BOLIVIA: IMPLICATIONS OF APEX SILVER SELLOUT

C O N F I D E N T I A L LA PAZ 002540

SIPDIS

E.O. 12958: DECL: 12/05/2018
TAGS: EMIN ECON EFIN EINV ETRD PREL BL
SUBJECT: BOLIVIA: IMPLICATIONS OF APEX SILVER SELLOUT

Classified By: A/DCM Mike Hammer for reasons 1.4 b,d


1. (C) Summary: Charge met with executives from Denver-based
Apex Silver and its subsidiary Minera San Cristobal on
December 5 to discuss the future of Bolivia's largest mining
operation. High taxes, the fall in metals prices, and Apex's
unfavorable loan structure have caused a drop in Apex stock
prices from a high of 23.75 April 2006 to the current price
of 0.66. Apex's debilitating financing structure, including
a hedge on silver prices that has cost the company millions
of dollars, was influenced by banks' unwillingness to invest
in a country with Bolivia's risk-profile. Apex has also
suffered from the Morales' administration's knee-jerk
anti-American and anti-capitalist tendencies. End summary.

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Turning Japanese
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2. (C) Sumitomo Corporation, which is currently 35 percent
owner of the San Cristobal mine, is in negotiations to buy
the remaining 65 percent of the mine from Apex, with Apex to
continue as the mine's operator. Local Minera San Cristobal
executives are already seeing the results of the projected
change in ownership. While the mine was majority
American-owned, no high-level national officials under the
Evo Morales government would visit the mine (not even Mining
Minister Echazu, who indicated to San Cristobal officials
that he was interested in a visit but that it would endanger
his job.) Now that the mine will soon be entirely Japanese,
Echazu has informed the mine's executives that he and
President Morales are interested in a visit.


3. (C) Minera San Cristobal President Gerardo Garrett relayed
a conversation he had with Bolivian Mining Director General
Freddy Beltran, who said, "It's good that you're going to
become Japanese." Minera San Cristobal executives anticipate
that no longer being a U.S. company will help them on two
lobbying issues: continuation of the CEDEIMS import tax
rebate plan, which may be threatened under Article 351.4 of
the Movement Toward Socialism (MAS) draft Constitution; and
modification of a currency exchange adjustment accounting
rule which is currently costing the mining industry a lot of
money.


4. (C) San Cristobal executives are also involved in drafting
proposed text for the mining law that is expected to be
passed after (and if) the draft MAS constitution is approved
by referendum in January 2009. The mining industry hopes
that some of the vaguely threatening language in the draft
constitution can be neutralized by more business-friendly
text in the mining law (Note: This optimism seems more a
result of wishful thinking, since the same socialist
ideologues who drafted the MAS constitution will have a hand
in the mining law. End note.) Sumitomo will also lobby for
the removal of the additional 25 percent surtax that only San
Cristobal is big enough to pay, although Apex VP Jerry Danni
noted wryly that with the current low price of minerals, the
mine isn't making enough money to have to pay the surtax.
Danni added that as of now, only the Bolivian and Potosi
regional governments have made money from San Cristobal mine.

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Non-Yankee Investment Welcome
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5. (C) The proposed investment in the Mutun iron deposit (in
Santa Cruz department on the border with Brazil) that was
touted by President Morales as a 2 billion dollar boost to
the Bolivian economy is still in the exploration stages, and
the general opinion in the Bolivian mining community is that
the project is many years from starting (if it ever gets off
the ground: the government is having trouble delivering on
its contractual promises of cheap gas supplies, an improved
transportation network, and land reform to allow surface
access.) The joint venture between the Bolivian state mining
entity COMIBOL and South Korean state mining company Kores to
reopen an old copper mine seems to be progressing, but it too
is in the exploration stages and the government's
announcements about future investments are therefore
premature. Morales's enthusiasm for these two potential
investments is in stark contrast to his animosity towards
U.S. mining interests, despite the fact that San Bartolome
and San Cristobal are currently providing jobs and royalties
in one Morales stronghold, the poor and mostly-indigenous
altiplano.

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Shaking the Dust from Their Steeltoes
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6. (C) Apex Silver, which plans to return to its core
competency as an exploration and development company
(possibly after declaring bankruptcy),has a number of
promising concessions in Bolivia, but Corporate Vice
President Jerry Danni was adamant that the company is not
interested in investing in Bolivia at this time: "With some
of the highest taxes in the world and the current political
instability, plus what happened with San Cristobal, our
shareholders wouldn't look too kindly on our putting more
money into Bolivia." Danni pointed out that there is
"nothing in the pipeline" in terms of international
investment in Bolivian mining, adding that Idaho-based
Coeur's investment in the San Bartolome mine in Potosi is
suffering due to low silver prices and Denver-based Newmont's
gold operations in Oruro are scheduled to shut down in the
next two years. (Note: Coeur executives have confided to us
in the past that if they had to do it over again, they would
not invest in San Bartolome because of the difficulties in
dealing with the Bolivian government, the tax increases, and
the legal instability. End note.)

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Comment
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7. (C) At a time when mineral prices have dropped
precipitously, the Bolivian government is scrambling to prop
up non-tax-paying cooperativist miners while alienating
international investment. The Morales administration's
anti-American bias creates an uneven playing field, although
currently not even the favored (non-U.S.) nations are showing
much interest in investing in Bolivia. Sumitomo Corporation
has opened a small office in La Paz to handle San
Cristobal-related issues and to look into the possibility of
investing in lithium extraction from the Uyuni Salt Flats in
Potosi. South Korean exploration is ongoing but small-scale,
and Jindal's iron project is stalled at the exploration
stage. Bolivia has a five-hundred-plus year history of
mining and extensive mineral reserves. At a time when
Bolivia could most use money and jobs, the government's
policies have driven investors to other countries in the
region. In fact, Peruvian President Alan Garcia recently
thanked Bolivia for its mining regime and the resulting
inflow of investors to Peru. End comment.
LAMBERT