THE BRV'S PROPOSED MINING SECTOR REFORM: CHAVEZ

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 002047

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON, INTERIOR FOR ITORRES

E.O. 12958: DECL: 07/07/2016
TAGS: ECON EMIN EINV EIND VE
SUBJECT: THE BRV'S PROPOSED MINING SECTOR REFORM: CHAVEZ
GETS THE GOLDMINE AND THE PRIVATE SECTOR GETS THE SHAFT


Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (U) SUMMARY: On June 20, 2006, the Ministry of Basic
Industries and Mines (MIBAM) proposed legislation in the
National Assembly to reform Venezuela's mining laws and
thereby empower the BRV to increase its control over the
mining sector. Modeled on its reform of the petroleum
sector, the bill would authorize the BRV to expropriate
"idle" mining properties, cancel mining concessions for tax
and regulatory violations, and transform private mining
rights into majority-BRV-owned joint-ventures. The reform
will directly affect little U.S. investment, relative to that
in petroleum, but the bill is another instance of BRV
hostility toward private property rights and private-sector
business activity. Moreover, mining companies' experiences
further evidence BRV administrative incompetence and
corruption. END SUMMARY

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THE BRV SEEKS SPEEDY CONTROL OF VENEZUELA'S MINING SECTOR
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2. (U) According to MIBAM Minister Victor Alvarez, the mining
sector reform seeks to "rescue our sovereignty and
effectively nationalize our mineral resources." Alvarez
stated that the reform is part of the framework of the BRV's
Bolivarian Revolution, the realization of which requires that
Venezuela "recover sovereign control of the strategic sectors
of our economy, of petroleum, land, basic industries, and
mining resources." The proposal comes as mining and basic
industries have assumed a more prominent place in Chavez's
public discourse: in recent editions of his Sunday television
program, "Alo, Presidente", Chavez has stressed the
importance of government-led basic industries projects as
sources of "endogenous development" for the Venezuelan
economy. Reminiscent of Venezuela's state-led efforts to
"sow the oil" during the 1970s petroleum price shocks, Chavez
has stated that the BRV intends to build a series of
industrial cities -- dedicated to, among other things, iron
ore, gold, and diamond mining, as well as steel and aluminum
production -- to reduce the country's reliance on imports for
primary materials.


3. (U) The legislation would advance state control of the
mining sector by eventually eliminating mining concessions
and transforming all privately held mining rights into
minority positions in joint-ventures with a newly created
state mining company or, in the case of small miners, into
operating contracts let by MIBAM. Most mining industry
watchers believe that Chavez's allies in the National
Assembly will pass the bill without material amendment before
the mid-August legislative recess, after a perfunctory period
of public discussion in which mining companies intend to
participate, however fruitlessly.

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WHAT THE REFORM WILL DO TO MINING RIGHTS
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4. (U) Alvarez claims that there are currently 760 separate
issuances of mining rights in Venezuela: 413 concessions and
347 mining contracts let either by the Guayana Corporation of
Venezuela (CVG),a state basic industries firm under MIBAM,
or by the now defunct Ministry of Energy and Mines (MEM).
Under the prevailing 1999 Organic Mining Law, concessions are
a species of private property conferring on the
concessionaire the exclusive right to explore and exploit the
mineral resources found within the concessionary tract. As a
property right, a concession can be alienated, subleased or
used as collateral to obtain financing. Alvarez made plain
that under the reform the order of the day is: "No more

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concessions."


5. (U) The legislation contains several provisions through
which the BRV would eventually eliminate concessions. First,
the bill provides that upon its entry into force all
applications for new concessions pending before MIBAM will be
void. Many such applications have been pending for years,
represent substantial time and investment, and remain pending
only because of administrative inefficiency, incompetence,
and corruption within MIBAM itself. Small miners in
particular have expressed strong criticism of this provision,
as it will eliminate what for many of them represents years
of effort to secure the legal rights they need to obtain
essential bank financing.


6. (U) Second, though the bill states in principle that
existing concessions will be honored for their respective
terms, it goes on to provide various predicates for
cancellation, such as failure to pay all taxes or fees due in
a given year, failure to complete feasibility studies on
agreed timetables, or failure to begin exploration within
three years of the concession's issue date. It merits
mention in this connection that the BRV's tax authority
(SENIAT) announced on June 28, 2006, that it intends to
review the tax returns of companies throughout the mining
sector, just as it recently audited and assessed arrears
against those of the petroleum sector. Existing
concessionaires will, however, have the option of converting
their rights into minority interests in joint-ventures with a
state mining entity, the National Mining Social Production
Company, established by the legislation.


7. (U) The proposed reform further provides that once
concessions expire by the passage of time or are canceled for
whatever reason, all lands covered by them will be considered
"free zones" and placed at MIBAM's disposition. All
investments in such lands -- fixed or moveable, tangible or
intangible -- will likewise become property of the state,
free of encumbrance and without compensation to the
concessionaire.


8. (U) While the above provisions will eventually eliminate
concessions as a form of mining right in Venezuela, the
legislation similarly disposes of mining contracts previously
let by CVG and MEM. Unlike concessions, mining contracts
simply confer upon the contracting party the right to explore
and/or exploit mineral resources within a defined territory;
such rights cannot be alienated, subleased or used as
collateral. The bill provides that mining contract holders
must convert their rights into majority-BRV-owned
joint-ventures. Failure to initiate the conversion process
within six months of the legislation's entry into force
rescinds the contract.

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WHO WILL BE AFFECTED
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9. (U) Alvarez claims that, taken together, existing
concessions and mining contracts currently cover 1,363,005
hectares of Venezuelan territory and that 71.1% of this is
currently inactive, while 20.3% is controlled by four large
international corporations. Alvarez further alleges that
large private companies routinely fail to exploit their
concessionary territories and instead use their mining rights
as assets against which they can raise capital.


10. (U) U.S. companies with concessions and significant
investment in Venezuela include Hecla Mining Company, Gold
Reserves Incorporated and Guaniamo Mining Company, a smaller,
75-percent-U.S.-owned diamond operation. In addition,

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Crystallex International Corporation of Canada has the mining
contract let by CVG to develop Las Cristinas, Venezuela's
largest known gold deposit, but the company has not been able
to begin production; it has been awaiting MIBAM approval of
environmental permits since April 2004. While publicly
Crystallex has been reassuring investors that its contract
rights are secure and that it enjoys BRV support for the
project, industry analysts are looking at the company as the
proverbial canary in the mineshaft. If Crystallex is
compelled to convert its contract to a majority-BRV-owned
joint-venture, mining watchers believe all private companies
will suffer the same fate. Most analysts agree that such an
outcome will strongly discourage future foreign investment in
Venezuelan mining.

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NO NEED TO DIG DEEP FOR BRV INCOMPETENCE & CORRUPTION
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11. (C) Meeting with Econoffs, Gilberto Sanchez (protect) and
Luis Machado (protect),respectively president and vice
president of Venezuela's Chamber of Mining (CAMIVEN),stated
that contrary to Minister Alvarez's allegations the largest
holder of inactive mining rights in Venezuela is in fact CVG
and that, because private-sector investors generally insist
on seeing results as soon as possible, the suggestion that
private-sector companies are sitting on their rights is
simply fallacious. Sanchez and Machado further claimed that,
to the extent that privately held mining rights were
unproductive, the lack of activity had to do with
inefficiency, incompetence, and corruption within MIBAM and
the extreme difficulty of obtaining required permits.
Sanchez and Machado also stated that MIBAM is currently
staffed by politically loyal, technically incompetent,
corrupt bureaucrats and that these administrative weaknesses,
together with the proposed reforms, will staunch future
foreign investment in Venezuela's mining sector.


12. (C) In a separate meeting with Econoffs, Dominic Channer
(protect) -- vice president of Guaniamo Mining Company --
provided further evidence that incompetence and corruption
have plagued both MIBAM and its predecessor, MEM, at least
since 2003. Channer related that in 2003 then MEM
Vice-Minister Orlando Ortegano personally visited Guaniamo
and advised the company that two of its concessions had been
summarily canceled, citing as justification (false) charges
that the company had failed to pay taxes and comply with
various regulations. (COMMENT: Ortegano's visit to Guaniamo
was a clear shake-down attempt. END COMMENT.) Guaniamo
contested the expropriations in Venezuela's courts (the
litigation is still pending),but nevertheless proceeded to
explore tracts covered by its remaining concessions. After
having invested roughly $50 million in exploration and having
attracted new investors, including Rio Tinto of the United
Kingdom, Guaniamo received a letter from then newly installed
MIBAM Minister Alvarez abruptly advising the company that all
of its remaining concessions had likewise been canceled.
Alvarez likewise cited tax and regulatory discrepancies, but
added as justification Guaniamo's association with
anti-Chavista Venezuelan businessmen. Channer subsequently
learned that associates of Rafael Ramirez, current Minister
of Energy and Petroleum and PDVSA President, have been
angling to acquire Guaniamo's concessions. Guaniamo has thus
had to stop all of its exploration and exploitation
activities. The company is currently fighting all of the
expropriations in Venezuela's Supreme Court.


13. (SBU) COMMENT: The BRV's mining sector reform is
noteworthy not so much for what it will do to U.S. interests
as for what it represents. As the draft's legislative
process shows, Chavez's complete dominance of the National

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Assembly assures that he can push through bills at will,
disregarding input from those most affected by the laws.
Further, the mining bill, like the reform of the petroleum
sector, evinces Chavez's commitment to asserting ever greater
state control of the economy, particularly with respect to
industries he deems strategic. Moreover, mining companies'
treatment at the hands of ministerial, vice-ministerial and
lower levels of the BRV bureaucracy offers further proof that
incompetence and corruption are exacting a terrible toll on
the Venezuelan economy.
BROWNFIELD