BIDDING ON MUTUN IRON ORE PROJECT DELAYED AGAIN

UNCLAS LA PAZ 000439 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/AND LPETRONI ENERGY FOR CDAY AND SLADISLAW COMMERCE FOR JANGLIN TREASURY FOR SGOOCH E.O. 12958: N/A TAGS: EMIN ECON EINV PGOV BL SUBJECT: BIDDING ON MUTUN IRON ORE PROJECT DELAYED AGAIN REF: 05 LA PAZ 3771 ¶1. (U) Summary: Shortly before an earlier sixty-day delay expired, the GOB announced plans to postpone for an additional ninety days international bidding on the rights to develop Mutun, one of the world's largest iron ore deposits. Interested firms may now be expected to fund not only the extraction of iron ore, but also its domestic industrialization and related construction projects. Observers worry that GOB officials' plans to revise existing bid protocols and to modify its proposed joint venture contract may undermine investors' confidence in the bid process, noting that since officials have failed to offer specifics, interested firms face significant uncertainty and the possibility of further delays. End summary. ¶2. (U) On February 19, the GOB postponed for ninety days international bidding on the rights to develop Mutun, one of the world's largest iron ore deposits. The news came just days before the expiration of a sixty-day delay announced December 20, 2005 (reftel) and revealed the GOB's intentions to revise existing bid protocols and to modify the joint venture contract the GOB will sign with the winning bidder. Officials indicated they would seek favorable mineral prices for the state; require the domestic industrialization of iron ore extracted from the Mutun deposit; mandate the eventual use of natural gas (instead of coal) to power the site's proposed processing facility; and compel the construction of a canal and railroad spur to link the project to a nearby riverine port. ¶3. (U) Five firms, including the Netherlands' Mittal Steel, Brazil's EBX Siderurgica, Argentina's Techint-Siderar, China's Luneng Shandong, and India's Jindal Steel and Power, have expressed interest in the project, each apparently having determined that potential profits from the development of the deposit's estimated 40 billion tons of iron ore and associated magnesium make bearing the political risks of Bolivia's uncertain investment climate worthwhile. To continue, each firm will have to demonstrate its ability to raise enough cash to cover a projected $1.7 billion total investment. Given proposed changes to the contract, the winning bidder will not only be expected to build a $500 million industrial plant to process iron ore, but also to construct a $400 million pipeline to supply the project with Bolivian natural gas (note: Brazil currently consumes all gas shipped through the region's existing pipeline) and to build a $170 million canal and 140-kilometer railroad spur to link the project to a port (which must also be constructed) at Puerto Busch, a facility designed to provide access to the Paraguay River and the Atlantic Ocean. ¶4. (SBU) Comment: Historically high mineral prices and the GOB's promise of reasonably priced natural gas may make the Mutun project economically viable, but investors must weigh potential profits against the risk of doing business in an increasingly uncertain investment climate. Observers worry that GOB officials' plans to revise existing bid protocols and to modify its proposed joint venture contract may undermine investors' confidence in the bid process, noting that since neither President Evo Morales nor any of his advisors or ministers have offered specifics, interested firms face significant uncertainty and the possibility of further delays. Business and community leaders in Santa Cruz and towns near the project have vowed to initiate roadblocks if the process is postponed again, leading some to wonder if the issue won't evolve into a power struggle between the new MAS-led administration - which has repeatedly declared its desire to nationalize Bolivia's natural resources, revise the mining code, and raise mineral royalties - and the region's business interests, which favor a private sector-led development strategy. End comment. GREENLEE