MUTUN IRON MINE DEAL: JACKPOT OR JINXED?

C O N F I D E N T I A L LA PAZ 002090

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/30/2017
TAGS: EMIN EINV BL
SUBJECT: MUTUN IRON MINE DEAL: JACKPOT OR JINXED?

REF: A. LA PAZ 1740

B. LA PAZ 1840

Classified By: Ambassador Philip Goldberg, reasons 1.4b,d


1. (C) On July 18 President Morales announced a contract with
Jindal Steel and Power Ltd (India's third largest stainless
steel producer) to develop the massive Mutun iron deposit,
which straddles the border with Brazil. (Note: reportedly
the contract allows Jindal to develop 50 percent of the
Bolivian reserves, while keeping the other 50 percent "for
the Bolivian people." End note.) The contact comes after
more than a year of negotiations with Jindal and must still
be submitted to Congress: President Morales and his
administration are lobbying hard for accelerated
congressional approval. The Morales administration is
hailing this contract as a victory for Bolivia, focusing on
the claimed USD2.1 billion dollar investment promise made by
Jindal (which would make the project more than twice as
expensive as Bolivia's largest current mining project, Apex
Silver's USD800 million San Cristobal mine.) President
Morales is also trumpeting the project's expected employment
creation: 4,000 direct and over 12,000 indirect jobs.
However, details of the contract are scarce and, depending on
which minister is speaking, occasionally contradictory.
Despite jubilant press releases, available information casts
some doubts on the project.

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Background on the Project
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2. (C) Mutun is reportedly the world's largest iron ore
deposit. Located in Santa Cruz Department near Puerto
Suarez, it extends across the border into Brazil. It has
estimated reserves of about 40 billion tons of iron. (Note:
Mutun's ore is medium-grade and reserves are only estimated,
not proven. The U.S. Geological Survey estimates the total
world reserves of iron at 230 billion. End note.) There has
been little construction at the site, mostly because of its
remoteness and lack of infrastructure. EBX, a Brazilian
company, briefly had a project which was blocked by President
Morales soon after he took office, supposedly due to
environmental and licensing concerns. Bidding for the mine
originally included Jindal Steel and Power Ltd,
Rotterdam-based Mittal Steel, China's Shandong Luneng
Hengyuan Trading Group Co Ltd, an Argentine joint venture,
and the Brazil-based EBX Group.

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Natural Gas Issues
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3. (C) Most of the delays during the last year of
negotiations between the Morales administration and Jindal
have centered around the provision and price of natural gas
for the project. The contract reportedly guarantees Jindal
eight million cubic meters of natural gas per day at a fixed
price of USD3.91 per million BTU (part of Jindal's USD2.1
billion investment in the project is a 450 MW electrical
plant.) President Morales claims that the gas deal is
positive for Bolivia because "Jindal will lose more than
USD80 million a year on the deal." (Comment: An interesting
insight into President Morales' view of win-win business
deals. End comment.) However, there is an opportunity cost
inherent in selling natural gas at USD3.91 per million BTU,
when the gas could be sold to Brazil, for example, at the
current estimated average contract price of USD4.1 per
million BTU. Initial calculations suggest that the GOB has
basically accepted an opportunity cost of USD55,000 per day
under this agreement. More worrisome is the fact that the
agreed quantity of gas constitutes one third of Bolivia's
current gas exports to Brazil and a fifth of Bolivia's total
gas production in 2005. Bolivia has recently faced
difficulties fulfilling its natural gas contracts, and
industry observers question whether the national production
capacity is able to support a project of this size.

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The Importance of Employment
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4. (C) Most of the celebrations surrounding the signing of
the contract have focused on employment creation: Mutun is
located in one of the poorest areas of the country, and in
2006 local villagers took government officials hostage in an
attempt to force the GOB to allow industrialization of the
project (the Bolivian army later freed the captured
officials.) President Morales' government has been under
significant local pressure to obtain a contract with Jindal,
which may explain the generous gas subsidies. Press reports
have focused less on the other major source of GOB funding
which will subsidize the project: rail and road
infrastructure at an estimated cost of USD150 million.

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Viability Doubts
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5. (C) In a conversation with Emboff on July 26, a number of
Bolivian mining experts discussed their doubts about the
project, listing the following potential problems:

(a) There has been no rigorous study of the reserves at
Mutun and therefore Jindal may have bid without full
knowledge of what they were getting. Additionally, an
observer who had previously passed up developing the project
wondered if Jindal was aware of the presence of phosphorus in
the ore, something that he suggested could be very difficult
to deal with in the concentration and smelting phases.

(b) There has been no Environmental Impact Study
(ironically, since an earlier project was blocked by
President Morales for its supposed potential for
environmental damage.)

(c) There has been no feasibility study for natural gas
provision. The assembled observers all expressed strong
doubts as to whether the GOB could manage to produce the
natural gas and provide it to Jindal with the necessary
consistency.

(d) There has been no economic study for the marketing of
the final product. Considering the location's isolation and
infrastructure limitations, getting the product to market
could be difficult. A number of press reports have noted
that Jindal does not have potential buyers lined up yet.

(e) With the GOB drafting a new mining code and proposing
higher taxes, the assembled observers also questioned why
Jindal would want to sign an agreement with the legal
situation still so uncertain. Although President Morales has
declared that the GOB will offer Jindal "judicial security",
the tone of a July 26th Amcham meeting on competitiveness in
the Bolivian mining sector (excepting the GOB speaker) was
grim. The proposed draft mining code would require all
companies to enter into joint ventures with the Bolivian
Mining Corporation (COMIBOL) with COMIBOL having at least a
51 percent presence. In addition, the Bolivian Mining
Association estimates that the new tax proposals could raise
the effective tax rate in Bolivia to over 70 percent, and
President Morales and his ministers have made statements
about nationalizing various mining projects (refs A and B.)

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Comment
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6. (C) Although the contract between the GOB and Jindal may
in fact be the windfall for Bolivia that President Morales
claims, a number of aspects of the situation raise questions.
However, even if the contract is weak, it is likely to be
approved since Congress will look like the bad guy if they do
not allow the project, with its popular creation of jobs, to
go forward. End comment.
GOLDBERG