TAX CHANGES POSE SERIOUS PROBLEMS FOR U.S. MINE

C O N F I D E N T I A L LA PAZ 002217

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/01/2017
TAGS: ECON EMIN EINV BL
SUBJECT: TAX CHANGES POSE SERIOUS PROBLEMS FOR U.S. MINE

REF: A. LA PAZ 2090


B. LA PAZ 1847

C. LA PAZ 1840

D. LA PAZ 1740

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

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Summary
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1. (C) On August 1, Ambassador Goldberg met with executives
from Apex Silver, Sumitomo Corporation, and San Cristobal
mine (which is jointly owned by Apex and Sumitomo) to discuss
the future of the mine and the impact of the proposed changes
to Bolivia's mining code and tax regime. The outlook is
difficult for San Cristobal right now, since the GOB's
proposed tax changes are particularly onerous for companies
which produce concentrate instead of metals and the GOB's
proposed elimination of refunds on import taxes would only
also apply to companies that produce concentrate (ref D,
note: San Cristobal is the only major U.S. mine in Bolivia
that produces concentrate instead of metal. End note.) The
GOB's proposal to eliminate the right of mining companies to
mortgage their reserves is also potentially devastating to
San Cristobal. Because San Cristobal had to hedge on metal
prices in order to obtain loans, in aggregate the changes
proposed by the GOB pose a serious threat to the mine (when
hedge costs are factored in to the overall cost structure,
San Cristobal estimates that the proposed tax regime will
yield the GOB a 93 percent effective tax rate, and if the
refunds on import taxes are eliminated, the GOB's take would
be more than 100 percent.)

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San Cristobal's Meetings with Ministers
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2. (C) Ambassador Goldberg spoke to Vice President Garcia
Linera by phone after his meeting with the San Cristobal
group to ask the Vice President to encourage a meaningful and
productive meeting with the mining minister. In a seemingly
positive development, Mining Minister Echazu agreed to meet
with Apex and Sumitomo representatives the afternoon of
August 1 and Minister of Presidency Quintana accepted a
meeting for August 2. In what has become familiar for San
Cristobal executives but reportedly surprised and offended
the Japanese visitors, both Echazu and Quintana were not
available when the Apex/Sumitomo party arrived at their
offices (note: Minister Echazu had been called to Congress,
where the new mining tax code passed the lower house the
night of his scheduled meeting. End note.) Minister Echazu
eventually rescheduled and Apex/Sumitomo financial experts
were also able to meet with the Mining Ministry's technical
team.


3. (C) Mine executives told Emboff that they were pleased
to hear Minister Echazu say that his ministry does not
support the elimination of the CEDEIMS import tax refund
program, which has been proposed by the Ministry of Finance
(ref D.) Less encouragingly, the Minister seemed completely
surprised by San Cristobal's costs estimates. (Note:
although the mine has offered to share this information many
times in the past, the Minister never agreed to meet with
them before. End note.) Minister Echazu reportedly said that
he was now faced with a problem: he had spoken to Vice
President Linera the night before and the Vice President had
quoted the 90 percent figure (which Ambassador Goldberg had
mentioned to the Vice President,) but Minister Echazu had
told the Vice President that this number was false. Now,
facing evidence that the number is true, Minister Echazu is
in the difficult position of having misled his boss.


4. (C) Since the new mining tax code passed the lower house
of Congress without any input from the mining industry, the
San Cristobal executives asked Minister Echazu what could be
done to modify the new tax code. According to San Cristobal
executives, Minister Echazu seemed uncomfortable: having
supported the new tax code and ignored the pleas of the
industry, he did not want to have to approach his superiors
with new information a day too late. Minister Echazu
suggested that the only way to change the law would be to
lobby the Senate, warning that the ruling Movement Toward
Socialism (MAS) party senators had already been told to pass
the bill as is. Minister Echazu suggested that San Cristobal
approach opposition PODEMOS Senators and ask them to modify
the bill.


5. (C) Apex, Sumitomo, and San Cristobal executives
explained in their meeting with Mining Minister Echazu that
they hoped to arrange the inclusion of a tax stability clause
in the new tax code. Initially they suggested a period of
five years, which would cover the four and half years that
Apex had to hedge its prices in order to obtain loans.
Minister Echazu reportedly reacted favorably toward this kind
of modification of the bill, and Elidoro Sandy, head of the
ministry's political unit, reportedly added that this kind of
tax-stability measure is common in other countries, listing
Chile, Peru and Argentina as examples. After the meeting,
Apex, Sumitomo, and San Cristobal executives drafted a clause
which they will lobby for inclusion by the Senate. The
addition will include a series of tax-stability periods
ranging from three to ten years, based on the level of
investment in the mine; San Cristobal would fall in the ten
year category. (Note: As envisioned by San Cristobal, only
San Cristobal, San Bartolome, and Jindal's Mutun would be
large enough to benefit from this tax-stability regime.
During the meeting, Minister Echazu was reportedly concerned
that Glencore operations might benefit and seemed relieved
when reassured that Glencore would not benefit under this
proposal (ref C.) End note.)


6. (C) The Mining Ministry's technical team met on August 3
with Apex and San Cristobal financial experts to discuss the
mine's cost estimates. The technical team discovered that
one reason for the discrepancy between the GOB's cost
estimates and the mining industry's estimates was that the
Mining Ministry technical team was unaware of the existence
of a regulation that specifies how to calculate surtax; the
ministry was also not including all costs that the mining
industry included in its estimates. San Cristobal provided
the mining ministry with a copy of the surtax-calculation
regulation, and the Mining Ministry technical team is
currently reviewing the numbers. Whereas San Cristobal
executives expect to be challenged on some specifics, they
are hopeful that the GOB will now accept more input from the
mining companies.

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Public Attention and Embassy Involvement
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7. (C) In order to get the attention of the GOB, San
Cristobal has been trying to gain public support through the
media: recent news articles have stated that the GOB's
proposed tax changes threaten San Cristobal and highlight the
benefits of the project to Bolivia. One article also quoted
an unnamed source within San Cristobal who described the
company's lobbying efforts in support of extension of the
Andean Trade Preference Drug Enforcement Agreement (ATPDEA)
(refs C and D). (Note: Apex executives report that they
intend to continue lobbying for ATPDEA in an attempt to gain
favor with the GOB.) During their meeting with the
Ambassador, Apex and Sumitomo executives emphasized how
helpful the Ambassador's calls to Vice President Garcia
Linera have been (ref B.) Coeur D'Alene's San Bartolome
President Jim Duff has also asked that the Ambassador try to
arrange a meeting between the three big U.S. mining concerns
(Coeur D'Alene's San Bartolome, Apex's San Cristobal, and
Newmont's Inti Raymi) and the Vice President. Ambassador
Goldberg visited one of Newmont's two gold mines on August 3.


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Comment
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8. (C) San Cristobal is the largest mining operation in
Bolivia, and much of their projected USD900 million
investment is already in place. In comparison, Jindal Steel
and Power has promised to invest USD2.1 billion, but so far
no investment has been made and the contract has not been
approved by Congress (ref A). Nevertheless, President
Morales is hailing the Jindal agreement as a huge win for
Bolivia and participated in a public contract signing
ceremony, while he is not willing to meet with executives of
San Cristobal. In their eagerness to showcase Jindal's Mutun
project as a new, non-U.S. investment which validates the
GOB's policies and refutes international concerns about
investing in Bolivia, the GOB is treating Jindal much
differently than other international mining operations, at
least publicly. Jindal is scheduled to produce concentrate
for two or more years before steel-production can begin at
the site: it will be interesting to see if the GOB somehow
exempts Jindal from the more stringent tax situation that
could soon apply to companies that produce concentrate (refs
C and D). Since Jindal's Mutun mine would be one of only
three operations to benefit from San Cristobal's proposed
tax-stability modification to the tax bill, San Cristobal and
San Bartolome may decide to work with Jindal on this issue,
although they say they have no plans to do so at present.
End comment.
GOLDBERG