILLION TONS)

hEDIA 9130 10000 10.70 10.70 9.30 7,00 7.80 6.S0 5.00 9.S0 2.60 .50 0.,5 1.50 0.,8 1.10

GUELDS - - - 9 _.20 6,20 6.2 02 020 8,40 02.50 12.50 02.50 02.20 00_90

TOTAL 9.20 10.00 10070 00.20 1.4.0 04.08 04,00 13.00 12.00 12.00 12.00 13.00 14,80 14.00 14.00 13.00

NET SALES

MESIA 12S.39 163.44 202.12 232.31 216.05 197,77 211.61 193.53 176.62 175.00 77.60 17.27 59.97 64.07 B2.26 45.65

GUELBS - - - 8007 014,70 002,02 19.1 209. 209 207.99 312,27 480.10 554.75 593.59 619.89 646.98

OTHER REVENUES (NET) .40 .70 . '2 .77 .B2 .00 .94 0,01 I.08 0.05 0.24 1,22 0.40 1,51 1.51 1.51

TOTAL 02S079 064.04 202.04 233.00 296.95 373.43 399.57 390.72 307,62 384.14 391.20 490.69 616.04 659.16 703.66 694.14

CORT OF GOODS SOLD

MINING 20.74 3'.24 37,91 39.75 45.09 54.50 53.38 52.24 53.02 69.92 76.14 70.00 S0.45 06.04 103.73 106.16

PROCESSINS - - -- 06.96 30,01 40. 30 43.089 40,02 SU019 77.7 002.40 009,59 023.14 139.63 049,58

MAIL RRAO 4RANSPORT 23-00 20,90 32.42 34.06 40.46 49..24 5204 51.85 50.70 55 44 60 2S 70.76 81.03 87.49 9783 98.47

PORT HANOLING 0.03 9.96 10056 10092 14.01 1oô.4 ,o 2 06.00 963 07_42 10.69 20 06 20.42 22 96 24.74 26.48

SUD-TOTAL 61.05 76.60 00.09 86.14 119.20 050.96 164.04 164.09 160.67 192.96 233.44 263.22 292.64 319.62 365.93 380.67

0ROSS PROFIT 67.24 R8.03 121.95 146.95 177.67 204.47 235.53 226.63 218.95 191.10 157.76 235.47 323.48 339.54 337.73 313.47

OPERATINM EXPENSES

OUERMEADS 31.61 33.05 34.22 36.40 38.68 40138 43.04 46,60 49.73 53.26 57.05 610,8 65.48 70803 78.08 83.55

RE8EARCH 2,00 2.25 2.40 2.57 .75 2.94 3,15 .56 .60 .64 .69 .74 .79 .84 .90 -

SELLIND 257 3,27 4.04 4.3 .9 7.45 7,7 7.29 7.67 3 7.6 7.8 .5 22 3.51.093

DEPRECIATION 0.30 20 5 0 1 62 24.20 62.50 65 76 62,22 54.6S 45. 07 6.O7 400042 107253 93,49 96377 Y2 0C495

DUTIES ANI' TAXES 0.00 0.08 1b 1.74 0.32 1.42 1.50 0.62 0.73 1086 1.99 2.02 2,27 2.43 2 60 2.7-

SUB-TOTAL 55.59 60.24 61.44 69.14 116.17 000.95 110.70 111.26 005.66 109.48 168.04 176.52 174.32 003.22 187.70 189.11

OPERATING PROFIT 07.00 27.79 60.52 77.81 60.50 95.53 116.83 115.37 003.29 00.70 (10.20) 58.95 149.08 156.32 150.03 124.35

F3NANCIAL CHAR0 ES 0.07 5.37 9.71 05.44 18.84 19.33 00.16 16.74 07.4S 22.67 30.10 30.82 30.84 26.55 4.85 2.76

NET PRE-TAX PROFIT 10.74 22.42 50.90 62.37 42.06 '6.20 8.67 90.63 95.01 59.02 (40.380 28.13 010.24 129.77 145.18 121.60

TAXES 7.70 101,3 12.03 04.75 20.43 37.25 39.06 30.97 30.65 30.30 39.08 49.74 61.46 85.77 70.22 69.26

NET PROFIT AFTER TAX 2.58 t7.29 37.97 47.62 12. 27 3e.05 5.UO 50.06 57.15 20.72 (79.30) (21.61) 56.77 64.01 74.96 52.33

TOTAL COST 026.20 151.95 164.87 065.47 274.72 334.40 340.76 331.06 330.46 363.42 470.58 520.29 559.26 595.15 628.70 641.80

TOTAL CDST2TN 13.1 17.1? Lz.AI 10/. 33 22.15 23.07 24.34 25.47 27.54 30.28 39.21 40.02 39.95 42.51 44.91 49.37

INDUSTPlAL PROJCT27 DEPAU8MENT

REPON PREFARED - 05 l8-70

1019 UFFU 100~~~i~1 19.20 UOU2 0484 090 0900 lUS? UOUU 1009 199U 0291 0992 1992 1994

SOURCES OF FONDU

FIOUO 11.UL 40.0 02.15 34,79 00.02 '2.U OSSUo 95.5 116.03 00.37 I104- 00,002U,30 50.05 040,0 150.3I 000,02 024.45

UFFR~c.OU200 1031 UU.5 09.2 24.2 045 5.76 0t2- 54.00 0. 4400 IU02 U02.532 9340 967 220 09

SD-roFUI. 3U.- 4620 00.013 1UO.UU 120.0 SUE.29 079,29 10U.0S 109,06 U27,- SU.13 000.40 242.57 253.09 242.00 220. 28

E UCTEU- t000 .00 -

EX001N F0200 5.009 ,0 2,0 0,0 .0-

FOND l2.0 400 050 000 07 0.00 -00E1 FUl-.0 9.00 000 1.0 ---

F0000 - '0,00 5.0 00 SO --

0E0F 50.0 5,0 .0 --

.000 - 30.00 90.00 20.U O ----

OUFROIFR FoFob - - - - 200 0.0 5.0 00

000-90000 22.200~~~~~~~~~~~~--- - 73.00--- 031,00- -- 3.00-- 20.00------- - -- 50.00- 020.00-- -------- 10.00--- ------ ---- ----- ----

TOTA 0001- 0 OUFIOL22.0 2,.20 9.-23 08.00 10.00 7,5 15,0 27, .0-20 2.70 20,204 0.205 03.200 0.00 215.980

1N-STMSEHT 002 00 .47 lI.00 .50 4.30 1.14 9.00 .0 .041 S.03 9.00 - 3 2- - - -0913l1

C97-0N-_0C90.N FOORO IA 2-5 20 0.70 00.00 -E9 09.09 6.00, I?10,0 0.0 20 20.09 20.921 30.04 26.55 4. 2.70

00H00IN02DE0 - .- 9 -- 4 .-- 2:1

00T9RA202N0L0A0 0.02 52 0,71 0.5.4 00.94 019.460 00..4 17.36 23,0 59,UO 30,04 30,04 00,5 4.05 2.76

0000 T--9- -41 S- 2.0 5710- ,7 .05.0 52 5.71 5.7 4-7 5,72

0950TNC - 1.179 .5 .4 29 2,40 2,02 2.200 2,12 ,0 33 4.07 404 4.055704

F0000 - - - - 4,30 2,09 2.90 3,02 2.10 4.20 4.00 3,55 3.69 3,04 4,02~~~~ 10 71,4:1' 4,,~, 194:1

000 -- - - - 0,00 2.09 2.32 2,40 2,00 7.27 2.90 2,07 3.31 3,200 3.71~~~~~~~~~~~~~~125 .5 25 2., .~,2.I 2s~ .l

o00~~~~~ - - .02 .00 .09 .920 .09 .02 .09 .00 .00 .09~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.1 " .. B

000 1006 1000 - - .95 1.00 090 1,01 0,0E 1,00 U.01 0.91 0,91 1.90 1.920~~~~~~~~~:,99:I~ ~ 191 ~11 1.1 9

DFR- - 4 .2 0 . 93 9,0:0 0.09 0.00 0. 20.3 1.49 ,0

090 FOD- -- 0 . 25 .25 2 .220 .25 .05.2 .25 .70

0001 - --,- 00.0 090 000.00

SOR-TOTEI - ROFOOOFSO 00,0~~~~~~~~~lI.9 ,620 3.41 4.01 4.05 0259 2,, 23.79 2, 20.50 2o.3 22,00 52,0 00,30 59,3 53.55

TAXER POYERoF 7,70~~~~~~~~~~~~~~~.1 00.02 12.03 14,7 220.44 32,25 - -30.0 3F 4 49,0 49.20 39.00, 00,73 00.40 00.77 70,2 09.2

900900 0F00019 00 2.00 02.00 12.0 12 1212.0 2,00 12,00 1,2

030T FF0009 030 0070 130 100.24 121 101,52 005.91 200,00 1, O 0 7.02 120.40 106.0 204,07 29.4t025

040[A,O SOOFUS 3,200 .00 30.,0 20,0 00.03 52.27 03,03 140, SioO.9S, 2-.09 109,o21 1.001 24.54 40,52 23.05 45,72

01I-001,1 00!2-vl1 3.90 4.4 30,020 -02.00 002,0 02,9 229 '2 01,4 O -S U.'î -0',t0,0 20.29 274.32 4200,43 45,9

'403-

08005154NIA ASIE 8-o

GUELBS IRON DU0 Pll00l f,ïo 6

BALANC4E 5500(US0 MIILLION)0GRPIEN1

001,' <'00 101I.2 13 01 100 1900 1907 190A l'a, 1940 1_93170 1993 174

C000EN1 OSOETO

0000 AND0 06A4. 1.9 0 7. 1 OY.,2' 1 o 190 1 . 17.0 70.10 19~.30, <00 01 23002 .935.5340

R0000061 Il..) 1.7<6.4 20>9 7'O '7 O 10,10 30.7~3 0,28 ? 2090 2.92 89 87 30

ECE VA05EES 11,2 10.0. î0l 5. 40 ,40 1<110' 54.10 49.09 51 1,25.35315,15.0

0U07-070î 79.07S 51 G Il I l la105,a~ 2[ 2'îo.24 .0<' 254 l,3 293.06 3177.,6~ 367,62 40.5435

F1000 A70E00 30.' 27 017.'33 "I"063 01.0. 754.. T0<' 13 L010 O3 1051 11040.00 03 17,2 1.102. 57 I4l.' 14541 450 598 518

LSO :100.4082. 6 "03.1' 0 174.07 .102.0 O14 971 .01 067,5 1.47 S70,02- 9o3,51 1002 123 212

OTFIEOO A5010 77 1"1 71I.'.0.7 .17 1 1 1

rf0T00 ASEr0 16-, 3. 70 0I1t,2 4,3î 7,2 94 <0 S. o1.4>1 10,9 1'- 70.35 F15.4 19301.9 0.9182

0000, 1094100 GO 7.1.1901 O 76 0.03, 0,41 .1.01 4.7' 17,.0 0 27 717 1,37 7927 2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.î3 50.07 58.36 59,36 03.55 36,58~~~~~~~~~~~~------ -- ---

00000 1.10 9,00 .7.77 3,03 0,7 4>0 7 0.72 4.73 0,70 4.90 0,90 4,00 4.98 4,98 4.94~~~~~ 4.~IIA il's.8 ~ 194.9 4:9 499 .984.~

00UP0TOTAL II..A .35 I.1 L . .0.04 o.1.14 7<2 2,4',7 O .07. Il. IL 4.90 - 7

0080 l~~~ ~ ~~~~~ ~ ~~~~~ ~~~~~~~~~ ~~~~~~~~~~~~099 U,0' '. 5,î7 1.3 31,70 20-<2:, 7.96 17.15 51.43 5.72--

0000 -O 0,77 3.A 4

3.U LI37.7< 2 e i 1I 2 17,49 11,1545.0.0

000010 0040 0,01. 45.9- 30,72 O 31.27 28,70 20,05 23.75 21.25~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~_ 3:531.2 8 1 5..L13. 0 21

F4WAIT FO NI 43.9 27 17 1 13~9.54 2,8 40--

000 O 77 20.7.. <0.07 O 10.55 7,24 3,73 .02 .02~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- 43

060F~~~~ ~~~~~ ~ ~~~~~~~~~ ~ ~~~~~~~~~~~ ~ ~~~~~~~~~~~~ 141," 5 720 I 3./ 8,89 8.00 7,18 6,22

0811 0080 0080 70,0 7)1.0 ". 00 19,91. 14 35 'I '3 Il 0.03 5,71 3.81 1,90 -~~~~~~~~~~~~~~~~~1 ~41:4371 .91 19

00070 Olo' 7.03 4.40 3,11 1.61 .00 .00~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~9 I'A4 9 . 10

AFDI0 0000 000000 . . 20,797 .97 0 0000112 1125037 75062

000-0E 0 F3,9 3,4U00 9'N1,1D3 3 0.,1 '77 4 6 25' . 7 35.0 30.52281 4.2100

LI0 1 O ) O1 S~ O '.0 009

ANK00 44S0 00 <.0 0 0'1<00 170 7107.1 23.023,93085370

'00PFLIERS CREDIT <" 7"( 11.0 14. 3,9 - .2-127l.9 ,2

008-30106 1.9.35 ""7 Il 0 0"1 19 199<0 770 Il 000 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 370,22 421.10 473,11 536,07 576.40~~~~~éIT4,, 4B,1 -6215.0

TOTOL £7001110000/1 1>, ~~~~~~~~~~~~~~~~~~~~~~~0 277.39~jl,'A LI 1l7,23 000 ,35 807.94 009,90 779.2

rAN400 L,IG 7000<0 0000 03700 1 7,041 .00 2 .300 346 3 00

7007T 01. .A1 .7r,773 41 -,pO1 tb' 21974 3,3.,6 .905

A07T091 D 1131 l7.I1S

NEF P1711 AT~ T'.1,701'0'V .7

-108-

MAURIIMIA t25n1z6.-i18GUELES IRON OU PROJET

COEINOR-PRCtRCTRD ROU3EUR AIR OPEP0T75C COSTS

(Ugo 000)

197Y OR80 t'01 19112 19R1 1904 1905 t9tl6 1787 t9S13 190 1990 *991 1992 1993 1994

1. VARIABLE RATA

A. SALES VOLUME 1000 TNSI

ED1I4 9300.00 10000.00 007/0.00 10701,.10 70(0.0-1 70,J00 /800,00( 0800,0 0000OO S800.00 2600000 500.00 1500.00 1500.00 1200.00 1100.003UEELBS -- - - - 3111.00` 02:(`0.00 ?0200,00 2.?00).011 6200,00 0200.00 0400.00 12200.00 12500,00 12500.00 12200.00 11000.00lOTAL SALES VOLUME 9300.00 100()0.0 1 07000. 1020.1.00 1200(.00 lO'.00 140000.00 2(0001 .00 12000,00.020E 0OU 12000,00 13000.00 140000.00 14000.0E 14000.00 13000.0

R. SELLINE PROCES (USO/TON,

IIEIIIA 11840.0>0 1.310)'1,00tY 10050.00) 15 21111,0,1 15210,0 I > 5500.00 î2504.î0OiS2î.00 169201100 10 2 4 40 14483 30 1079.0 1 520000 65200 00 15200,00 12900.00

Il. REVENUE

6EDIA 111112.00 131000.00 151405.01 162.400.,1) t1113,. .00 120,1.20 1209302(0 102:100,00 00610000 .IlîOO.91` 33000,00 0037.0 228O()00 22800000 27380.00 14190.00GUELES 22 0.1 10o02 .60 l25.00 140/0,00 14/0,H101 W -6 o (/ 1 45103,02 198610,50 211250.00 211250.00 208100,00 201110.00

TOTAL REVENUE 100E CONASTI 4020 134000 , (10 1U .(,0 110000(,î2000.00 .916 /5-00 )1 .2'îH, 22/007-00 20` 040.0 0 192000.00 171862.44 170

011.6b 202255 SE 234050.Oîl "OOSO.00 233540.00 215300,00

TOTAL RFUENIJE (lJi CURRR 42E1390.59 163438.22 201 10.2 23:305.00 200525.20 .i500,02 '90021,.0E 213-09,10 31(620.-s 382000.57 3S9055.49 497367.77 6l4000.28 657652.24 702154.55 092o28.7

III.OPERATING COS0S

KEDIA ININRE 24645.00 30 ,00 2000.0. 2000.00 250 0 200.0 (1.00 15000.1,0 15000. OODO 000.1 1000 00 3200.00 2/00,00 3500.00 2000,00

OURLES5M7NIES - -- 0110.00 0400,00 5921(',00 11.3,0,00 11200,0>0 100.00 13200. 00 10200. 00 28700 00 2 U000 0 2UEOO 00 22000 64940000 31000.00POUUESOORU - - - I 044.î.îî I 20500,00 20530,00 20520.00 20530.00 20050.00 35050.00 03590.00 03590.00 05800,00 04400,00 48400.800O 29b 870000 1800.0 480 .0 4 4000,0 4100.0RAILROAII TRANSFORT 20779.00 232030.00 20020 .00) 20020.00 2'000).004 30000.0)0 2000î1).00 290000.00 2/l2,1.010 27120.00) 27/20.00 20120.00 32270.00 32500.00 32540.00 380610.00PORT HANDLINR 6805 .0 8020.00 820.00) 0 520.0 100'0.00 10100.00 1 /2/0,0 0950.00 8520.00 0520,00 0520,00 8540500 050000 U540.00 E230.0 0230,00

7LRTÉOUÉRES WITI WIND 2?-4 2 620 00 30 O? 2Ho)46 44bt 110 0 00lO . 3-, 25402543L46tO48t0 OOO IO OSELLINS /L00E OO 1R20.2 000 22.0 2520 05 0 501 OSol OloO.So 305.0 3502.2C~ 5 2400,/O 0053,40 4080.00 OoEV 800 300ZORERATE OVERHEADO 100000 110000 11000C,0 14000.0 lUOQ .00, 410/10.00' 1 0000,00 'loC 110.00 14000 .00 11000,0 140.00 11000,00 41000,00 10.0 11000 10.0NOUBADHIBU OVERHEArlS 10 3300.00 133000.00 1.32500.00. 1 3300.0(1 1[3300 1 30 (1300.00) 1 3300.00 133(10.00 13300.00 13300.00 13300.00 13300.00 13300.00 13300 00 13300.00rENERAL OUVRHEARS 2010,00 2390.00, 1000,00 . 181,1.00 1o711.00 îo'0.00) IO0.00 îo'0,00 167 0.00 10/0,00 1820,00 1800.00 1670.00 1870,00 1120,00

RESER 1800.0 ,0 1800, 100 4 , 0.Ot0 30040 0 60000 i300 00 300 00 300.00 0LERS SEVIRGS MEURIUSA 4" 02.0 0490.00 1210.00 2 O 8,0.003420.00" 0500/9,00 30.00 5500,00 5o21 31.O0,00 5800,00 5000.0 8400

TOTAL. COST (US$ CONSTANT) 03401,24 91900.00 94052,(4 9003.0b0 4(090215. 00 12900

.. 1 4254 150. L 0602L. 11310.00 403.3;25 230370.O 53 4533. 10174351.00 10305. 00 1526SOSO48506.8 000

TOIAL C080 (USS TURRENTI 0/321.07 114/60.56 1 21.0 ,1 12-24.3j0 10.02.6211. 0 2..14 21-,l4.00 219-115.04 2267222.05 /5002479 209075.80 3350)87.37 371195.56 403041,02 050955,0 420070,00

TDTAL C00T/TN (US$ CUNSFI 0975.40 9199.00 H0,9.504 (1l9.4 ' 792. O 0204.01 0i4./2 019.4i5 0430. 23 E94.044 1086.0 ,5 10502.55 1(096.50 10260.79 10903.63 IL431.23

F'ROFITBFFORF TAXE, DEPRECIATIONANI' FIN. CHARES RlISS CORN) 340O3.02 48,69.0, 110501, 31 i2 1oO./0 t29420,. 'A 16182134. 1 -023.04 I0 10.01140.03 l28761 162?O.402 24042.71 254010.40 20319.11 21055o.05

INDUSTRTAIL PFRUJECTS DEFOAO1NFNI13EfORl IREP AREj 05,4 t5./79

MAURITANIA - GUELBS IRON ORE PROJECaSNIM UTS OTIER TANI COMINOR

PROJECTED INCOME STATEMENT(UM Millions - Current Terme)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

STEEL PLANTTotal Revenues 150.2 311.9 293.0 316.3 344.8 379.8 411.1 448.9 488.2 543.8 581.9 622.6 666.2 712.8

Less: Operating CostL9a 184.1 253.0 263.9 280.2 264.7 283.2 303.0 324.5 347.1 378.3 405.9 434.3 464.7 497.2

Depreciation 25.0 51.0 51.0 51.0 51.0 53.0 53.0 53.0 53.0 53.0 4.0 4.0 4.0 4.0

Financial Charges 20.0 23.0 18.0 13.0 8.1 4.2 3.4 2.7 2.0 1.2 .5 - -

Net Profit (65.9) (15.1) (39.9) (27.9) 21.0 39.4 51.7 68.7 86.1 111.3 171.5 184.3 197.5 211.6

SN7MEXTotal Revenues 90.0 109.2 157.7 167.4 197.1 188.6 178.6 187.0 193.4 197.0 210.8 225.5 241.3 258.2

Less: Operating Costs 76.5 87.2 127,0 135.1 155.2 152.8 143.7 148.8 152.0 156.2 167.1 178.8 187.8 201.0Depreciation 12.7 12.5 8.3 5.4 5.2 5.8 5.8 6.1 6.1 6.5 1.0 1.0 1.0 1.0

Financial Charges - -- - - - - - -

Net Profit .8 9.5 22.4 26.9 36.7 30.0 29.1 32.1 35.3 34.3 42.7 45.7 52.5 56.2

DCPPTotal Revenues 1,279.2 1,512.7 1,853.5 2,201.3 2,427.0 2,678.5 3.032.9 3.246.3 3,578.4 4,150.7 4,441.3 4,752.2 5,084.9 5,440.8

Less:Operating Costs 1,178.3 1,283.8 1,590.0 1,875.8 2.065.7 2,278.3 2,595.0 2,765.3 3,045.2 3,54Z.4 3,790.4 4,055.8 4,338.7 4,743.4

Depreciation 11.0 17,9 19.6 20.1 21.4 26.9 32.9 39.3 46.1 54.4 55.4 57.4 59.4 62.1

Financial Charges .7 - - - - - - - - - -

Net Profit 89.2 211.0 243.9 305.6 339.9 373.3 405.0 441.7 487.1 553.9 595.5 639.0 686.8 635.3

CYPSUn OPERATIONTotal Revenues 24,4 42.3 44.3 70.3 75.2 80.5 86.1 92.1 98.6 105.5 112.8 120.7 129.2 138.2

Less: Operating Costs 18.4 32.7 34.0 48.3 51.7 53.6 57.3 63.3 67.8 72.5 77.3 82.9 88.8 95.0

Depreciation 1.1 3.5 0.4 0.4 1,2 1.2 1.2 1.2 1.2 1.6 1.6 1.6 1.6 1.6

Financial Charges - - - - -- - _ - - - _ - -

Net Profit 4.9 6.1 9,9 21.6 22.3 25.7 27.6 27.6 29.6 31.4 33.9 36.2 38.8 41.6

H1EAD OFFICE & SUPPORT SERVICESTotal Revenues 158.5 134.6 106.3 113.8 121.7 130.3 138.2 148.3 158.7 169.8 181.6 194.4 208.0 222.5

Less: Operating Caste 550.6 557.4 495.6 530.5 567.7 607.4 641.8 652.0 697.9 746.8 799.0 855.0 914.8 978.9

Deprecistion 103.3 115.1 103.1 75.3 61.0 63.7 70.6 82.0 93.3 111.4 106.3 119.8 139.1 151.7

Financial Charges 70.5 23.2 6 2.4 0.8 - - - - - - - -_

Net Profit (565.9) (561.1) (499.3) (494.4) (507.S) (540,8) (574.2) (585.7) (632.5) (688.4) (723.7) (780.4) (845.9) <908.1

TOTAL NET PROFIT (536.9) (349.6) (263.0) (168.2) (87.9) (72.4) (60.7) (15.6) 5.6 42.5 119.9 124.3 129.7 36.6

Industrial Prajeets Oepartment

May 1979

tLAURTTANIA - GU8LBS IRON ORE P.ROJECTNl NTITS_R TRANCOEIINOR

_O0CTED_0BALNCE Sh'ET(UM Million)

1978 1979 1980 1981 19S2 1983 1934 1933 1986 1 37 1988 1989 1990 199' 992

(Jurreet AssolaCaa7 and B-ske 261.0 147.2 442.7 296,7 285.0 406.2 592.0 835.6 875.0 931.7 1,017.5 1,067,2 1,165.7 1,271.8 1,283.2Onveevableîn

7 9 3 .2L 518.012 67.0 81.2 95.4 103,6 113.5 125.9 138.3 151.1 174.6 181.2 188.2 195.7 2.73.8Inaventories 492.1 264.0 283 3 298.5 352.4 322.2 325.6 332.8 340.0 345.4 368.3 368.3 368.3 368.3 368.3vInte Unît Acceenîns _ 409,8 _- - - _

snbtotal 1,856.1 921.2 792.6 676.4 692.8 832.8 1,031.1 1,294.3 1,353.3 1,428.2 1,560.4 1,616.7 1,722.2 1,835.8 1.860.3

Fixed AssletFiord assola 1,714.4 1,991.0 2,137.3 2,184.3 2,241.1 2,318.8 2,411.3 2,520.0 2,657.0 2,818.6 3,025.4 3,260.5 3,492.7 3,745,4 4,031.0Less dnprnstina (35. t505.3) 785.3) 887.7) (1.039.9) (1.179.7) (1,330.3) (1,493.8) (16735.4) (1.875.1) (2_102,0) (227O.

3) (2_454.1) (2659%2) (2879.6)

Not Fiord A-nota 1,362.2 1,485.7 1,432.0 1,296,6 1,201.2 1,139.1 1,081.0 1,026.2 981.6 943.5 923.4 99012 1,038.5 1,086.2 1,151.7

0_cr Anneatste 17007 4/ 1,319,5/3 1,205.5 1,O61.2 887.2 657.4 23854 -4- -

Oth-e 4 9912 L2 49.2 49.2 49.2 49.2 49.2 49.2 49.2 49.2 49.2 49.2 49.2 49.2 49.Z 49.2SOnhtotl 2.199.6 1,3i8.7 1.254.7 1,110,4 936.4 706.6 587.8 49.2 49.2 49 4949.2 49.2 49.2 49.2 49.2

TOTAI. ASSErS 3,217.9 3,775 6 3 479.3 3,083 4 2,830.4 2,677.7 2,399.7 2.369.7 2,384.1 2,420.9 2,533.0 2,656.1 2,810.0 2,971.2 3,061.2

LIAB LITIE

Cnrrent 1.iahilitlrsAreontat payables 456.4 273,4 304.1 363.3 414.9 454.3 494.1 542.2 i90.3 639.5 727.1 754.3 783.4 814.6 84S.0Othver bor-tterm liabilities 2,838.41 53. , s O 88.0 88,0 88.0 88.0 38.0 38.0 38.0 38.0 88.0 38.0 88.0 S8.0 38.0 iC_nront pnrtien of Ivvg tern dAnt 413.9 427.4 192.1 136.4 104.1 245.4 18.18 .8.0 18.O 18.0 18.0 - - -

S.btetal 3,708.8 1,238.8 584.2 587.7 607.0 787.7 600,1 648.2 694.3 745.5 833.1 842.3 871.4 902.6 936.0

Lee,e-Trrn DobtBsnk tsars 778.4 543.0 579.9 439.5 335.4 90.0 72.0 54.0 36.0 19.0 - . -Lnag- toerm nvr 450_ -_ - -

SOnhtotal t,526 4 543 0 575.9 439.5 335.4 90.0 72.0 54.0 36.0 18.0

Shsrohn1dors capItal 458.0 2,708.0 3,383.0 3,383.0 3.383.0 3,383.0 3.383.0 3,383.0 3,383.0 3,383.0 3,383.0 3,383.0 3,383.0 3,383.0 3,383.0

Reltiord .areivgr (253,9) (790.8) (1,149 4) (1,403.4) (1,571.6) (1,659,6) (1,732.0) (1,792.1) (1,807.3) (1,802.2) (1,759.7) (1,645.8) (1,521.0) (1,391.0) (1.334.4)

Pînniaion- 76,5 _ 7'. 6 77.6 736. 6 73.6 6 54 7.6 75.6 7.5 74. 6 74.6 .6 76.6Snbtntal 298,7 1,993.8 2,319.2 2,056.2 1,888.0 1,800.2 1,727.6 1,667.5 1,651.9 1,657.4 1,699.9 1,831.8 1,938.6 2,068,6 2,118.9

TOTAL LIA31LITTES 5,217,9 3,775.6 3,479.3 3,083.4 2,836.4 2,677.7 2,399.7 2,369.7 2,384.1 2,420.9 2,533.0 2,656.1 2,810.0 2,971.2 3,061.2

1 Inelnding 450M U mIllion noton te br pAid by SNIM eld 1979 or secon. t oE hllFE8RM enpen -otlnn a,,d reimbnrsed by Stal:e nlneltoernsly.L2 Il " 1 v ' " ed 1980 " v "/3 e1-l1,ding aonneta dibvared by SSIM on Slote' aoeen-t i 1978 .. d in 1979 rospoetivly 112.5 UM million Le 1978 .,d 230 cil illion in 1979 On tn

loduatriai Prvrecta llep snlvetl 9May 1979

MAURITANTA - GUELBS IRON ORE PROJECT

SNIM - PROJECTED CONSOLIDATED CASH PLOW

(UM Millions - Current Terms)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

T - COMINOR

Total sourceo.-l 3,610.4 5,458.6 10,177.0 9,374.3 6,885.4 7,258.6 8,058.0 7,652.9 9,413.2 11,150.4 7,206.8 7,717.2 10,916.7 11,390.1Total Application /L 3,436.5 5,432.3 8,755.1 8,203.4 5,048.5 4,568.7 5,216.7 9,486.8 10,086.1 9,805.4 8,092.8 7,717.9 8,912.5 9,206.4

Net Annual Surplus 173.9 26.3 1,421.9 1,170.9 1,836.9 2,689.9 2,841.4 (1,833.9) (672.9) 1,345,0 (886.0) (0.7) 2.004.3 2,183.7

II - SNIN UNITS OTHER TRAN COMINOR

Sources

Profit before Taxes & Fin. Charges (445.7) (303.4) (238.1) (152.8) (79.0) (68.2) (57.4) (12.9) 7.6 43.7 120.4 124.8 129.7 36.6Depreciation 153.1 200.0 182.4 152.2 139.8 150.6 163.5 181.6 199.7 226.9 168.3 183.8 205.1 220.4

Sabtotal (292,6) (103.4) (55.7) (.6) 60.8 82.4 106.1 168.7 207.3 270.6 288.7 308.6 334.8 257.0

Additional EqCity 2,250.0 6750 - - - - - - - - - -Disbursement Existing L.0.. 243 4 225.01k - - _ - - _ _ _ _ _Reioborseeent State Debts 630.9- 114.0 144.3 174.0 229.8 419.0 238.4Reimb.re.ment Cooinor Debt 409.8 - - - - -

Total Sources 3,241.5 910.6 88.6 173,4 290.6 501.4 344.5 168.7 207.3 270.6 288.7 308.6 334.8 257.0

ApPlications

Investneu-s 276.6 146.3 47.0 56.8 77.7 92.5 108.7 137.1 161.6 206.8 235.7 232.2 252.4 265.9Incre.ents in WHrki.g capital 1,964.0 (4.4) (29.8) (23.5) (21.3) (26.5) (29.2) (28.5) (31.0) (41.2) (14.6) (22.1) (23.7) (25.3) SDisbursemsent State 250.0 - - - - - - - - - - _ _ _Financial Charges 91.2 46.2 24.9 15,4 8.9 4.2 3.4 2.7 2.0 1.2 .5 - _ _Losn Repsyments 465.3

3 9 0 . 6 Lb 192.1 136.4 104.0 245.4.1k l8.0 18.0 18.0 18.0 18.0 -

Total Application 3,047.1 615.5 234.2 185.1 169.4 315.6 100.9 129.2 150.6 184.8 239.0 210.1 228.7 240.6

Net Annual Surplus 194.4 295.1 (145.6) (11.7) 121.2 185.8 243.6 39.5 56.7 85.8 49.7 98.5 106.1 16.4

11I - TOTAL NET ANNUAL SURPLUS 368.3 321.4 1,276.3 1,159.2 1,95S.1 2,875.7 3.085.0 (1,794.4) (616.2) 1,430.8 (836.3) 97.8 2,110.4 2,200.1

C17MULATED ANNUAL SURPLUS 368.3 689.7 1,966.0 3,125.2 5,083.3 7,959.0 11,044.0 9,249.6 8,633.4 10,064.2 9,227.9 9,325.7 11,436.1 13,636.2

CUMULATED ANNUAL SURPLUS ($ Million) 8.18 15.33 43.69 69.45 112.96 176.87 245.42 205.55 191.85 223.65 205.06 207.23 254.14 303.03

/e S.mmarleed fr00 Annex 8-2, Page 2

IF UM 225.0 million is recorded as both a source and se aof fonds in 1980 repreaenting a US$5 million loan with UES which SNIM hopes to roll over.Le Includes 25% of taxes payable In 1979 plus *11 1978 taxes which are due to State and which appear iS 1978 balance Bh.et in the short ter. debts.

Induatrial Projeeta LepartasntaMay 1979

MAURITANIA - GUELBS IRON ORE PROJECTSNIM - PROJECTED CONSOLIDATED BALANCE ShEET

(bM Million - Cornent Tenon)

1978 1979 1980 1981 1982 1983 1984 1983 1986 1987 1988 1989 1990 1991 1992

Cotrrect AssetsCash anAd Be-ks 271.5 528.2 877.0 2,158.0 3,320.5 5,348.1 8,342.3 11,415.1 9,583.4 8,941.4 10,383.1 9,589.5 9,745.6 11,91086 14,122.8Receivobles 1,586.6 991.7 646.5 762.8 837.2 1,023.7 1,242.5 1,254.9 1,129.2 1,027.8 936.5 868.7 1,176.2 1,492.9 1,501.0Inventories I,.912.0 1_838 1,894.2 2,029.1 2 ,287.2 2 ,639.4 2,772.5 2,516.6 2.295.1 2,090.9 2.,356.8 2613. 2,675.0 2,724,1 2 781.2

SbLtota 3,770.1 3,350.7 3,417.7 4,949.9 6,444.9 9,011.2 12,357.3 15.186.6 13,007.7 12,080.1 13,676.4 13,071.9 13,596.8 16,127.6 18,405.0

Finad AnnotaFixed assets 18,935.9 20,457.6 24,999.4 32,254.7 38,665.6 40,77'.5 41.445.0 42,872.2 49,258.5 56,1S4.3 62,127.8 65,479.3 67,656.9 69,188.0 71,314.0L,ess leprociati: f4(11,254.1) (12.2 352 1 (13534.7) (14,421001 (15,665.2) (18_49 .6± (21,952.7) (24.916.5) (27,559.1) (29,823.3) (32,123.4) (36,810.8) (41,608.8) (46,021.4) L3054B.i.5

Not Fixeld Asets 7,681.8 8,223.5 11,544.7 17,834.7 23,000.4 21,933.9 19,492.3 17,955.7 21,699.4 26,321.0 30,004.4 28,668.5 26,048.1 23,166.6 20,725.1

Othcr Assotsstlte 1,700.3 1,319.5 1,205.5 1,061.2 807.2 657.4 238.4 - - - - - -Oth-e 507.0 56.9 56.9 56.9 56.9 56.9 56.9 56.9 56,9 56.9 56.9 56.9 56.9 56.9 _ 56.9

Oubtotal 2,207.3 1,376.4 1,262.4 1,118.1 944.1 714.3 295.3 56.9 56.9 56.9 56.9 56.9 56.9 56.9 59.9

TOTAL ASSET8 13.6 L5 12,952.6 16, 2 24.8 23,902.7 30,359.4 31.659.4 32,144.9 33,199.2 34,764.0 38,438.0 43,737.7 41,797.3 39,701.8 39,351.1 394l87.0

L.IA3ILITIES

Cornent LiablitiesAccounts psa/bles 1.289.4 628.9 697.5 750.0 799.2 939.3 1,096.6 1,120.4 1,113.9 1,136.7 1,271.3 1,400.3 1,479.9 1,552.4 1,610.0Oth-e shoot taon l3onlu8ien 5,673.3 7.i2.1 312.1 312.1 312.1 312.1 312.1 312.1 312.1 312.1 312.1 312.1 312.1 312.1 317.lCerront p-rtior cf Iocg-rercs dobt 709.3 735.7 390.6 317.0 322.2 812.1 1,015.7 1,097.8 1.176.7 1,210.7 _t.? 1_237 5 2,568.3 2,626.5 2t.r71.2

Sob total 5,872.0 2,126.7 1,400.2 1,379.1 1,433.5 2,063.5 2,424.4 2,530.3 2,602.7 2,659.5 2,804.6 2,949.9 4,360.3 4,491.0 4,593.3

Leno-terîo DabtBonk loins 1,460.8 1,913,4 5,033.1 1O,51L,8 14,475.0 14,743.0 13,727.3 12,629.5 11,452.8 12,492.3 16,671.7 18,584.5 16,466.3 13,839.8 11,168.5Log tem nootes 450.0 - - -_- __ - -

Sobtotal 1,910.8 1,913.4 5,033.1 10,51t.6 14,475.0 13,727.3 12,629.5 11,452.8 12,492.3 16,671.7 18,584.5 16,466.3 13,839.8 11,168.5

Sharohlldcts capital 6,433.9 9,896.6 10,571.6 L1,246.6 11,840.7 IL,840.7 11,840.7 11,840.7 11,840.7 11,840.7 11,840.7 11,840.7 11,840.7 11,840.7 11,840.7Rotalnil earolngs (698.1) (1,115.8) (911.8) 530.5 2,505.5 2,877.5 4,018.0 6,064.0 8,733.1 11,310.8 12,286.0 8,287.5 6,899.8 9,044.9 11,449,8Provisions 134.6 134.7 134.7 134.7 134.7 154.7 134.7 134.7 134.7 134.7 134.7 134.7 134.7 134.7 134.7

Subtotal 5,876.6 8,912.4 9,791.5 11,911.8 14,480.9 14,852.9 15,993,2 18,039.4 20,708.5 23,206.2 24,261.4 20,2 2.9 18,975.2 21,023.3 23,425.2

TOTAL LIABILITIES 13.659.4 12,952.6 16,224.8 23,902.7 30.389.4 31659 4 32.144. 33,199,2 3457ô4.0 384438.943_7377 41,797 3 307701.8 39,351.' 39%187.0

Debt Eq,ity Ratio 25:75 18:82 34:66 47:53 50:50 50:50 46:54 41:59 36:64 35:65 41:59 48:52 47:53 40:60 32:68Cornent Ratio 0.64 1.58 2.44 3.59 4.50 4.37 5.10 6.00 5.00 4.53 4.87 4.43 3 12 3.59 4,00Dobt Servioo CoJeta3e Ratio .7 .5 1,6 3.5 3.8 4,2 3.4 3.4 3.3 2.9 1.9 1.0 1.6 2.1 2.3

Inloatnial Projents Departt.entMay 1979

- 11.1 -

ANNEX 8-5Page 1 of 3

MAURITANIA - GUELBS IRON ORE PROJECT

FINANCIAL RATE OF RETURN AND SENSITIVITY ANALYSIS

Input Data

The incremental, internal financial rate of return calculation for

the project is based on incremental cost/benefit streams in 1977 real terms,

obtained by comparing the financial data for COMINOR as a whole with a

hypothetical case "without the project" in which only the production of the

existing Kedia mines would be available until their exhaustiLon. The methodo-logy and assumptions were the following:

(a) For the case "without the project" it was assumed thatCOMINOR would have to maintain production at Kedia at anaverage rate of 8 million tpy until exhaustion of the depositin 1990 in order to attain the breakeven point. This productionlevel is higher than the 5-6 million tpy assumed Ito be theKedia's share in COMINOR total output in the case "with theproject". Costs of additional investments and replacements forKedia have been recalculated accordingly;

(b) A scrap value of 5% of fixed assets and 100% of working capitalwas assumed in the case "without the project". The scrap valueof fixed assets in the case "with the project" was assumed at 25%in the year 2000 since in this case production from the Guelbswould continue after that date;

(c) Operating costs of COMINOR have been increased to include thatpart of SNIM's overheads pertaining indirectly to COMINOR. Thetotal overheads pertaining to COMINOR (the indirect ones plusthose included in COMINOR's financial projections) have beenassumed at 70% of SNIM's total overheads; and

(d) Preinvestment expenditures for the Guelbs, prior to 1979, esti-mated at US$18.6 million have been added to the capital costs.

All calculations are based on a 25-year period which includes 16 years of fullproduction of the Guelbs Phase 2.

- 112 -

ANNEX 8-5Page 2 of 3

INCREMENTAL FINANCIAL RATE OF RETURN

Sensitivity Tests

Capital Operating Revenue Rate of ReturnCase Cost Cost %

1 Base - Before royalties 100 100 100 5.4

2 Base - Capital costs up 10% 110 100 100 4.3

3 Base - Operating costs up 10% 100 110 100 2.9

4 Base - Revenues down 10% 100 100 90 1.6

5 Base - Revenues up 10% 100 100 110 8.8

6 Base case with one yearslippage in startup 100 100 100 4.8

7 Base case after paymentof royalties 100 100 100 1.3

8 Base case excluding US$20million in extraordinarycontingencies 100 100 100 5.8

Industrial Projects DepartmentMay 1979

- 113 -

ANNEX 8-5Page 3 of 3

MAURITANIA - GUELBS IRON ORE PROJECT

INCREMENTAL FINANCIAL RATE OF RETURN

COST AND BENEFIT STREAMS(US$ million)

Incremental Incremental IncrementalYear Capital Costs Operating Costs Benefits

1978 19.8 -1979 18.3 0.8 -1980 76.9 7.8 7.81981 123.4 10.2 28.21982 96.6 12.3 41.1

1983 26.9 23.1 70.21984 12.5 56.1 85.61985 1.5 53.5 103.81986 6.8 52.0 103.81987 62.1 46.9 86.5

1988 67.6 43.8 71.31989 58.1 49.5 66.01990 29.6 61.4 65.81991 67.8 68.3 89.61992 14.8 147.1 234.1

1993 14.7 149.4 234.11994 19.1 152.7 233.61995 6.2 148.6 215.61996 4.2 149.0 215.61997 13.5 140.3 215.6

1998 12.7 140.3 215.61999 20.2 140.3 215.62000 18.2 140.3 215.62001 - 140.3 215.62002 (232.9) 140.3 215.6

Financial Rate of Return Base Case 5.4%

Industrial Projects DepartmentMay 1979

- 114 -ANNEX 9-1Page 1 of 3

MAURITANIA - GUELBS IRON ORE PROJECT

ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS

Assumptions

The incremental economic rate of return has been calculated on thesame basis (with and without the project) as the financial rate of return.The incremental costs and benefits streams have been derived from cost/benefitstreams shown in Annex 8-5, with the following modifications:

(a) Mauritanian personnel costs have been shadow priced at 30%and 50% of the financial costs, respectively, for labor andforemen. The corresponding reduction in operating costs is7%. This is a conservative assumption in view of the non-marginal nature of the project, and the lack of alternativeemployment opportunities that would be available, were theproject not to be implemented and the Kedia deposits ex-hausted in 1990;

(b) The various indirect taxes have been deducted from theoperating costs. Their aggregate represents an averageof roughly 3% of FOB ore export value;

(c) Similarly, Mauritanian personnel costs have been shadow pricedand indirect taxes deducted, in the local components of initialcapital costs and replacement costs, representing civil worksand erection works carried out by contractors, as well as thesame works and replacements carried out by SNIM's own forces,throughout project life. The corresponding reduction averages3% of capital costs;

(d) The costs resulting from the closure of the mine have been addedin the case "without the project". They consist of the cost ofresettling the population of Zouerate, F'derik, the railway main-tenance stations and part of the population of Nouadhibou whichwill have no alternative means of subsistence in these desertareas and would have to be relocated in other parts of Mauritaniaif the mines were to be closed. The corresponding costs includ-ing moving, the creation of basic-work and other infrastructure,etc., have been estimated at US$2,000 per person on the basis ofcomparable costs for existing or new rural and urban resettlementprojects in Senegal and Mauritania. The resettlement cost forthe 40,000 persons assumed to be involved has been spread overthe 1990-92 period; and

(e) No shadow pricing of foreign exchange has been assumed since100% of iron-ore sales revenues, 70% of recurrent operatingcosts, 90% of investment outlays and 70-80% of replacementcosts are denominated in foreign exchange.

- 115 -

ANNEX 9-1Page 2 of 3

INCREMENTAL ECONOMIC RATE OF RETURN

Sensitivity Tests

Capital Operating Revenue Rate of ReturnCase Cost Cost _

1 Base 100 100 100 11.8

2 B. - - Capital casts up 10% 110 100 100 10.3

3 Base - Operatir.g costs up 10% 100 110 100 10.2

4 Base - RevenuAs down 10% 100 100 90 8.6

5 Base - Revenues up 10% 100 100 110 14.7

6 Base Ca-se witth one year delayin Startup 100 100 100 10.3

7 Base Case with pre-1978exploration & study expendi-tures as sunk costs 100 100 100 12.6

8 Base Case excluding USS20mii lion extraordinarycontingencies 100 100 100 12.4

industrial Projects DepartmentMay 1979

ANNEX 9-1Page 3 oL 3

MAURITANTIA - GIJELBS IPON.' ORE PRvo)ECT

INC RrMFNTAL ECONC`MIC R-TF, 0F RET'LlN

COST AND BENEFIT STREAMS(US$ million)

Incremental Incremental Increment aiYear Capital Costs Operating Costs Benefits-

1978 19.2 -1979 17.3 0.7 -1980 79.2 5.2 7.81981 119.1 9.1 28.21982 93.0 10.9 41.1

1983 25.5 18.2 70.21984 11.8 45.9 85.61985 1.0 44.2 103.81986 6.5 39.2 103.81987 60.7 38.4 86.5

1988 66.1 34.4 71.31989 57.2 39.1 66.01990 29.5 48.9 65.81991 64.7 53.9 119.61992 13.3 121.0 264.1

1993 14.5 122.9 254.1.1994 18.9 130.4 233.51995 7.4 127.0 215.31996 5.1 127.3 215.31997 12.7 120.1 215.3

1998 12.3 120.1 215.31999 19.6 120.1 215.32000 17.6 120.1 215.32002 - 120.1 215.32002 (226.1) 120.1 215.3

Economic Rate of Return Base Case: 11.8%

/1 Including saving of costs which would be incurred because of closing minesand townsites if the project is not implemented.

Industrial Projects DepartmentMay 1979

MAURITANIA - GUELBS IRON ORE PROJECTTOTAL FOREIGN EXCdANGE EFFECTS OF COMINOR

(US$ Million - Current Terms)

19'9 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

I. FOR l(3i. EXCIANGE INFLOWS

Forc,igT. FinaAcing 49.8 73.0 146.0 106.2 24.0 - - - 50.0 120.0 70.0 10.0 - -ExuorL 'a1es '28.4 163.4 202.1 232.3 296.1 372.6 398.6 389.7 386.5 383.0 390.0 497.4 614.6 657.7

To.aJ Inflows 1.78.2 236.4 348.1 338.5 320.1 372.6 398.6 389.7 436.5 503.0 460.0 507.4 614.6 657.7

2. trOISiGN ;XCHOANGE OTLFLOWS

Cr5pitel Ex.enditure/.sl- 24.5 85.9 146.2 127.1 40.7 1'.5 21.3 118.3 128.2 117.6 64.9 50.8 32.4 37.7

81.5 95.1 98.3 104.8 133.3 167.3 165.5 166.0 172.0 192.7 225.7 252.5 279.5 303.7

Deb.: Servïce 9y3 12,2 14.1 19.4 23.7 31,9 40.3 40.7 43.2 49.2 56.8 58.3 87.9 85.0

Dividands _ _ _ 12.0 12.0 12.0 _- - 12.0 12.0 12.0 12.0

Total Ou,5lows 115.3 193.2 258.6 251.3 207.7 222.7 239.1 325.0 343.4 359.5 359.4 373.6 411.8 438.4

3. ÎOET FOREIGN EXCRANGE SURPLUS_ (ficit) 62.9 43.2 89.5 87.2 110.4 149.9 159.5 64.7 93.1 143.5 100.6 133.8 202.8 219.3

N2t Foreigr. Exchange 54,n 34.6 67.0 61.0 72.2 91.6 91.1 34.5 46.5 66.9 43.8 54.5 77.2 78.0Surç t,if, (lefiçit) Di constant 1977 terns

/1 Foreig.7 exchange comnponent estima_e4 ar 90% of total cost./7 Operating costs of COMINOR plus the part of SNIM's overheads pertaining to COMINOR (estimated at 70%); foreign exchange comiponent estimated

at 'T/ for 19'7-80, 76', in 1981, ?757. lr 1982; 741; in 1983-84, 73% thereafter.

lidus--rial Prujects Departmineu>5 z

MAURITANIA - GUELBS IRON ORE PROJECTINCREMENTAL FOREIGN EXCHANGE EFFECTS OF GUELBS PROJECT

(US$ Million - Current Terms

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

I. FOREIGN EXCHANGE INFLOW

1. Foreign Loans and Equity 43.8 73.0 146.0 106.2 24.0 - - - 50.0 120.0 70.0 10.0 - -

2. Incremental Export SaleseL 8.0 30.1 46.2 80.5 110.5 152.9 163.5 145.8 128.6 129.3 137.8 200.9 561.4 600.6

Total Inflow 51.8 103.1 192.2 186,7 134.5 152.9 163.5 145.8 178.6 249.3 207.8 210.9 561.4 600.6

Il. FOREIGN EXCHANGE OUTFLOW

Capital Expenditures 15.2 77.6 139.8 124,4 32.1 3.7 10.5 105.5 122.8 115.4 63.8 49.5 32.9 38.2

2, Operating _ExpndituresL3 5.4 10.3 13.2 20.8 59.2 64.5 60.4 63.2 60.5 74.8 100.2 118.0 283.6 308.2

3. Debt Service 0.3 3.9 8.8 16.0 21.0 30.6 39.7 40.1 42.6 46.6 56.8 57.6 87.1 85.0

4. Dividends - - - - 12.0 12.0 12.0 - _ 12.0 12.0 12.0 12.0

Total Outflow 20.9 91.8 161.8 161.2 124.3 110.8 122.6 208.8 225.9 236.8 232.8 237.1 415.6 443.4

III. FOREIGN EXCHANGE SURPLUS 30.9 11.3 30.4 25.5 10.2 42.1 40.9 (63.0) (47.3) 12.5 (25-0) (26.2) 45.8 15i.2

(Deficit) (Current Terms)

Foreign Exchange Surplus 26.5 9.1 22.8 17.8 6.7 25.7 23.4 (33.6) (23.6) 5.8 (10.9) (10.8) 55.5 55.9

(Deficit) in Constant 77 Terms

/1 Incremental sales as compared to case without the Guelbs with slow exhaustion of existing Kedia mine

/2 Incremental costs " " " " " " " " "

/3 Incremental " " " " I " "

including COMINOR's share of SNIM's overheads

Industrial Projects Department

May 1979

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