DRUMMOND HAS MAJORITY STAKE IN NEW RAIL CONCESSION

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 -------------- ¶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 -------------- ¶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 -------------- ¶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