LITHIUM: A NEW BATTERY FOR BOLIVIA'S ECONOMY?

C O N F I D E N T I A L LA PAZ 000267

SIPDIS

E.O. 12958: DECL: 12/05/2018
TAGS: EMIN ECON EFIN EINV ETRD PREL BL
SUBJECT: LITHIUM: A NEW BATTERY FOR BOLIVIA'S ECONOMY?

REF: A. LA PAZ 183

B. 08 LA PAZ 2540

C. 08 LA PAZ 1055

Classified By: Acting EcoPol Chief Brian Quigley for reasons 1.4 b,d


1. (C) Summary: Recent articles from BBC, the New York
Times, and business journals have created substantial buzz
about the reportedly large reserves of lithium contained in
Bolivia's Uyuni salt flat. On February 11, Bolivia's National
Mining Director Freddy Beltran announced that four
companies--Japan's Mitsubishi and Sumitomo, Frances' Bollore,
and Korea's LG--have expressed interest in the Uyuni deposit.
Estimates of the grade and the recoverability of the deposit
vary greatly, and the true quantity of lithium and viability
of any mining project will not be known until after the
start-up of state mining company COMIBOL's pilot plant in
April (even then data may not be made public). Although
local officials have informed Emboff that Oruro's Coipasa
salt flat has limited lithium development potential, on
February 10 President Morales also announced that the
Bolivian government will seek investment to develop lithium
extraction at Coipasa. Despite this surge of interest, the
Morales' government's anti-capitalist bias could make it
unattractive for companies to invest in Bolivia's lithium
(ref A). End summary.

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History: U.S. Company Forced Out in 1990
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2. (U) In the late 1980s and early 1990s there was only a
modest demand for lithium, which was mainly used in drugs and
ceramic and glass manufacturing. In the late 1980s, only one
major international company was actively seeking investment
in Bolivia's potential lithium reserves: Lithium Corporation
of America--based in Gastonia, N.C. and known as Lithco. The
value of the Lithco contract discussed at the time would have
been minimal: the contract called for an initial investment
of USD 6 million and a three-year feasibility study, with an
additional USD 40 million for a processing plant if Lithco
decided to proceed. Lithco estimated at the time that it
would create 200 jobs and result in expected USD 100 million
in exports over ten years.


3. (U) Lithco had been in negotiations for several years with
the Bolivian government when then-President Jaime Paz Zamora
announced on May 4, 1990, that the Bolivian government would
not proceed with the deal. Paz Zamora was reacting to hunger
strikes from the contract's opponents and indications that
the Bolivian congress would not approve the contract with
Lithco. During a Labor Day demonstration three days before
the announcement, marchers had carried signs saying, "Death
to those who would hand over the Uyuni salt flat."
Describing the situation as "extremely politicized", Paz
Zamora urged Bolivians to assume a "modern mental attitude,
without complexes or fear of progress" and said that in the
competitive mining environment, Bolivia should strive to
limit "obstacles in the road and create the best conditions
to capture investment."

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A Tale of Two Salt Flats: Uyuni and Coipasa
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4. (C) The Bolivian government, through the state mining
company COMIBOL, has begun construction of a small pilot
plant to investigate lithium extraction methods in Uyuni.
The plant is expected to start production in April 2009, and
until that time the feasibility of extraction is not known.
Encouraged by the international interest in lithium, on
February 10 President Morales announced that the Bolivian
government will also seek international investment to develop
lithium extraction from the much smaller Coipasa salt flat in
the department of Oruro. In a 2008 meeting (ref C),Emboff
spoke with Engineer Huascar Guzman of the Oruro Departmental
Mining Ministry, who said that the department has high hopes
for exploitation of the Coipasa salt flat's non-metallic
deposits (primarily sodium chloride with recoverable levels
of potassium and some lithium.) According to Guzman,
Potosi's Uyuni salt flat has higher levels of lithium and
therefore has attracted more international interest, however
the potassium deposits in Oruro's Coipasa salt flat could
provide fertilizer for Bolivia's eastern agricultural
regions. Currently the Coipasa salt flat is being exploited
only by local communities for sodium chloride used as
table-salt. A pilot plant would be necessary to determine
whether the mineral can be economically extracted, and Guzman
said that the prefecture would expect to form 50/50 joint
ventures with any interested investors. The national
government also expects to maintain an interest in any
production at Coipasa, suggesting that potential investors
will face two levels of governmental oversight and
participation.

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International Interest
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5. (U) Currently no major U.S. companies are actively
courting the Morales administration for mining rights in
Uyuni, and none of the three major Latin American lithium
producers (Rockwood, SQM, and FMC Lithium) has shown interest
in investing in Bolivia. Timothy McKenna, a vice president
of investor relations at Rockwood Holdings was quoted in a
recent McClatchy Newspapers article as saying, "there are
fairly significant barriers to developing the resource in
Bolivia." These barriers include infrastructural
deficiencies (Bolivia's roads are poor and its rail system
almost non-functioning) and environmental difficulties (heavy
rains could interfere with the evaporation process needed to
recover lithium from Uyuni's brines.)


6. (SBU) According to press reports, Mitsubishi, Sumitomo,
and a European consortium led by France's Bollore group have
sent representatives to meet with members of the Morales
administration. Bolivia's National Mining Director Freddy
Beltran recently told the press that while those three groups
had "formalized" their intention to mine lithium in Uyuni by
sending "high level missions", South Korean multinational LG
has also expressed interest. Increasing governmental
involvement in mining--the new constitution puts the State in
charge of every step of the mining process--is a barrier to
international investment interest, however. The Bolivian
government's stated intention that any lithium mining be
"value added" (that is, that lithium batteries would be made
in Bolivia) has also caused some investor concern: Bolivia's
land-locked location and relatively-untrained workforce do
not make it a promising location for high-technology
production.


7. (SBU) In his February 17 trip to France, President Evo
Morales met with French President Nicolas Sarkozy and
executives from Bollore and Total to discuss the possibility
of lithium and gas exploitation in Bolivia. According to
press reports, Morales recognized the need for international
investment to develop lithium but stated that Bolivia "will
not sell (the resource) for any price." Palace spokesman
Ivan Canelas announced that Bollore will "make a proposal to
the Bolivian government regarding the investigation,
production, marketing, and even the fabrication of
lithium-battery fueled cars" in Bolivia. (Note: Morales's
discussion with gas company Total included a now-familiar
caveat: Morales warned that the French company should
"accelerate investment" and "comply with contracts" or else
"Bolivia will make its decisions." End note.)

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Sumitomo: One Company with Bolivian Experience
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8. (C) Sumitomo's representative in Bolivia, Ms. Ai Kato,
recently told Emboff that the company had not originally
intended to form a Bolivian mining subsidiary, but found that
their new role as sole owners of the San Cristobal silver
mine (formerly 65 percent owned by Denver's Apex Silver which
is now bankrupt) required extensive meetings with the
Bolivian government. Kato described the frustration of
dealing with "inexperienced" government officials: "They
don't even know what Sumitomo is. I call for a meeting, and
they say, 'Who?". I get letters addressed to Mr. Sumitomo
and calls from officials who want to speak to him." Kato
formerly worked for the Japanese Embassy in La Paz and says
that she has to use her contacts from that position in order
to arrange meetings: "With the Bolivian government, private
companies are very low ranking. They want to deal with other
government officials, not with executives, even though
Sumitomo is now one of Bolivia's largest investors."


9. (C) Kato also said that she has had to confront a common
Bolivian government misconception that Sumitomo "took
advantage" of Apex's bankruptcy and bought San Cristobal mine
at a bargain price: "Sometimes officials say, 'the Bolivian
government should have bought San Cristobal, why should you
get it so cheaply?' They don't understand the debt
structure, the fact that Sumitomo had loaned a lot of money
to Apex and owned 35 percent outright. Sumitomo is assuming
San Cristobal's debt of 400 million dollars, too." Kato
believes Sumitomo has escaped the possibility that the
government would seek to nationalize San Cristobal outright,
but she worries that this attitude persists at high levels in
the government. Sumitomo is currently experiencing another
downside of the Bolivian mining industry: conflict with the
local community and workers has shut down mining since
February 16.


10. (U) During a recent visit by Sumitomo executive Jiro
Miyata, Kato arranged an interview with La Paz daily La
Razon, partially to make public the fact that, due to
production delays and current low mineral prices, San
Cristobal mine is currently facing losses of more than USD 10
million per month. Miyata is quoted: "Despite the fact that
monthly we're registering losses, we still pay high taxes--to
date we have already paid some 200 million dollars. We have
the right to receive refunds of added value tax (through the
CEDEIM certificate program) but the refunds are very
backlogged. We don't want to complain, but we need the help
of the Bolivian government to get our refunds." Describing
how San Cristobal is desperately seeking ways to lower costs
(Kato confided that San Cristobal's already-highly paid
employees are currently demanding a salary hike),Miyata
concluded, "If we have success with this project (San
Cristobal),we will think about another project, such as the
development of lithium. But first we have to have success
with this project."

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Nationalism Increasing
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11. (U) Nationalist sentiment over the lithium reserves is
growing, and state mining company COMIBOL has been unwilling
to begin working with international investors until the small
COMIBOL pilot plant has shown the best processes for lithium
extraction. Government officials have stated that they look
to international investors for "technical support" but not as
full partners. According to Saul Villegas, head of state
mining company COMIBOL's lithium division: "The previous
imperialist model of exploitation of our natural resources
will never be repeated in Bolivia. Maybe there could be the
possibility of foreigners accepted as minority partners or,
better yet, as our clients."


12. (C) Many industry observers worry that the Bolivian
government has neither the capacity nor wherewithal to
successfully exploit the lithium reserves on an economic
scale and that President Morales's history of nationalization
(of hydrocarbons and companies such as Italian telecom giant
ENTEL) will discourage necessary investment. A balanced
development approach seeking international investment in
lithium extraction could benefit the country via tax-income
and employment, but it is unclear whether Morales' socialist
"revolutionary" sentiments will allow for such a win/win
solution. As quoted in a recent New York Times article,
economist Juan Carlos Zuleta points out: "We have the most
magnificent lithium reserves on the planet, but if we don't
step into the race now, we will lose this chance. The market
will find other solutions for the world's battery needs."
The Uyuni salt flat's status as one of Bolivia's main tourist
attractions has also raised environmental concerns: although
lithium extraction could be managed with minimal impact, many
observers doubt that COMIBOL has the experience or capacity
to run an operation in an environmentally sensitive manner.

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Comment
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13. (C) What constitutes a mineral "reserve" in mining is
based on what can be economically extracted at the time of
determination; reserve estimates are therefore affected by
prevailing market prices and extraction technology as well as
the specific grade of the deposits. The Uyuni salt flat
represents a reserve that has yet to be sufficiently
explored: until the pilot plant shows results, it will not be
known if the lithium can be economically extracted. Politics
also affect the economics of extraction, and the Bolivian
government's fundamental antipathy toward capitalism and
multinational companies (even non-U.S. companies) will serve
to make Uyuni lithium more difficult to extract and therefore
more costly. As lithium prices rise, borderline deposits
will become economically viable, many in countries with
more-cooperative governments (considering only the western
hemisphere, Canada has large undeveloped deposits of
lithium-containing pegmatites, while salt flats in Chile and
Argentina are already being exploited.) The current hype
about Bolivia's lithium reserves has encouraged the Bolivian
government to begin a game of "gotcha" with potential
investors, but Bolivia will be the loser if investors decide
they would rather play a different game in a country where
the rules of play are more stable and the dice are not loaded
against them. End comment.
URS