Madagascar faces uphill struggle to revive bruised mining sector

* Madagascar economy yet to recover from a coup in 2009

* Cash-strapped Madagascar govt courts mining companies

* Tumbling commodities prices hurt exploration prospects

* Miners fume about delays in issuing of permits

By Drazen Jorgic and Lovasoa Rabary

ANTANANARIVO, Aug 25 (Reuters) - When foreign mining firmsand Western donors were pulling funds out of Madagascarfollowing a coup in 2009, Austral Resources chief executiveScott Reid did the opposite and poured money in to the IndianOcean island.

Yet far from being rewarded, the company's $3.5 millioninvestment in drilling and exploration of a high-grade mine hasturned sour. Austral's permit to extract zircon, used inceramics, has expired and the project is far from production.

Sliding global commodities prices have hindered theAustralian firm but to Reid the main frustration has beenbureaucracy and government failure to renew its permit whichlanguishes in the mining ministry with about 4,000 others.

With woeful air links hobbling tourism and power outagesholding back its textiles industry, the former French colony'seconomic recovery after years of political turmoil hinges on therevival of its mining sector.

But without permits, most miners are unable to raise cash onstock markets or get loans to keep their projects alive. Recentpolitical upheaval, including attempts by lawmakers to topplethe government, have also eroded Madagascar's lure to investors.

"It's very difficult to justify investing in Madagascar whenyou see what's happened here in the last five years," Reid toldReuters in the capital Antananarivo.

It is miners like Reid that Madagascar must win over torevitalise its mining industry, which before a 2009 coupattracted 80 percent of the country's foreign direct investment.

The peaceful election of President Hery Rajaonarimampianinain late 2013 was hailed as a new start for Madagascar, whosedeposits of nickel, titanium, cobalt, iron, coal and uranium hadlast decade prompted the likes of Rio Tinto and SherrittInternational to invest billions.

Backed by donors who resumed aid flows, Rajaonarimampianinavowed to boost growth and restore the confidence of miners. Sofar though, his overtures have fallen flat.

"Companies are put off by the political instability and thehuge investment needed to build mines in a country with suchpoor infrastructure," said Barnaby Fletcher, a Control Risksanalyst.

EFFORTS HAMSTRUNG

Rajaonarimampianina's efforts have been hamstrung by a routin global commodities prices sparked by slackening demand fromChina, a major buyer of Africa's minerals. On the London MetalExchange the price of nickel, Madagascar's main export,this month tumbled to its lowest level since December 2009.

Analysts say mining investments in most 'riskier'jurisdictions, such as Madagascar, have ground to a halt. Juniorminers have struggled to raise capital for new projects whilegiants are in austerity mode, largely retreating from Africa.

"It's very difficult to make a case for new investment atthese current prices," David Pathe, chief executive of SherrittInternational, told Reuters.

Sherritt operates and owns 40 percent of the $7 billionAmbatovy mine, Madagascar's biggest foreign direct investmentand one of the world's largest nickel and cobalt plants. Othershareholders in Ambatovy are Japanese trading house SumitomoCorp and Korea Resources.

Corruption and a fresh political uncertainty has worsenedthe situation, mining executives say.

In January, the government resigned amid public frustrationabout power cuts and a dearth of opportunity in a nation of 24million. Lawmakers in May then impeached Rajaonarimampianina.The constitutional court overturned the impeachment but acensure vote in July nearly toppled the new government.

The re-drafting of Madagascar's business-friendly miningcode has also caused jitters and some fear the government may betempted to raise mining taxes to boost weak economic growth.

Reviving the mining sector is a top priority, said miningminister Joeli Lalaharisaina.

"Our strategy is to be prepared for the (increase) in(global) prices, so at that time we are ready to attractpeople," he said, ruling out big changes to the mining bill.

STABILITY AT A PREMIUM

In the meantime, the flagship Ambatovy mine has been hit bystrikes and Sherritt's Pathe said nickel prices at about $5 perpound make it hard to break even. Sherritt in June reducedheadcount at Ambatovy by 12 percent, laying off 1,100 people.

There are no plans for more cuts but analysts saidSherritt's hand may be forced if nickel prices fall further.

The number two mine, a billion dollar Rio Tinto project insouth Madagascar, has struggled amid falling demand forilmenite, used as pigment in paints, paper and plastics.

Annual mine capacity stands at 750,000 tonnes but output wasexpected to fall to about 240,000 tonnes this year from roughly300,000 tonnes in 2014. Yet there have been some positives.

Sherritt plans to ramp up Ambatovy production from about 90percent closer to full capacity.

Lalaharisaina said his ministry will soon start issuingpermits and parliament should pass the mining bill soon afterMadagascar hosts a big mining conference in September.

Even so, political stability remains at a premium.

"The single biggest thing for any foreign investor ... ispredictability and stability," said Sherritt Chief ExecutivePathe. "We've tried to stress to the government the importanceof that." (Writing by Drazen Jorgic; Editing by Matthew Mpoke Bigg andAnna Willard)

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