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Cablegate: South American Mining Sector Downturn Calls For

VZCZCXRO5841
RR RUEHAST RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHTM
DE RUEHBR #1504/01 3251507
ZNR UUUUU ZZH
R 201507Z NOV 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2960
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUEHPE/AMEMBASSY LIMA 4031
RUEHSG/AMEMBASSY SANTIAGO 0713
RUEHQT/AMEMBASSY QUITO 2651
RUEHAC/AMEMBASSY ASUNCION 7210
RUEHGE/AMEMBASSY GEORGETOWN 1614
RUEHPO/AMEMBASSY PARAMARIBO 1690
RUEHRG/AMCONSUL RECIFE 8733
RUEHSO/AMCONSUL SAO PAULO 3099
RUEHRI/AMCONSUL RIO DE JANEIRO 6909
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHC/DOI WASHDC
RUEAWJA/DOJ WASHDC
RUEAEPA/HQ EPA WASHDC
RUEANAT/NASA HQ WASHDC
RUCPDC/NOAA WASHDC
RUMIAAA/USCINCSO MIAMI FL
RUEHRC/USDA WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 05 BRASILIA 001504

SIPDIS

DEPT PASS USAID LAC/RSD,LAC/SAM,G/ENV,PPC/ENV
INTERIOR PASS USGS INTERNATIONAL: JWEAVER; DMENZIE;AGURMENDI
NSF FOR INTERNATIONAL: HAROLD STOLBERG

E.O. 12958: N/A
TAGS: SENVEAGREAIDTBIOECONSOCIXR
SUBJECT: SOUTH AMERICAN MINING SECTOR DOWNTURN CALLS FOR
ENVIRONMENTAL VIGILANCE

BRASILIA 00001504 001.2 OF 005


1. SUMMARY: Between 2002 and 2008, South America experienced a
sustained, successful expansion of its mining sector, with strong
growth in Brazil, Chile, and Peru. This expansion brought
environmental costs to some fragile ecosystems and public health
concerns to vulnerable populations - impacts which are slowly being
ameliorated by growing environmental transparency and stringent
enforcement of environmental regulations. Although the current
economic slowdown may signal some concern for these South American
mining export countries, it is unlikely to serve as a negative in
the environmental sector.

2. The current global financial crisis and associated market
contraction has hit hard in the metals/mining sector, driving some
large mining companies and juniors alike to reduce production or
delay investments. Brazil's Vale iron ore producer plans to reduce
mining of manganese and ferroalloys; Chile's State company Codelco
is looking closely at investments; Peruvian miners are also
evaluating future investments. However, China's long-term quest for
Latin American natural resources is unlikely to be hindered by the
current global economic crisis. END SUMMARY.

MINING BOON DROVE SUCCESSFUL GROWTH 2002-2008

3. Between 2002 and mid-2008, rising global demand and subsequent
increases in metal commodity prices drove a successful export market
and sustained expansion of the mining sector in Chile and Brazil. In
Peru, mining sector growth has been strong since the early 1990s.
Starting in 2003, rising mineral commodity prices drove the
extraction of diverse marketable minerals in underdeveloped regions
through use of modern techniques and equipment. During this era of
high mineral prices, mining companies earned substantial profits,
recovering from the protracted downturn of the late 1990s, early
2000s.

4. Brazil, Chile, and Peru are the lead mining product exporters in
South America. In 2006, export values for mining products and mined
construction materials totaled US$40.1 billion, US$38 billion and
US$14.8 billion for these respective economies (USGS, 2008). In
relative terms, mined products accounted for 29 percent, 66 percent,
and 62 percent, respectively, of total export values for Brazil,
Chile, and Peru.

5. Internationally, Brazil is the second or third leading global
producer of: bauxite, alumina, iron ore, niobium, tantalum, and
manganese. Mineral-based industries account for 6% of Brazil's GDP.
In Chile, copper revenues have kept Chile's external trade balance
solidly in the black for the past 5 years. Chile is the world's
largest copper producer, accounting for more than one third of the
world's copper. Chile is also the world's leading lithium producer.
Peru is a world leader in exports of copper, gold, lead, molybdenum,
silver, tellurium, tin, and zinc. Record high metal commodity prices
in 2006-2008 drove Peruvian export values to unprecedented levels.
Indicative of high metals prices, Peru's Central Bank reports that
Peruvian mining export values for 2008 (January-September) were 20%
higher than same period in 2007.

6. Among the other South American countries, Argentina, a
relatively minor player in mining exports, is considered an untapped
mineral resource. Bolivia, Colombia, Venezuela, Guyana and Suriname
have smaller metal export markets.

2008 FINANCIAL CRISIS STRIKES MINING SECTOR

7. The statistics above represent the mining sector situation
before the September 2008 financial crisis, a crisis that created a
global credit crunch, a reduction in global demand for construction
materials/metals, and severe contraction in metals prices worldwide.

BRASILIA 00001504 002.2 OF 005


In recent months, copper prices have fallen from US$4 per pound to
the current US$1.67, the metal's lowest value since 2005. Aluminum,
Zinc and Lead have all fallen from peak prices in early and mid-2007
to current values that are reminiscent of 2004-2005 pricing, with
economic analysts forecasting further price slides. However, today's
metals prices are still well above the low market values of the
1990s and early 2000s.

8. In this climate of global contraction, reports of financing
troubles and mining production cut backs ripple across the region
and globe. Junior companies (exploration stage) are suspending
projects and cutting investment. Major players, hit harder by
falling demand, are cutting back production and delaying
investments, although some companies in Peru are proceeding ahead
with substantial capital commitments. International economic
analysts consider the potential development of abundant metals
stockpiles as an impediment to market recovery, and strongly
recommend production cut backs. Furthermore, owing to technical
problems, lower ore grades, labor unrest, and increased utility,
equipment and other input costs, production costs for mineral
commodities have risen sharply over the 2006-2008 period, greatly
reducing profitability in a time of falling commodity prices and
potentially encouraging delays or deferment of production (USGS,
2008).

9. Brazil's Vale iron ore producer plans to reduce mining of
manganese and ferroalloys, as part of its strategy to reduce
worldwide output by 10 percent (US$2.2 billion decrease in the
Brazilian export value) over a 12 month period. Internationally,
Alcoa is curtailing aluminum output 15 percent in response to
weakening demand. It is not clear if the company will maintain
planned production at its new Juruti mine in Brazil's Para state
when the construction phase concludes in early 2009. Chile's State
company Codelco is looking closely at investments, particularly at
marginal projects. In Peru, some large mining companies are reducing
production and reevaluating project investments owing to low metals
prices (Cerro Verde, Xstrata). However, these and other large
companies are moving forward with other capital commitments,
choosing a long-term investment horizon in preparation for commodity
price rebounds. In the short-term, Peru's diversified production in
the non-ferrous mining sector (copper, lead, molybdenum, silver,
tin, zinc) may not reduce export values substantially; however, the
recent 35 percent drop in metals prices is a concern (USGS, 2008).
Moreover, both iron ore production and gold output in Peru may be
scaled back, owing to reduced steel mill intake and depletion of
gold reserves, respectively.

10. NOTE: The copper and metals industry relies heavily on Asian
markets. China has emerged as Chile's top trading partner, and
Peru's second largest trading partner and export market. It is
possible that China's recently announced plans to offset adverse
global economic conditions by boosting domestic demand through a
2-year, US$600 billion infrastructure stimulus package (low-income
housing construction, rural infrastructure, and transportation) will
continue to provide short-term stimulation of the metals market, but
how much remains to be seen. In the long-term, there is little
chance that China's appetite for raw materials will diminish. END
NOTE.

ENVIRONMENTAL CONCERNS OF MINING

11. Although mining has proven a recent boon to economies in Latin
America, mining sector expansion has also brought environmental
costs to fragile ecosystems and public health concerns to vulnerable
populations. Mining involves massive movement of earth and rock,
disrupting topography, hydrology and vegetation. Mining
concentration processes of flotation, hydrometallurgy (acid

BRASILIA 00001504 003.2 OF 005


leaching), smelting, zone temperature separation, and
electrorefining create large reservoirs of process waters,
quantities of depleted ore (tailings), and air emissions of
particulate matter, greenhouse gases (GHGs), and sulfur dioxides.
Additionally, mineral processing (mining, grinding, concentrating
smelting, and refining) requires energy input, requiring
thermoelectric power that also contributes to GHG emissions.

12. In the majority of South American mining countries, regulations
controlling environmental protection and handling of mine processing
wastes have existed for decades. However, in many regions, the
environmental implications of mining go far beyond regulatory
controls. In Brazil, even though Alcoa's new Juruti bauxite/alumina
production center has been under close regulatory oversight, the new
facility has taken over 1,500 hectares of rainforest land, required
construction of its own landing strip and 57-km rail line, and drawn
close to 5,000 new workers to the mining site alongside the Amazon
River. For Brazil's iron ore industry, environmental concerns range
from construction of new thermoelectric power plants (Vale
Corporation) for steel production, to deforestation driven by wood
charcoal demand among pig iron producers.

13. In Chile, the primary environmental concerns of the copper
sector are related to water consumption, though mining companies are
reluctant to talk publicly owing to growing awareness of water
scarcity in domestic Chilean politics. Chilean copper production is
a particularly thirsty business, an unlikely match for the dry
Atacama Desert and regions north. According to Water Management
Consultants, Chilean copper mines water used approximately 2.5
million cubic meters of water per day (4.5% of the country's water
resources), the equivalent to total domestic water demand. Most
mines in Chile (Peru and Bolivia) are located on the leeward side of
the Andes, and receive only scant rainfall. Historic mining
operations have relied on glacial melt to furnish the water critical
to mining operations. However, as glacial melt proceeds at an
unprecedented pace, water supplies are predicted to diminish in
coming years (REFTEL BRASILIA 1341). Other mines already affected by
chronic water shortages, are starting to pump desalinated water from
the Pacific Ocean high into the Andes for mining operations, an
extremely expensive proposition requiring extensive capital
infrastructure and energy intensive pumping.

14. The bi-national Chilean, Argentine Pascua Lama gold mining
project recently raised tensions regarding glacial melt awareness,
when it was accused of destroying 50 to 70 percent of local glaciers
through gold prospecting and road construction. Further complicating
this bi-national mining project was Argentine President Cristina
Kirchner's recent veto of a law protecting Argentina's glaciers,
giving pre-eminence to mining and oil drilling activities in the
Andean peaks along the Argentine border.

15. In Peru, revised mining regulations were passed in the
early-1990s; however, in some regions enforcement of regulations has
lagged behind legislation. Peru's new environmental ministry counts
1,900 areas in the country where liabilities from old mining
operations, many prior to 1933, have left behind substantial
contamination. Forty of these sites are considered highly toxic,
while another 610 sites require treatment. Such wastes, with an
estimated US$400M price tag for cleanup, have impacted drinking
water supplies for rural and urban centers, including Lima. Heavy
metal concentrations have been found in nearly every sediment sample
analyzed along the Peruvian coast, as well as tested marine life
(USAID 1995).

16. La Oroya, a central Andean smelter town, has a long history of
contamination through its 80 plus years of operation. In 1999,
Peru's Director General of Environmental Health reported that 99

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percent of La Oroya's children had blood lead levels exceeding
acceptable limits. In 2004, Peru's Health Ministry repeated the
public health alarm, reporting over 90 percent of children with high
blood lead levels. La Oroya made the Blacksmith Institute's list of
the 10 most polluted cities in the world in 2006 and 2007. Recently,
smelter-owner Renco Doe Run Peru invested US $157 M in improvements
outlined in its environmental operating agreement with the Peruvian
government. Current monitoring of La Oroya's air emissions
demonstrates that reductions have been achieved in air levels of
particulates, lead, arsenic, and other metals. Despite advancements
however, sulfur dioxide emissions reached record levels in August
2008.

17. Optimistic towards the future, the Peruvian Environment
Minister suggests that large-scale environmental mining liabilities
are not actively created today in Peru, owing to tough environmental
standards. Instead, the Environmental Ministry believes that the
majority of mining contamination today comes from independent
artisanal gold miners, a group that falls through the cracks of
environmental enforcement. Artisanal gold miners are responsible for
the vast majority of mercury contamination of Amazonian rivers in
Peru, Brazil, Guyana, Venezuela, and Suriname.

ENVIRONMENTAL PROTECTION IN ERA OF CHANGING MINING OWNERSHIP: THE
ROLE OF CHINA

18. Lower base metals prices have caused broad contraction in the
mining industry, and already forced project reevaluations in South
American countries Brazil, Chile and Peru. Although the slowdown may
signal economic concern for future exports of these countries, it is
unlikely to serve as a negative in the environmental sector. In
contrast, during an era of growing environmental transparency,
increasingly stringent enforcement of regulations, and diminishing
water resources (Chile and Peru), it is unlikely that the metals
market slow down will result in a relaxing of attention to
environmental controls. In fact, a decline in the mining fever pace
of mineral exploration and expansion may allow regulatory
enforcement to catch up with domestic laws that reflect
international mining standards for best practices, public health
protection, and pollution mitigation. Enforcement vigilance must be
maintained.

19. It is important to note, that some multinational mining
operations (including Chinese companies) do not receive positive
environmental and health compliance reports. Osinergmin (Peru's
mining environmental regulations enforcement agency) and Peru's
General Directorate of Environmental Health have ongoing concerns
regarding the health of iron-ore miners at the Chinese-owned
Shougang mine. Osinergmin reports that health conditions are
disregarded, resulting in higher rates of mine-worker illness,
accidents and deaths at the Shougang mine, than at other
foreign-owned open-pit mines in Peru. Recent announcements that the
Shougang Group has further committed to a $1 billion expansion of
the Shougang iron ore project as well as a pipeline extension from
the Camisea natural gas field, are certainly cause for environmental
and public health concern. Press releases of the planned Shougang
expansion come in timed coordination with the China-Peru Free Trade
Agreement (see NOTE below).

20. NOTE: Chile signed a Free Trade Agreement with China in 2006. A
China-Peru Free Trade Agreement is expected to be signed this month,
November, at the 2008 APEC summit in Peru. This trade agreement
coincides with announcements of Chinese commitments for US$6 billion
in investments in Peru's mining sector over the next three years.
Existing Chinese investments in Peru include Minmetals Corp, Jiangxi
Copper (Galeno project), Zijin Mining Group (Rio Blanco project),
and Aluminium Corp of China (Chalco) to develop the $2.2 billion

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Toromocho mine. These Chinese Peruvian acquisitions are part of a
larger hunt for resources in Latin America. Chinese trade with Latin
America has grown tenfold since 2000, and shows little sign of
slowing. In the past five years, Chinese companies have made oil and
mineral deals with Chile, Argentina, Brazil, Colombia and Venezuela.
END NOTE.

SOBEL

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