BOLIVIA: MINING SECTOR THREATENED

C O N F I D E N T I A L LA PAZ 003187

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/28/2017
TAGS: ECON EMIN EINV ETRD BL
SUBJECT: BOLIVIA: MINING SECTOR THREATENED


Classified By: ADCM Mike Hammer for reasons 1.4 b,d

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Summary
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1. (C) In the controversy following the ruling Movement
Toward Socialism's (MAS) possibly-illegal initial approval of
a draft constitution on November 26, there has been little
attention given to the passage through Congress of a new
mining tax bill on November 23. Neither the draft
constitution nor the mining tax bill have been officially
published, but we have received credible copies from various
contacts. The mining tax bill is almost identical to the
drafts reviewed in previous cables: a system of royalties is
instituted, the royalties are not creditable against income
tax at current prices, and an additional 12.5 percent income
tax is added. The draft constitution, should it become
official as currently written, would have serious
consequences for U.S mining interests in Bolivia and would
likely to discourage international investors. There is one
ray of hope in that our contacts tell us that the CEDEIMS
import tax recovery regime is likely to continue unchanged,
where previously the government had threatened to eliminate
it for companies not producing a metallic product (among
major U.S. interests, only Apex's San Cristobal would have
been affected.) However, the overall situation in the mining
sector in Bolivia seems to be deteriorating, with increasing
conflicts and violence at a number of small operations and a
generally poor environment for investment. End summary.

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San Cristobal: Largest Investment in Bolivia Hit Hard
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2. (C) In a meeting with the Charge and Ecopoloffs December
5, Apex Senior Vice President Jerry Danni and San Cristobal
(Apex's Bolivian subsidiary) executives discussed the impact
of the new tax law on their mine, the largest capital
investment in Bolivia. According to Danni, with a government
take of over 80 percent, Apex is now "working for the
Bolivian government instead of for our shareholders." He
added that, under the current tax regime, Apex would not have
invested one billion dollars in Bolivia. Apex continues to
be unable to arrange meetings (or even get responses) from
the Mining Ministry and other Bolivian officials, and they
report that Sumitomo (35 percent owner of San Cristobal) is
equally shut out.


3. (C) In an attempt to gain some influence, and recognizing
that the United States currently has little to offer that
Evo's government seems to want, Apex is also continuing their
lobbying efforts on ATPDEA. Danni informed us that they have
hired the Livingston Group and have met recently with
Bolivian Ambassador Guzman. Apex is hoping that help on
ATPDEA will lead the government to provide tax relief, but at
the same time Apex wants it subtly known that, should Apex
get no cooperation, it will consider opposing ATPDEA.
Overall, Danni and the local San Cristobal executives said
that the new tax regime is "the end of investment in mining
in Bolivia" and the new constitution, should it pass as
currently drafted, "will be the end of private mining in
Bolivia." Many other contacts in the mining industry share
this bleak assessment.


4. (C) San Cristobal is currently meeting with low-level
officials in the Ministry of Finance to lobby for a change in
Bolivian tax laws that would let them deduct their hedge
costs. They are also hoping for a change in the Bolivian tax
law that would eliminate the 25 percent "excess profits
surtax" or windfall tax: this surtax kicks in when profits
exceed a certain level (the surtax is included in the
estimate of an 85 percent government take.) Currently only
San Cristobal and possibly the proposed Jindal Mutun
operation would be subject to this surtax. In what Danni
describes as a reaction to the new tax law and the overall
perceived political instability in Bolivia, Apex's share
price has four to five dollars per share in the past weeks.

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Constitution Disillusion
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5. (C) The remains confusion over which draft of the
MAS-backed constitution is the right one, and any draft is
still subject to review and change, therefore a number of our
industry contacts are withholding judgment on the drastic
changes to the mining sector that would follow should the MAS
draft constitution enter into force. There are, however,
reasons for concern. Certain sections of the draft
constitution reflect rumors that had been circulating in the
mining sector regarding details of a new mining code: in
particular, a requirement for all mining operations to sign
joint venture agreements with the state mining company
COMIBOL. Under article 349 (Natural Resources),"the state,
through public, social or community entities, will assume
control and direction over exploration, exploitation,
industrialization, transportation and marketing of natural
resources. The state will be able to sign joint venture
contracts with legal entities, Bolivian or foreign, for the
development of natural resources."


6. (C) In article 318, the draft constitution lays out rules
for foreign investment in Bolivia: "Bolivian investment will
be prioritized over foreign investment. All foreign
investment will be subject to Bolivian jurisdiction, laws and
authorities, and no one will be able to invoke exceptions or
diplomatic claims to obtain more favorable treatment...The
state is independent in all decisions of internal economic
policy and will not accept impositions or conditions on this
policy on the part of states, banks, or financial
institutions, Bolivian or foreign, multilateral entities nor
transnational companies." Article 355 states that private
companies will not be able to list reserves as corporate
assets, even if they have the concessions from the
government.


7. (C) The draft constitution contains what seems to be
broad land rights for indigenous individuals and groups and
rights to "share the benefits" of resources on that land.
The mining sector does not need to wait to see what will
happen with the draft constitution, however: on November 7,
President Morales signed into law the UN Declaration on the
Rights of Indigenous Peoples, which provides even greater
basis for indigenous land claims. The section of the UN
Declaration (now Bolivian Law No. 3760) that refers to
provision of lands and resources seems to recognize
indigenous rights to lands that they have historically
occupied. This provision could result in endless land
disputes in the mining sector (and elsewhere),considering
that before the arrival of the Spanish all of Bolivia was to
some extent occupied by indigenous people, and also
considering that the majority of Bolivians currently
self-identify as indigenous (depending on the survey.)

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Cooperativists Not Cooperative on Constitution
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8. (C) Although the cooperativist miners (social groups with
special status under Bolivian law),supported the MAS and
President Morales during his campaign, relations have soured
and the new constitution has further alienated the groups.
Approximately five-hundred former Huanuni cooperativists,
unemployed for almost a year since the nationalization of the
Huanuni deposit, marched on Sucre on November 30 to reject
the draft constitution, expressing their "unconditional
support to the city of Sucre" and criticizing that "the legal
process was not respected by the government in the vote on
the (draft) constitution." The broad rights given to
indigenous groups under the draft constitution have prompted
cooperativist ire, particularly since the promulgation of law
3760 based on the UN Declaration comes in the wake of a
number of recent mine invasions by local communities.
Currently there are dozens of cases of indigenous or
campesino groups taking over small mines by force, claiming
an indigenous right to the land, and in at least one case, a
number of deaths have been reported.


9. (C) Some of the cases involve small private mines: for
example, an Argentine and Brazilian couple have filed for
assistance with the Bolivian government after local
campesinos (indigenous farmers) invaded their mine and
reportedly forced them to sign over the mine and their house
"under the recent UN Declaration of Indigenous Rights." An
embassy contact who manages a small private mine that has
been taken by local campesinos recently outlined to emboff
his plans to hire "miners" who are more known for their
ability to fight than mine. The mine manager explained that
the police are not interested in getting involved and that
frontier law is in effect. The Mining Ministry lists eleven
cases of private mines being taken by local communities and
eight official complaints from cooperativist miners. The
Mining Ministry's policy is to try to arrange meetings to
reconcile differences, a tactic that has not been productive,
and violent confrontations between miners and indigenous
communities are occurring with greater frequency. The threat
of more indigenous "takings" of cooperative mines has turned
the cooperativists against the draft constitution and, to
some extent, against the MAS.

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Death (of investment) and Taxes
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10. (C) The mining tax bill has not been substantially
changed in any way that will help U.S. companies, although
there does seem to be a small concession which will assist
Newmont's Inti Raymi operations (specifically giving
more-favorable royalty rates for gold coming from "marginal
mines and sulfurous minerals requiring high technology.")
Otherwise, the new law includes all of the points that we
have reported on before, including a new 12.5 percent
additional tax on top of the current income tax. Companies
which produce "value added products" (that is, metals rather
than concentrates) will only have to pay 60 percent of the
additional 12.5 percent income tax (note: of large U.S.
operations, only San Cristobal produces concentrates, and
therefore only San Cristobal will pay the full 12.5 percent
additional rate. End note.) The 12.5 percent additional
income tax rate will be applied when the mineral prices are
above the levels set for calculating royalties: currently all
metal prices are above those levels and therefore the 12.5
percent increase in income tax will be effective immediately.



11. (C) The new royalties are calculated on a 3-tiered system
based on mineral price (for example, for silver there is a 6
percent royalty when prices are over 8 USD per troy ounce,
0.75 percent times the price when the price is between 4 and
8 USD per troy ounce, and 3 percent when the price is less
than 4 USD per troy ounce. The tiered prices have been set
so that, currently, all royalties will be charged at the
highest level possible.) The new royalties will be
creditable against income tax only when mineral prices are
below certain levels (again, these levels are far below
current market prices, meaning that for now and in the
foreseeable future, companies will not be able to credit
their royalties against their income tax and will instead
have to pay both.) Royalties are deductible when not
creditable. (Note: One noticeable change in the tax law is
that the numerical price level for crediting royalties on
iron is now much lower than it was in previous drafts, so
that royalties on iron will also not be creditable at current
market prices. This change could have a negative impact on
the viability of the Jindal Mutun project, although our
contacts in the Honorary Indian Consulate do not seem
concerned. End note.)


12. (C) Overall, these changes convert Bolivia from a
country with a relatively attractive mining tax regime into
the country with one of the highest tax rates in the region.
A number of our contacts have pointed out that, with
Bolivia's instability and infrastructural limitations,
international mining companies are avoiding Bolivia in favor
of nearby countries. Having lost any tax advantages it once
had, Bolivia now holds even less appeal for international
investors. Apex's Jerry Danni pointed out that, with the
passage of the new tax law, international interest in
investment in the Bolivian mining sector has been basically
eliminated, while investment in neighboring countries is
booming. Danni and local San Cristobal executives confirmed
that the MAS are looking at the short term--what will get
them more money and more votes in the next few months--and
ignoring long-term effects as their actions drive away
investment. Knowing that mines, by their nature, can't be
moved and that U.S. companies have invested too much to pull
out, the MAS intend to wring every last penny possible out of
them, regardless of what this may do for Bolivia's reputation
in the mining industry.

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Slightly Tarnished Silver Lining
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13. (C) According to sources in the mining sector, the
Congress will soon approve a bill which will leave the
CEDEIMS import tax recovery program unchanged. Previously,
the Bolivian government had proposed a change to the CEDEIMS
program which would have meant that only companies producing
"value added" products (metals instead of concentrate) would
be allowed to claim their import taxes against export taxes.
This change would, again, have affected only Apex's San
Cristobal mine among large U.S. operations. Currently, San
Cristobal executives and the president of Bolivia's national
"Medium Miners Association" believe that the Senate and the
President will sign the new bill leaving CEDEIMS unchanged,
to the benefit of San Cristobal.

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Comment
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14. (C) Apex and local U.S. mining executives view the public
welcoming of the new tax law by U.S. Coeur D'Alene executives
as a strange aberration, and local Couer executives confess
privately to us that the new tax law is, in fact, bad for
Coeur. Although the higher taxes are not good for any
international operation, the increased taxes fall
disproportionately on Apex's San Cristobal mine. The
Ambassador has advocated for U.S. mining interests in the
past, calling on Vice President Garcia Linera and other
officials to try to protect U.S. investments in the sector.
Recent government actions and statements have shown, however,
that the MAS-led government is not interested in the concerns
of international mining investors. During the Ambassador's
recent visit to Coeur D'Alene's San Bartolome operation,
scheduled to begin production in 2008, Coeur's South American
Operations President Jim Duff was asked about the situation
in the Bolivian mining sector. Duff replied that,
considering the investment climate under the new government
and increasingly strained relations with local communities,
if Coeur had to decide today, they would not invest in
Bolivia. Apex Vice President Jerry Danni echoed this
sentiment, saying, "we certainly wouldn't have built a one
billion dollar project here under the current parameters."

URS