Identifier
Created
Classification
Origin
05BOGOTA6448
2005-07-08 15:52:00
UNCLASSIFIED
Embassy Bogota
Cable title:  

MINING SECTOR OVERVIEW

Tags:  ENRG EMIN CO 
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081552Z Jul 05
UNCLAS SECTION 01 OF 05 BOGOTA 006448 

SIPDIS

E.O. 12958: N/A
TAGS: ENRG EMIN CO
SUBJECT: MINING SECTOR OVERVIEW

REF: A. BOGOTA 2880


B. BOGOTA 5979

UNCLAS SECTION 01 OF 05 BOGOTA 006448

SIPDIS

E.O. 12958: N/A
TAGS: ENRG EMIN CO
SUBJECT: MINING SECTOR OVERVIEW

REF: A. BOGOTA 2880


B. BOGOTA 5979


1. Summary. Colombia,s success in reforming regulation of
the mining industry has enhanced the sector,s international
competitiveness, created a more attractive investment
climate, and in conjunction with similar reforms in the oil
and gas sector (see reftel A) made the extractive sector the
principal recipient of foreign direct investment in 2004.
The 2001 mining code improved contractual terms and
stability, streamlined bureaucratic procedures and resulted
in a large increase in private sector investment. The
country is the largest producer of coal in Latin America and
is an important producer of emeralds, gold, ferronickel and
platinum. During 2003, mining activity showed a significant
increase in production volume and exports. Growth in 2004
was significantly less, with the exception of coal and
ferronickel, which topped historic levels. End Summary.

-------------- --------------
Legal Framework: Colombia's Forward-Leaning Mining Code
-------------- --------------


2. The Colombian Mining Code, passed by Congress on August
15, 2001, provides contractual stability and more favorable
economic concessions for private investors. The 2001 code
streamlined the previous 11 different types of concession
agreements between private investors and the state into one
agreement, and significantly reduced the bureaucratic
requirements needed to sign a concession agreement with the
Colombian government. The new concession system maintains a
thirty-year term, and provides for the extension of up to 30
additional years upon the concessionaire,s request. The
2001 code eliminated the one to two year exploration license
previously required for a concession to be ultimately
granted. Exploration licenses are now included in the
30-year concession term, and are granted for a maximum of
three years, with a possible two-year extension. In
addition, the previous four-year window for construction and
installation has been reduced to three years, extendable for
an additional year within the concession term. According to
Jairo Herrera, Director of Mining at the Colombian Mines and
Energy Planning Unit (UPME),the avalanche of requests for
concession agreements from private investors throughout the
country is evidence of the code,s success.


3. The 2001 code protects contract terms for old concessions
and makes them eligible for the enhanced conditions offered

by the new code. Old concession holders maintain the right
to exploit new mineral findings under the same contract.
Also, the code enhances contractual stability by keeping all
royalty payments and re-adjustments agreed under previous
regulations constant.


4. Under the previous law, all mining assets and
infrastructure became GOC property if a mining concession
expired or was renounced after the twentieth year of
production. The 2001 code allows concessionaires to renounce
mining rights at any time during the contract term or
withdraw all production and related right-of-way assets.


5. Foreign companies expecting to develop permanent business
in the mining sector must establish a branch or a legal
presence in Colombia. If the business is occasional or
temporary, a general attorney domiciled and resident in
Colombia must be appointed.

--------------
Fees, Royalties, and Taxes
--------------


6. The GOC receives ground fees and royalties in exchange
for mining concessions. During the exploration phase,
license holders pay yearly ground fees equivalent to a
minimum daily salary (approximately USD 5) per hectare of
exploration land. Small mining projects of less than 10
hectares are exempt from ground fees.


7. When the commercial exploitation phase begins, license
holders begin paying royalties to the government. Royalty
rates range from 3 to 12 percent depending on mineral type.
Departments and municipalities located at the exploitation
site share in royalty revenues; ports through which mining
products are transported are also eligible. Remaining
royalty payments are deposited in a National Royalty Fund
(NRF). The NRF distributes royalties to other territorial
entities for use in promotion of mining, environmental
protection, and investment in regional development projects
focused on electrification and road network projects. To
access NRF funds, governors and mayors must present
investment projects endorsed by the Ministry of Mines and
Energy and approved by the National Planning Department.


8. Mining companies receive tax benefits but also pay
production-related taxes. Companies receive exclusions for
assets devoted to mining activities while exporters receive a
thirty-year tax and levy exemption if they commit five
percent of their FOB value of annual exports to re-forestry
projects. Production-related taxes constitute a substantial
share of the tax burden for mining companies in Colombia. In
general, the government takes in 46 percent of the cash flow
of mining projects. Colombia also has customs duties and
import tax exemptions on machinery and technical equipment
imported for mineral exploration.

--------------
Overall Production Trends
--------------


9. Colombia is the largest producer of coal in Latin America
and is a leading exporter of gold and emeralds. The country
also produces platinum, ferronickel, silver, zinc, limestone,
iron-ore, lead, steel, copper, phosphates, sulfur, and
uranium. Colombia,s mining output (excluding petroleum)
grew from 67.6 million tons in 2003 to 72.6 million tons in
2004, an increase of 7.4 percent. Total mining exports
(excluding hydrocarbons) reached USD 3.4 billion in 2004, a
24.7 percent increase from 2003 levels. The 2004 total mining
export figure represents approximately 3.5 percent of GDP.

--------------
Coal
--------------


10. Colombia is increasing production of its significant
reserves of high-quality coal and has proven coal reserves of
7.3 billion tons. Most of Colombia,s coal reserves consist
of high-quality bituminous coal, with a sulfur content of
less than one percent. Coal production increased seven
percent, from 50 million tons in 2003 to 53.5 million tons in

2004. Colombian coal exports went from USD 1.4 billion in
2003 to USD 1.7 billion in 2004.


11. Over 90 percent of Colombian coal production occurs in
large-scale open cast mining operations in the northern
departments of La Guajira and Cesar. In La Guajira
department, Cerrejon Zona Norte is one of the highest quality
thermal deposits in the world. Site production started in
1985 at a rate of 1.5 million tons per year and has now
increased to 22 million tons per year; an output of 28
million tons is planned for 2007. A partnership between
Anglo American, BHP Billiton, and Glencore has a contract to
operate Cerrejon Zona Norte and Carbones del Cerrejon mine
until 2033. BHP Billiton owns 33.3 percent of the Cerrejon
mine and 99.8 percent of the Cerromatoso nickel mine. In
Cesar department, Drummond Coal (USA) operates another major
project at La Loma that contains estimated reserves in excess
of 534 million tons (see reftel B for details of Drummond,s
expansion). Drummond,s contract with the GOC runs through

2019. La Guajira and Cesar production is for export, mainly
to Western Europe and the United States.


12. Colombia also has a large amount of traditional small to
medium-sized block caving mines in the Andean Mountains.
These mines comprise the majority of coal mines and coal
miner employment in Colombia. Production from these mines
services domestic demand, mainly to meet power generation
needs. Approximately 1,000 mines (about a third of the
total) are illegal and are generally small-scale underground
operations. Domestic coal prices are about a fourth of
export prices.


13. In early 2003, the Colombian Mining Association
(Asomineros) and the GOC launched a campaign to promote coal
exports to other Central and South American countries and to
improve transportation capacity constraints. In mid-2003,
the GOC earmarked USD 320 million for infrastructure
development to increase coal export capacity. Part of the
investment will fund the construction of a second rail line
linking the Cesar region with Santa Marta port on the
Atlantic coast.

--------------
Copper
--------------


14. Colombian copper production and exports increased from
2003 to 2004. Total copper production went from 8,526 tons
in 2002 to 7,270 tons in 2003 and increased to 7,840 tons in

2004. Copper exports went from USD 3.2 million in 2003 to
USD 5.9 million in 2004. Production comes almost entirely
from the El Roble mine in Choco Department. The mine, owned
by Minera El Roble S.A., began production in 1990. In the
early 1990s, El Roble had reserve estimates of about one
million metric tons of ore. The mine had a production
capacity of 96,000 t/yr of crude ore and 14,000 t/yr of
copper concentrate. According to UPME,s Mining Director,
Jairo Herrera, based on production levels for the past 14
years, the mine will be depleted in the near future. All
production of copper concentrate was exported to Japan.
Copper in smaller quantities was also produced in Ancuya
Narino Department and El Dovio in Valle Department. Colombia
also produces secondary copper from scrap.

--------------
Iron and Steel
--------------


15. Colombia is one of Latin America,s major steel
importers. The country,s steel industry is small,
comprising only 2.3 percent of total manufacturing output.
Total iron and steel production went from 625,000 tons in
2003 to 642,546 tons in 2004. Colombia,s main integrated
steel maker is Acerias Paz del Rio with a capacity of 270,000
metric tons per year (t/yr) of crude steel (accounting for
about 40 percent of total production). The company has been
under financial restructuring recently because of high debt.
In early 2003, the GOC and the employees reached an agreement
to save the company from liquidation. Under the agreement,
the employees resigned their right to various annual premium
compensation payments that were being used to create a
capitalization fund. With those resources, the employees own
36 percent of the company. Several foreign companies have
expressed interest in buying Acerias Paz del Rio including
the Gerdau group from Brazil, the European consortium Acelor,
and the Techint group from Argentina. The company, however,
has not yet been sold. The Gerdau group purchased Diaco and
Sidelpa, Acerias Paz del Rio's competitors, in January 2005
for USD 130 million.


16. Scrap metal is vital to the Colombian iron and steel
industry but a tight scrap market is contributing to higher
domestic steel prices. Colombia,s local iron and steel
producers (Diaco, Acerias de Caldas, Sidoc, and Acerias de
Sogamoso-responsible for 60 percent of total production) face
rising steel prices caused by a recent surge in international
demand that has reduced the local scrap supply. According to
Juan Manuel Lesmes, Director of the Colombian Federation of
Metal Producers (Fedemetal),Colombian suppliers export about
2,000 tons of scrap per month (valued at approximately USD 2
million). Colombia,s international scrap buyers are mainly
Chinese and have indicated they would like to increase their
purchases to 5,000 tons per month. In an effort to maintain
local scrap supply and control prices, the GOC issued Decree
1771 on June 2, 2004. Decree 1771 imposed scrap export
quotas of 4,700 tons of ferrous scrap (iron and steel) and
15,200 tons of non-ferrous scrap (copper, aluminum, and lead)
every six months but the GOC ended the quotas in December
2004 out of concern they might violate WTO agreements. Local
scrap prices have remained high due to the limited number of
local scrap providers.

--------------
Precious Metals - Gold, Platinum, Silver
--------------


17. In 2004, the total production of precious metals (gold,
platinum, and silver) was 47.5 tons and total exports of
precious metals reached USD 576.5 million. According to the
UPME Mining Director, gold production estimates are not very
good because there is a considerable amount of gold
contraband that is very difficult to estimate.

--------------
Gold
--------------


18. Colombia,s gold production rates have fluctuated
recently. Production increased from 20.7 tons in 2002 to
46.5 tons in 2003. However in 2004, production fell to 37.6
tons. The 2003 boost in gold production was due to a change
in tax policy that made production of gold in dore form more
profitable than processing the gold into gold leaf. Gold
leaf exports dropped precipitously in 2003 as a result, but
gold exports increased from USD 94.4 million in 2002 to USD
585.2 million in 2003, falling to USD 556 million in 2004.


19. Colombia gold exploration relies on artesanal or
traditional methods, and generally lacks large-scale.
Small-scale Colombian operations, both artesanal and
semi-modernized, continue to produce significant quantities
of gold averaging 950,000 (declared) troy ounces per year
over the last fifteen years according to the Colombian
Central Bank. Three departments, Antioquia, Bolivar, and
Cordoba, are the source for 90 percent of the total gold
production in the country, with Antioquia accounting for more
than 50 percent. Colombia,s largest alluvial operation is
El Bagre located by the Nechi River, which is owned by the
domestic producer Mineros de Antioquia, S.A. El Bagre mining
operations include three bucket line dredges and three Beaver
dredges that process approximately 15 million cubic meters of
material per year.


20. Colombia has two significant large-scale exploration
projects: Murindo copper-gold mine and the Piedra Sentada
Guachavez. The Murindo mine contains alluvial gold deposits
and a large hard rock copper deposit at the La Rica mountain.
The Piedra Sentada Guachavez gold prospect has abundant
alluvial deposits. Foreign companies, particularly Greystar
Resources and Anglo Gold Ashanti, are planning to expand
exploration projects in Angostura, Norte de Santander
department and San Martin and Barranco de Loba mines in
Bolivar department.

--------------
Platinum
--------------


21. Colombia,s platinum production is less than one percent
of the world total but production and exports have increased
steadily over the last several years. Platinum production
grew from 828 kg in 2003 to 1,160 kg in 2004. Platinum
exports increased from approximately USD 8 million in 2002 to
USD 19 million in 2003, reaching USD 20 million in 2004. All
platinum production in Colombia is from placer deposits.
Choco Department is the primary source of platinum and
contains several mines, mainly in the San Juan Valley.
Antioquia Department ranks second in production although
smaller quantities are produced in the Departments of
Bolivar, Cauca, Cordoba, Narino, and Valle del Cauca.

--------------
Silver
--------------


22. In Colombia, silver is recovered as a by-product of gold
mining; no company is exclusively dedicated to the silver
production. Over 80 percent of Colombia,s silver production
occurs in the departments of Antioquia and Cordoba. Silver
production increased 36 percent from 6,986 kg in 2002 to
9,511 kg in 2003, dropping to 8,189 kg in 2004. Exports of
silver went from approximately USD 377,700 in 2002 to USD
678,400 in 2003, dropping to USD 550,300 in 2004.

--------------
Other Non-Precious Metals
--------------


23. Colombia,s total ferronickel exports increased from USD
414.7 million in 2003 to USD 626.1 million in 2004.
Colombia,s only nickel producer is Cerro Matoso S.A., a
subsidiary of BHP Billiton Plc. through QNI Limited. The
Cerro Matoso deposit, located in the Department of Cordoba,
southwestern Colombia, is one of the highest-grade lateritic
nickel deposits in the world. The site has proven ore
reserves of 39.5 million tons with a 2.3 percent nickel
content. A 1999 plant expansion increased Cerro Matoso,s
ferronickel production. A second production line was
completed in January 2001 for USD 353 million. Cerro
Matoso,s ferronickel production went from 47,868 tons in
2003 to 48,818 tons in 2004 due to increased capacity and
strong nickel demand. Cerro Matoso hopes to increase
production to 55,000 ton per year.

--------------
The Green
--------------


24. Colombia is a leading supplier of high-quality emeralds,
providing approximately 50 percent of total world exports.
While emerald production climbed from 8.96 million carats in
2003 to 9.82 million carats in 2004, the value of emerald
exports decreased from USD 77.9 million in 2003 to USD 72.7
million in 2004. The common practice of injecting oil during
emerald production to hide possible fractures has affected
the reputation of Colombian emeralds in international
markets. This practice may have negatively affected global
interest in Colombian emeralds according to UPME,s Mining
Director.


25. Colombia has about 150 emerald mining sites although
some are not being exploited. The GOC leases mining rights
to private business but illegal mining is also common.
Legitimate mining interests operate in two major districts,
Muzo and Chivor, located in the "Cordillera Oriental" region
of the Andean mountains. The major mines of the Muzo
district, located 100 kilometers north of Bogota, include
Muzo, Cosquez, and Pena Blanca. Approximately three quarters
of Colombian emerald production comes from about 60 locations
belonging to the Coscuez mine. The Muzo mine is leased to
the government for 10-year periods to the Sociedad de Mineros
Boyancences. The Chivor district, situated southeast of
Bogota, contains two major mines, Chivor and Gachala. The
Chivor mine is the only major privately owned emerald mine in
Colombia.

--------------
The Future
--------------


26. Colombia's mining sector reforms have successfully
enhanced the investment climate and paid off in increased
demand for concessions. The GOC has focused its efforts on
streamlining regulatory oversight, reducing incentives for
illegal activity, particularly in the gold and emerald
industries, and most importantly, improving the contract
terms for potential investors. Thanks to these and similar
reforms in the oil and gas sector, the mining and petroleum
sector was the largest recipient of foreign direct investment
in 2004 and is expected to remain the leading sector for
foreign investment for the foreseeable future.
WOOD