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. - - - - - - - - - - - - - - - - - - - - - History: U.S. Company Forced Out in 1990 - - - - - - - - - - - - - - - - - - - - - ¶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." - - - - - - - - - - - - - - - - - - - - - - A Tale of Two Salt Flats: Uyuni and Coipasa - - - - - - - - - - - - - - - - - - - - - - ¶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. - - - - - - - - - - - - International Interest - - - - - - - - - - - - ¶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.) - - - - - - - - - - - - - - - - - - - - - - - - Sumitomo: One Company with Bolivian Experience - - - - - - - - - - - - - - - - - - - - - - - - ¶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." - - - - - - - - - - - - Nationalism Increasing - - - - - - - - - - - - ¶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. - - - - Comment - - - - ¶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