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Cablegate: Uncertainty in Bolivia's Mining Sector

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UNCLAS E F T O LA PAZ 001740

SIPDIS

NOFORN
SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EMIN SENV BL
SUBJECT: UNCERTAINTY IN BOLIVIA'S MINING SECTOR

Classified By: EcoPol Counselor Andrew Erickson for reasons
1.4(b) and (d).
-------
Summary
-------

1. (SBU) Proposed changes to the mining code and tax regime
worry international and U.S. mining companies in Bolivia.
Although the GOB's stated aim is a 50-50 split in profits
between the GOB and private companies, the head of the mining
association and U.S. company representatives have informed
emboff that the actual government take if the proposed
changes are passed will be more than 50 percent under
reasonable economic assumptions and could rise to 100 percent
under certain scenarios. In addition, the GOB is using
various tactics to encourage more value added to mining
production in Bolivia. The tone of government rhetoric is
also raising concerns, especially regarding the role of the
Bolivian Mining Company (COMIBOL) as a "partner" in all
future operations. Post will meet with executives of the
three major U.S. mining companies in the next weeks and will
attempt to arrange a courtesy call on the Mining Minister, at
which time general industry concerns can be raised. End
summary.

----------------------
Proposed Tax Increases
----------------------

2. (SBU) President Morales' executive branch has submitted to
the Bolivian congress a proposal to increase the tax on mine
profits from 25 to 37.5 percent when metal prices are over
certain levels (currently gold and silver prices are over the
proposed levels, and thus the tax increases would take effect
immediately upon passage of the legislation.) The proposed
tax changes also include the elimination of tax accreditation
(currently companies can credit royalties against the tax on
profits.) Mining contacts tell us that the proposed changes
will raise their effective tax rates to between 55 percent
and 70 percent and that their previous counterproposals seem
to have been ignored by the GOB. Humberto Rada, the head of
the Bolivian mining association and General Manager of
Newmont subsidiary Inti Raymi provided emboff with a series
of economic models that show that, under certain conditions,
the proposed changes could result in effective tax rates of
over 100 percent. To encourage greater refinement of
minerals and therefore more value added, the new tax proposal
includes an exception that allows companies that refine
metals (such as Newmont's Inti Raymi and Coeur D'Alene's San
Bartolome) to pay only 60 percent of the proposed 12.5
percent increase in tax on profits. Apex's San Cristobal,
which will produce less-processed concentrate, would not
benefit from this exception (paragraphs 4 and 5 discuss other
GOB tactics to increase value added in Bolivia.) (Note:
President Morales has excluded cooperatives from the proposed
12.5 percent tax increase, and they will also be required to
pay only 60 percent of royalties.)

--------------------------------------------- ------
Proposed Changes to Ownership of Mining Concessions
--------------------------------------------- ------

3. (SBU) The current draft of the new mining code also
includes changes which will codify President Morales' May 1st
decree declaring all mineral reserves to be property of the
government. This change would mean that mining companies
could not list reserves among their assets nor could they
mortgage the concessions. The change would have minimal
effect on Coeur's San Bartolome (which leases concessions
from cooperatives) and on Newmont's Inti Raymi, which is in
the final stages of production. The effect on Apex's San
Cristobal, however, could be serious, since the company has
mortgaged its concessions to raise money for start-up. At
the moment, current concessions are not being affected, but
the new draft mining code could eliminate this exception.

--------------------------------------------- --
Possible Elimination of Refunds on Import Taxes
--------------------------------------------- --

4. (SBU) In another worrying potential tax regime change, the
Finance Ministry has proposed the elimination of the current
CEDOIMS program (in which exporters can claim rebates on
taxes paid on imported inputs) for companies who are not
exporting "value added" products. Companies that produce
metals will still be able to participate under the CEDOIMS
program while companies which produce concentrate will not be
allowed to claim rebates of their import taxes (note, this
will apply to the hydrocarbons and lumber industries as
well.) According to mining association president Humberto
Rada, only three of the fifteen member companies in his
association (including Newmont's Inti Raymi, which produces
gold, and Coeur D'Alene's Manquiri, which will produce
metallic silver) will still be able to participate in the
CEDOIMS program if this change takes place. Apex's San
Cristobal plans to export concentrate and therefore would not
be able to claim rebates. San Cristobal executives have
explained that they have years' worth of back claims which
will not be paid by the GOB until San Cristobal starts
exporting (and, should this new law pass, might therefore
never be paid.) San Cristobal Corporate Vice President
Gerardo Garrett states that he does not expect the
elimination of CEDOIMS any time this year, but that if it
does occur, it will "kill San Cristobal" and that it is a
greater threat than the potential tax increases.

5. (SBU) The GOB's push to encourage more value-added in
the mining industry faces an uphill battle. The GOB has
pressed Apex's San Cristobal in the past to build a smelter,
but Bolivia is not an attractive option for a smelter due to
transportation difficulties both for the raw input and the
finished products, which would include sulfuric acid (a
byproduct of zinc smelting.) The start-up time for a smelter
would be approximately five years, and building a smelter
would not be a good economic decision for Apex (which also
rejected as unfeasible the possibility of refitting COMIBOL's
Karachipampa lead-silver smelter, built in 1983 at a cost of
approximately USD200 million and never fired.)

-----------------------
Nationalization Worries
-----------------------

6. (SBU) Although the GOB's current rhetoric focuses on
"partnerships" between private companies and the GOB (i.e.
COMIBOL), some observers suggest that nationalization could
be a threat in the future. For example, when asked about the
possibility of nationalization for Newmont's Inti Raymi
operation, Humberto Rada explained that the mining situation
at Inti Raymi (which has a very low-grade and complex ore)
means that the operation is not an attractive prospect for
nationalization, since COMIBOL does not have the expertise to
run such a mine. He warned that an operation like San
Cristobal, with high-grade ore and extensive reserves might
be more appealing. According to Rada, San Cristobal has
signed the mining association's letters of protest to the
GOB, but in general is trying to keep a low profile and not
confront the GOB because they have "everything to lose." San
Cristobal vice president Garrett confirmed that the company

does not want to engage in threats or bluster, because they
have very few options since they are fully invested in
Bolivia. He also informed emboff that after a mistaken
declaration of intent to nationalize in May of 2006 by the
former Mining Minister, San Cristobal received assurances
from the Morales government that in fact no nationalization
was planned for San Cristobal. Garrett cautioned that if
changes to the mining law require 50-50 joint ventures with
COMIBOL, nationalization could be the de facto result if Apex
can not arrange a viable joint-venture contract.

--------------------------------------------
Wooing the GOB with ATPDEA and other tactics
--------------------------------------------

7. (SBU) In such a unstable and unpredictable political
environment, US companies are looking for new ways to
encourage reasonable decisions on the part of the GOB. In a
meeting on June 15, a top official of Coeur d'Alene
subsidiary Manquiri informed emboff that Coeur d'Alene is
working its ties in the U.S. Congress to push for extension
of ATPDEA. Meanwhile, Apex is trying to leverage the
goodwill between Bolivia and Japan by approaching the GOB
through its Japanese partner Sumitomo (San Cristobal
executives report that their Japanese partners are having
little success, and that Sumitomo has within the last few
days sent a letter to President Morales asking,
diplomatically, why the GOB is not living up to the promises
it made during Morales' visit to Tokyo.) Newmont seems to be
relying on the fact that the Inti Raymi deposit is too
complex and low-grade for the GOB to want it, and they are
also encouraging the GOB's focus on value added since they
already produce metallic gold. All three companies report
difficulties in arranging meetings with the Mining Minister
(San Cristobal executives say they don't even get responses
to their requests any more.)

-------
Comment
-------

8. (SBU) Although the proposed tax regime and mining code
changes have yet to be approved by congress and could still
be modified, there is a sense of tense anticipation in the
international mining community in Bolivia. The GOB's
heavy-handed attempts to manage the economy through
differential tax regimes create an environment which is far
more negative for some projects (such as Apex's San
Cristobal) than others. The nationalization of Swiss-based
Glencore's Vinto smelter serves as a warning of potential
future threats to US assets, although the GOB currently
claims that all it wants is an "equitable" 50-50 share of
profits and "partnership" status with mining companies.
Executives of the three major U.S. mining concerns in Bolivia
will soon meet with the Ambassador. Subsequently, the
Ambassador may call on Mining Minister Echazu. Emboff has
visited Coeur's San Bartolome project in the past weeks, will
visit Newmont's Inti Raymi June 28, and is arranging a visit
to Apex's San Cristobal as soon as possible. Ecopol will
also meet with Mining Ministry and COMIBOL officials. End
comment.
GOLDBERG

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