* Angry protests around mine site shows tensions
* Mining firms defend tax concessions as justified
* Govt says measures needed to lure investors
By Simon Akam
KEMEDUGU, Sierra Leone, Dec 8 (Reuters) - In the civil war of the 1990s, rebels in Sierra Leone went into battle singing "Mr. President, where are our diamonds?"
Eight years after the end of hostilities that claimed 50,000 lives and rocked a fragile region, Sierra Leone faces new tensions over its resource riches. This time around, the controversy surrounds not gemstones but iron ore.
In a country where average income is $340 a year, emotions run high over a resource wealth which if managed properly could allow Sierra Leone to put its painful past behind it and enjoy some semblance of prosperity.
But local disappointment over employment pledges that have yet to come true and resentment over special tax treatment given to international mining firms are becoming a political hot potato for President Ernest Bai Koroma's government.
Police used teargas and live rounds last month to break up a protest by locals in the central Tonkolili district after a land dispute over the mining site of London-listed African Minerals turned nasty.
Security forces say they merely fired warning shots into the air to disperse the crowd. But several people were badly beaten and in the days that followed, the thatched-roofed village of Kemedugu was like a ghost town as its men fled.
"African Minerals do not consider us as human beings," said Tamba Turay, one of the arrested villagers, stripped to his underpants in a stinking holding cell at Mena Police Station in the town of Makeni, 50 miles (80 km) from Kemedugu.
African Minerals wanted to construct a dam on a nearby area of farming land outside their lease agreement that included the villagers' "sacred bush". Locals objected, and when African Minerals vehicles tried to reach the site they barricaded the road, taking drivers and expatriate staff hostage.
That same night youths went to the mining site and torched a $400,000 drilling rig belonging to the company, destroying it.
The African Minerals' project at Tonkolili is the bigger of two large-scale extraction leases with British companies pushed through parliament by the government this year. The other is London Mining's redevelopment of an abandoned mine at Marampa outside the town of Lunsar.
African Minerals' Executive Chairman Frank Timis hails the the Tonkolili find as the world's largest deposit of magnetite, with 10.5 billion tonnes of the ore.
Yet a proposed $1 billion-plus investment in the project by Shandong Iron and Steel has been repeatedly delayed, as the Chinese firm asks for more time to conduct due diligence.
Mindful of the impact that mining revenues could have on the country's finances, Sierra Leone last year drew up a new mining act in a bid to ensure they were used properly.
But although the ink is barely dry on the new law, opt-outs mean that neither the London Mining nor African Minerals deals conform to its provisions or preceding tax legislation.
At the time the deals were struck Sierra Leone specified a corporate tax rate for mining companies of 37.5 percent.
Yet London Mining is initially paying six percent, and is exempt from royalty payments when in a tax loss position. African Minerals is paying 25 percent tax.
Last month Sierra Leone's environmental protection agency announced London Mining's operations were suspended due to failure to comply with environmental requirements.
Yet by the end of the day the head of the agency recanted and the company announced work was going on as usual.
"The mining companies are so powerful," said Abu Brima, the executive director of the Network Movement for Justice and Development, a civil society group in Freetown.
"They have the money, they are taking advantage of the poverty and vulnerability of the Sierra Leoneans and their institutions," he said.
That view is strenuously countered by the companies, who maintain that their special treatment is justified given the challenges of investing in a country like Sierra Leone.
"In 2009, the Government of Sierra Leone and London Mining agreed a fiscal package that attracted investment by an international company into a country perceived globally as having a high investment risk, during a period of economic depression," a spokesman for the company said in a statement.
"These incentives allow for an economically viable operation to be started quickly which meets the needs of the region, economy and country."
African Minerals' Frank Timis is equally staunch in defence of his company's agreement, noting the lease won parliamentary approval.
"I don't agree that we got any preferences," he said in a telephone interview. "I am not aware of any company director or employer who has ever been asked for a bribe or paid a bribe."
It is hard to overestimate the importance of such projects to the local economy, with an estimated 800,000 youths without full employment out of a total population of just six million.
African Minerals plan to ship iron ore from late 2011 and Timis says sales revenue at maximum would be in the region of $3 billion per year -- six times annual state revenues. Tonkolili could provide 10,000 jobs, according to some figures quoted.
Village chiefs insist they have yet to see much evidence that locals are being employed at Tonkolili, but government officials urge patience and defend the concessions as necessary to lure investment to a country where road, energy and other infrastructure remains weak.
"Attracting foreign investment in a fragile economy like Sierra Leone is not easy," said Finance Minister Samura Kamara.
"It's like a trade-off."