UNCLAS BOGOTA 003049

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD ENRG EMIN CO
SUBJECT: DRUMMOND HAS MAJORITY STAKE IN NEW RAIL CONCESSION

REF: 05 BOGOTA 5979

Sensitive but unclassified -- please handle accordingly.


1. (U) Summary. The U.S. based Drummond Co. recently
purchased a controlling share of a new rail concession
linking Colombia's coal belt in Cesar with the northern coast
ports of Cienaga and Santa Marta, resolving one of Colombia's
most serious trade irritants. Drummond and other coal
companies participating in the venture committed to a USD 350
million investment to increase capacity along the line and
dramatically improve service over the line's prior owners,
Feneco. The increased capacity of the rail line will mean
coal will overtake petroleum as Colombia's largest export
commodity in the medium term. End Summary.

Drummond Gains Control of Rail Concession
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2. (U) On March 27, the Colombian government, with President
Uribe in attendance, approved the purchase by U.S.-owned coal
producer Drummond Ltd. of a controlling stake in a new
concession to operate a major rail line between Colombia's
coal belt in Cesar department and the northern coast port of
Santa Marta. Coal companies including Drummond Ltd.,
Glencore, Carbones de Caribe, Carbones de Cesar, Consorcio
Minero Unido, and Carboandes will operate the concession and
together plan to invest approximately USD 350 million to
expand capacity and build a second track generally within the
existing right of way. The transport capacity will expand to
about 80 million tons per year by 2007 and enable the
participating companies to expand their operations from a
current annual level of 35 million tons to 66 million tons of
coal production by 2010. Augusto Jimenez, President of
Drummond, Colombia, told econoff his company would own a
controlling 42 percent stake in the concession. The
agreement includes construction plans for 4 extensions or
spurs off the current line. The group plans to fufill the
original intent of the GOC when the rail line was first built
and carry general merchandise and commoditites for export
such as African palm oil, cement, and steel.


3. (U) Jimenez said the new agreement resolves a number of
difficulties Drummond en]mQ%m&t its commitments to renovate rail infrastructure and
make required land purchases for future spur expansions.
Drummond encountered particular difficulties with Feneco in
obtaining access rights needed to achieve its expansion
plans. An arbitration court ruled Feneco performance
necessitated the firm pay Drummond an indemnity in the amount
of USD 21 million for damages caused to Drummond operations.

Drummond Plans Large-Scale Expansion
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4. (SBU) As reported reftel, Alabama-based Drummond Co. Inc.
operates one of the world,s largest surface coal mining
operations in Cesar Department, northern Colombia. From
1995-2005, Drummond has extracted approximately 100 million
tons of high-grade coal from the Pribbenow Mine location of
the La Loma Coal Mining Project. In 2005, Drummond produced
22 million metric tons of coal from the site and forecasts 26
million tons of production for 2006. According to Drummond
officials, there are still about 400 million metric tons of
proven reserves at the Pribbenow Mine and vast resources
still to be "proven". A new concession called El Descanso
(located about 10 miles away) will begin production later in
2006 and has an estimated 1.5 billion tons of reserves.
Jimenez told econoff that the company would spend USD 1.2
billion over the next 5 years to further expand production to
almost 70 million tons per year (according to preliminary
company estimates) once El Descanso is operating at full
capacity. The company is also prepared to increase
investment in its port infrastructure to allow for this
increase in capacity.

Comment
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5. (U) Coal was Colombia,s second largest export commodity
behind petroleum with USD 2.6 billion in exports compared to
USD 5.6 billion for petroleum in 2005 according to Proexport.
Coal exports grew 40 percent in dollar terms from 2004 to
2005 compared to a rate of about 32 percent for petroleum.
Given Colombian coal investors' expansion plans and
Colombia,s dwindling oil production and reserves, coal is
positioned to be crowned export king in the medium term.
WOOD