JAPAN'S SUMITOMO ACQUIRES STAKE IN U.S. MINING

UNCLAS LA PAZ 002623 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/AND LPETRONI COMMERCE FOR JANGLIN TREASURY FOR SGOOCH E.O. 12958: N/A TAGS: EMIN EINV ECON BL SUBJECT: JAPAN'S SUMITOMO ACQUIRES STAKE IN U.S. MINING COMPANY REF: LA PAZ 2046 ¶1. (U) Summary: Japan's Sumitomo Corporation recently acquired a 35 percent participating interest in U.S.-based Apex Silver's $800 million San Cristobal silver-zinc-lead project (reftel). Apex will receive $224 million cash and future silver and zinc payments; Sumitomo will also assume 35 percent of San Cristobal's project financing and derivative liabilities. Company representatives told the Charge September 27 that they expected attractive returns, despite the risks of investing in a politically and economically volatile country. End summary. ¶2. (U) Japan's Sumitomo Corporation, a significant player in the global mining industry, recently acquired a 35 percent participating interest in U.S.-based Apex Silver's $800 million San Cristobal open pit silver-zinc-lead project (reftel). The September 25 agreement also gave Sumitomo a two-year option to purchase 35 percent shares in selected Apex Silver exploration projects in Bolivia, Peru, Mexico, and Argentina. ¶3. (U) In return, Apex will receive $224 million cash; deferred silver payments of 22.86 percent of Sumitomo's share of San Cristobal's future payable silver production; and deferred zinc payments of 20 percent of Sumitomo's share of the project's future payable zinc production. Sumitomo will also assume 35 percent of San Cristobal's $225 million project financing and $130 million derivative liabilities. ¶4. (SBU) Sumitomo representatives told the Charge September 27 that they were "very excited" about the investment and its potential returns, noting that San Cristobal's size and ore quality made it an attractive project. They noted only two problems: (1) the project is in a politically and economically unstable country and (2) record-high mineral prices will inevitably fall, perhaps before the firms extract the bulk of the project's reserves. Company representatives declared, however, that they could manage both risks. ¶5. (SBU) According to Apex Silver executives, the project is now fully financed and on track to begin production in the third quarter of 2007. From a technical standpoint, construction has proceeded relatively smoothly; problems have resulted primarily from road blockades (and related logistical delays) and demands from local communities for more jobs and higher pay. Apex Executive Vice President Alan Edwards said the company attempted to meet those demands, even hiring a local trucker's association to move construction materials when rail transport would have been cheaper. Unfortunately, Edwards noted, the company's efforts occasionally backfire: the truckers went on strike their first day, backing down only after negotiations. ¶6. (SBU) Comment: Both firms expect attractive returns, despite the risks of investing in a politically and economically volatile country. Executives take comfort in assurances from Minister of the Presidency Juan Ramon Quintana and other officials that the GOB will not nationalize the mining industry, but the government's future course is far from clear - and with record-high mineral prices boosting companies' returns, the GOB may find it hard to resist the temptation to tinker with existing tax and royalty structures to raise the state's share of profits. End comment. URS