UN Sanctions may affect Canada's Nevsun, foreign companies

WHAT'S THE HISTORY?

* Apart from small-scale artisan mining and some minor extraction by Italians during the colonial era, Eritrea's mining potential is unexploited. The main interests are gold, zinc and copper.

* Now more than a dozen foreign companies are exploring in Eritrea, with licences held by groups from Australia, Canada, China, Libya and Britain.

* Most recently, Australia's Gippsland Ltd (GIP.AX: 行情) was last month granted three prospecting licences for north-western Eritrea near the Sudanese border.

WHO IS GOING TO PRODUCE FIRST?

* Eritrea's most advanced project is Bisha, run by Canada's Nevsun Resources Ltd (NSU.TO: 行情). Its 27 million tonnes of ore are believed to contain 1 million ounces of gold, 700-800 million pounds of copper and 1 billion pounds of zinc.

* Nevsun spent a record $21.7 million on the project during the third quarter.

* The project most likely to start producing after Bisha is Zara, run by Australia's Chalice Gold Mines (CHN.AX: 行情). The mine, also expected to hold 1 million ounces of gold, just completed a scoping study. Production is expected in 2011.

ECONOMIC LIFELINE?

* Analysts say Eritrea's economy can expect a welcome boost if its mineral potential is effectively harnessed. The agriculture-based economy has suffered from irregular rainfall and the global economic crisis, with aid agencies fearful of widespread food shortages and hunger.

* Asmara is supportive of the industry -- it holds a 40 percent stake in the Bisha project -- and welcomes building a base of skilled local workers. But, analysts say, Asmara will not see a profit on its investment until 2012 at the earliest.

* In a rare interview, President Isaias Afwerki told Reuters last month that the industry was unlikely to affect the lives of ordinary Eritreans. "It would be very damaging to expect improvement in the economy because we are mining gold," he said. [ID:nLL161440]

WHAT ARE THE RISKS?

* Security -- Last month three Eritrean miners working for Chalice were ambushed and executed on a remote road northwest of the capital. Officials say it was an isolated incident, not a targeted attack. Relations with Ethiopia and Djibouti remain hostile. Some bigger miners were scared off by the 1998-2000 border war with Ethiopia that killed 70,000 people.

* "Resource curse" -- Geologists insist on the sector's potential, but Asmara cautions it must be developed slowly to prevent the so-called "resource curse" whereby oil and minerals have spawned corruption and violence elsewhere in Africa.
* Sanctions -- The momentum towards imposing sanctions on Eritrea for its alleged role in war-torn Somalia has grown in recent months. It remains unclear how they may effect foreign companies, but according to one analyst, any disruption to the burgeoning mining industry would put pressure on Asmara.

- Sources: Reuters, industry sources, Eritrean government, company websites (Editing by William Hardy)