This record is a partial extract of the original cable. The full text of the original cable is not available.

081552Z Jul 05

UNCLAS SECTION 01 OF 05 BOGOTA 006448 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EMIN CO
SUBJECT: MINING SECTOR OVERVIEW 
 
REF: A. BOGOTA 2880 
 
     ¶B. BOGOTA 5979 
 
¶1.  Summary.  Colombia,s success in reforming regulation of 
the mining industry has enhanced the sector,s international 
competitiveness, created a more attractive investment 
climate, and in conjunction with similar reforms in the oil 
and gas sector (see reftel A) made the extractive sector the 
principal recipient of foreign direct investment in 2004. 
The 2001 mining code improved contractual terms and 
stability, streamlined bureaucratic procedures and resulted 
in a large increase in private sector investment.  The 
country is the largest producer of coal in Latin America and 
is an important producer of emeralds, gold, ferronickel and 
platinum.  During 2003, mining activity showed a significant 
increase in production volume and exports.  Growth in 2004 
was significantly less, with the exception of coal and 
ferronickel, which topped historic levels.  End Summary. 
 
--------------------------------------------- ---------- 
Legal Framework: Colombia's Forward-Leaning Mining Code 
--------------------------------------------- ---------- 
 
¶2.  The Colombian Mining Code, passed by Congress on August 
15, 2001, provides contractual stability and more favorable 
economic concessions for private investors.  The 2001 code 
streamlined the previous 11 different types of concession 
agreements between private investors and the state into one 
agreement, and significantly reduced the bureaucratic 
requirements needed to sign a concession agreement with the 
Colombian government.  The new concession system maintains a 
thirty-year term, and provides for the extension of up to 30 
additional years upon the concessionaire,s request.  The 
2001 code eliminated the one to two year exploration license 
previously required for a concession to be ultimately 
granted.   Exploration licenses are now included in the 
30-year concession term, and are granted for a maximum of 
three years, with a possible two-year extension.  In 
addition, the previous four-year window for construction and 
installation has been reduced to three years, extendable for 
an additional year within the concession term.  According to 
Jairo Herrera, Director of Mining at the Colombian Mines and 
Energy Planning Unit (UPME), the avalanche of requests for 
concession agreements from private investors throughout the 
country is evidence of the code,s success. 
 
¶3.  The 2001 code protects contract terms for old concessions 
and makes them eligible for the enhanced conditions offered 
by the new code.  Old concession holders maintain the right 
to exploit new mineral findings under the same contract. 
Also, the code enhances contractual stability by keeping all 
royalty payments and re-adjustments agreed under previous 
regulations constant. 
 
¶4.  Under the previous law, all mining assets and 
infrastructure became GOC property if a mining concession 
expired or was renounced after the twentieth year of 
production.  The 2001 code allows concessionaires to renounce 
mining rights at any time during the contract term or 
withdraw all production and related right-of-way assets. 
 
¶5.  Foreign companies expecting to develop permanent business 
in the mining sector must establish a branch or a legal 
presence in Colombia.  If the business is occasional or 
temporary, a general attorney domiciled and resident in 
Colombia must be appointed. 
 
-------------------------- 
Fees, Royalties, and Taxes 
-------------------------- 
 
¶6.  The GOC receives ground fees and royalties in exchange 
for mining concessions.  During the exploration phase, 
license holders pay yearly ground fees equivalent to a 
minimum daily salary (approximately USD 5) per hectare of 
exploration land.  Small mining projects of less than 10 
hectares are exempt from ground fees. 
 
¶7.  When the commercial exploitation phase begins, license 
holders begin paying royalties to the government.  Royalty 
rates range from 3 to 12 percent depending on mineral type. 
Departments and municipalities located at the exploitation 
site share in royalty revenues; ports through which mining 
products are transported are also eligible.  Remaining 
royalty payments are deposited in a National Royalty Fund 
(NRF).  The NRF distributes royalties to other territorial 
entities for use in promotion of mining, environmental 
protection, and investment in regional development projects 
focused on electrification and road network projects.  To 
access NRF funds, governors and mayors must present 
investment projects endorsed by the Ministry of Mines and 
Energy and approved by the National Planning Department. 
 
¶8. Mining companies receive tax benefits but also pay 
production-related taxes.  Companies receive exclusions for 
assets devoted to mining activities while exporters receive a 
thirty-year tax and levy exemption if they commit five 
percent of their FOB value of annual exports to re-forestry 
projects.  Production-related taxes constitute a substantial 
share of the tax burden for mining companies in Colombia.  In 
general, the government takes in 46 percent of the cash flow 
of mining projects.  Colombia also has customs duties and 
import tax exemptions on machinery and technical equipment 
imported for mineral exploration. 
 
------------------------- 
Overall Production Trends 
------------------------- 
 
¶9.  Colombia is the largest producer of coal in Latin America 
and is a leading exporter of gold and emeralds.  The country 
also produces platinum, ferronickel, silver, zinc, limestone, 
iron-ore, lead, steel, copper, phosphates, sulfur, and 
uranium.  Colombia,s mining output (excluding petroleum) 
grew from 67.6 million tons in 2003 to 72.6 million tons in 
2004, an increase of 7.4 percent.  Total mining exports 
(excluding hydrocarbons) reached USD 3.4 billion in 2004, a 
24.7 percent increase from 2003 levels. The 2004 total mining 
export figure represents approximately 3.5 percent of GDP. 
 
---- 
Coal 
---- 
 
¶10.  Colombia is increasing production of its significant 
reserves of high-quality coal and has proven coal reserves of 
7.3 billion tons.  Most of Colombia,s coal reserves consist 
of high-quality bituminous coal, with a sulfur content of 
less than one percent.  Coal production increased seven 
percent, from 50 million tons in 2003 to 53.5 million tons in 
¶2004.  Colombian coal exports went from USD 1.4 billion in 
2003 to USD 1.7 billion in 2004. 
 
¶11.  Over 90 percent of Colombian coal production occurs in 
large-scale open cast mining operations in the northern 
departments of La Guajira and Cesar.  In La Guajira 
department, Cerrejon Zona Norte is one of the highest quality 
thermal deposits in the world.  Site production started in 
1985 at a rate of 1.5 million tons per year and has now 
increased to 22 million tons per year; an output of 28 
million tons is planned for 2007.  A partnership between 
Anglo American, BHP Billiton, and Glencore has a contract to 
operate Cerrejon Zona Norte and Carbones del Cerrejon mine 
until 2033.  BHP Billiton owns 33.3 percent of the Cerrejon 
mine and 99.8 percent of the Cerromatoso nickel mine.  In 
Cesar department, Drummond Coal (USA) operates another major 
project at La Loma that contains estimated reserves in excess 
of 534 million tons (see reftel B for details of Drummond,s 
expansion).  Drummond,s contract with the GOC runs through 
¶2019.  La Guajira and Cesar production is for export, mainly 
to Western Europe and the United States. 
 
¶12.  Colombia also has a large amount of traditional small to 
medium-sized block caving mines in the Andean Mountains. 
These mines comprise the majority of coal mines and coal 
miner employment in Colombia.  Production from these mines 
services domestic demand, mainly to meet power generation 
needs.  Approximately 1,000 mines (about a third of the 
total) are illegal and are generally small-scale underground 
operations.  Domestic coal prices are about a fourth of 
export prices. 
 
¶13.  In early 2003, the Colombian Mining Association 
(Asomineros) and the GOC launched a campaign to promote coal 
exports to other Central and South American countries and to 
improve transportation capacity constraints.  In mid-2003, 
the GOC earmarked USD 320 million for infrastructure 
development to increase coal export capacity.  Part of the 
investment will fund the construction of a second rail line 
linking the Cesar region with Santa Marta port on the 
Atlantic coast. 
 
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Copper 
------ 
 
¶14.  Colombian copper production and exports increased from 
2003 to 2004.  Total copper production went from 8,526 tons 
in 2002 to 7,270 tons in 2003 and increased to 7,840 tons in 
¶2004.  Copper exports went from USD 3.2 million in 2003 to 
USD 5.9 million in 2004.  Production comes almost entirely 
from the El Roble mine in Choco Department.  The mine, owned 
by Minera El Roble S.A., began production in 1990.  In the 
early 1990s, El Roble had reserve estimates of about one 
million metric tons of ore.  The mine had a production 
capacity of 96,000 t/yr of crude ore and 14,000 t/yr of 
copper concentrate.  According to UPME,s Mining Director, 
Jairo Herrera, based on production levels for the past 14 
years, the mine will be depleted in the near future.  All 
production of copper concentrate was exported to Japan. 
Copper in smaller quantities was also produced in Ancuya 
Narino Department and El Dovio in Valle Department.  Colombia 
also produces secondary copper from scrap. 
 
-------------- 
Iron and Steel 
-------------- 
 
¶15.  Colombia is one of Latin America,s major steel 
importers.  The country,s steel industry is small, 
comprising only 2.3 percent of total manufacturing output. 
Total iron and steel production went from 625,000 tons in 
2003 to 642,546 tons in 2004.  Colombia,s main integrated 
steel maker is Acerias Paz del Rio with a capacity of 270,000 
metric tons per year (t/yr) of crude steel (accounting for 
about 40 percent of total production).  The company has been 
under financial restructuring recently because of high debt. 
In early 2003, the GOC and the employees reached an agreement 
to save the company from liquidation.  Under the agreement, 
the employees resigned their right to various annual premium 
compensation payments that were being used to create a 
capitalization fund.  With those resources, the employees own 
36 percent of the company.  Several foreign companies have 
expressed interest in buying Acerias Paz del Rio including 
the Gerdau group from Brazil, the European consortium Acelor, 
and the Techint group from Argentina.  The company, however, 
has not yet been sold.  The Gerdau group purchased Diaco and 
Sidelpa, Acerias Paz del Rio's competitors, in January 2005 
for USD 130 million. 
 
¶16.  Scrap metal is vital to the Colombian iron and steel 
industry but a tight scrap market is contributing to higher 
domestic steel prices.  Colombia,s local iron and steel 
producers (Diaco, Acerias de Caldas, Sidoc, and Acerias de 
Sogamoso-responsible for 60 percent of total production) face 
rising steel prices caused by a recent surge in international 
demand that has reduced the local scrap supply.  According to 
Juan Manuel Lesmes, Director of the Colombian Federation of 
Metal Producers (Fedemetal), Colombian suppliers export about 
2,000 tons of scrap per month (valued at approximately USD 2 
million).  Colombia,s international scrap buyers are mainly 
Chinese and have indicated they would like to increase their 
purchases to 5,000 tons per month.  In an effort to maintain 
local scrap supply and control prices, the GOC issued Decree 
1771 on June 2, 2004.  Decree 1771 imposed scrap export 
quotas of 4,700 tons of ferrous scrap (iron and steel) and 
15,200 tons of non-ferrous scrap (copper, aluminum, and lead) 
every six months but the GOC ended the quotas in December 
2004 out of concern they might violate WTO agreements.  Local 
scrap prices have remained high due to the limited number of 
local scrap providers. 
 
---------------------------------------- 
Precious Metals - Gold, Platinum, Silver 
---------------------------------------- 
 
¶17.  In 2004, the total production of precious metals (gold, 
platinum, and silver) was 47.5 tons and total exports of 
precious metals reached USD 576.5 million.  According to the 
UPME Mining Director, gold production estimates are not very 
good because there is a considerable amount of gold 
contraband that is very difficult to estimate. 
 
---- 
Gold 
---- 
 
¶18.  Colombia,s gold production rates have fluctuated 
recently.  Production increased from 20.7 tons in 2002 to 
46.5 tons in 2003.  However in 2004, production fell to 37.6 
tons.  The 2003 boost in gold production was due to a change 
in tax policy that made production of gold in dore form more 
profitable than processing the gold into gold leaf.  Gold 
leaf exports dropped precipitously in 2003 as a result, but 
gold exports increased from USD 94.4 million in 2002 to USD 
585.2 million in 2003, falling to USD 556 million in 2004. 
 
¶19.  Colombia gold exploration relies on artesanal or 
traditional methods, and generally lacks large-scale. 
Small-scale Colombian operations, both artesanal and 
semi-modernized, continue to produce significant quantities 
of gold averaging 950,000 (declared) troy ounces per year 
over the last fifteen years according to the Colombian 
Central Bank.  Three departments, Antioquia, Bolivar, and 
Cordoba, are the source for 90 percent of the total gold 
production in the country, with Antioquia accounting for more 
than 50 percent.  Colombia,s largest alluvial operation is 
El Bagre located by the Nechi River, which is owned by the 
domestic producer Mineros de Antioquia, S.A.  El Bagre mining 
operations include three bucket line dredges and three Beaver 
dredges that process approximately 15 million cubic meters of 
material per year. 
 
¶20.  Colombia has two significant large-scale exploration 
projects:  Murindo copper-gold mine and the Piedra Sentada 
Guachavez.  The Murindo mine contains alluvial gold deposits 
and a large hard rock copper deposit at the La Rica mountain. 
 The Piedra Sentada Guachavez gold prospect has abundant 
alluvial deposits.  Foreign companies, particularly Greystar 
Resources and Anglo Gold Ashanti, are planning to expand 
exploration projects in Angostura, Norte de Santander 
department and San Martin and Barranco de Loba mines in 
Bolivar department. 
 
-------- 
Platinum 
-------- 
 
¶21.  Colombia,s platinum production is less than one percent 
of the world total but production and exports have increased 
steadily over the last several years.  Platinum production 
grew from 828 kg in 2003 to 1,160 kg in 2004.  Platinum 
exports increased from approximately USD 8 million in 2002 to 
USD 19 million in 2003, reaching USD 20 million in 2004.  All 
platinum production in Colombia is from placer deposits. 
Choco Department is the primary source of platinum and 
contains several mines, mainly in the San Juan Valley. 
Antioquia Department ranks second in production although 
smaller quantities are produced in the Departments of 
Bolivar, Cauca, Cordoba, Narino, and Valle del Cauca. 
 
------ 
Silver 
------ 
 
¶22.  In Colombia, silver is recovered as a by-product of gold 
mining; no company is exclusively dedicated to the silver 
production.  Over 80 percent of Colombia,s silver production 
occurs in the departments of Antioquia and Cordoba.  Silver 
production increased 36 percent from 6,986 kg in 2002 to 
9,511 kg in 2003, dropping to 8,189 kg in 2004.  Exports of 
silver went from approximately USD 377,700 in 2002 to USD 
678,400 in 2003, dropping to USD 550,300 in 2004. 
 
------------------------- 
Other Non-Precious Metals 
------------------------- 
 
¶23.  Colombia,s total ferronickel exports increased from USD 
414.7 million in 2003 to USD 626.1 million in 2004. 
Colombia,s only nickel producer is Cerro Matoso S.A., a 
subsidiary of BHP Billiton Plc. through QNI Limited.  The 
Cerro Matoso deposit, located in the Department of Cordoba, 
southwestern Colombia, is one of the highest-grade lateritic 
nickel deposits in the world.  The site has proven ore 
reserves of 39.5 million tons with a 2.3 percent nickel 
content.  A 1999 plant expansion increased Cerro Matoso,s 
ferronickel production.  A second production line was 
completed in January 2001 for USD 353 million.  Cerro 
Matoso,s ferronickel production went from 47,868 tons in 
2003 to 48,818 tons in 2004 due to increased capacity and 
strong nickel demand.  Cerro Matoso hopes to increase 
production to 55,000 ton per year. 
 
--------- 
The Green 
--------- 
 
¶24.  Colombia is a leading supplier of high-quality emeralds, 
providing approximately 50 percent of total world exports. 
While emerald production climbed from 8.96 million carats in 
2003 to 9.82 million carats in 2004, the value of emerald 
exports decreased from USD 77.9 million in 2003 to USD 72.7 
million in 2004.  The common practice of injecting oil during 
emerald production to hide possible fractures has affected 
the reputation of Colombian emeralds in international 
markets.  This practice may have negatively affected global 
interest in Colombian emeralds according to UPME,s Mining 
Director. 
 
¶25.  Colombia has about 150 emerald mining sites although 
some are not being exploited.  The GOC leases mining rights 
to private business but illegal mining is also common. 
Legitimate mining interests operate in two major districts, 
Muzo and Chivor, located in the "Cordillera Oriental" region 
of the Andean mountains.  The major mines of the Muzo 
district, located 100 kilometers north of Bogota, include 
Muzo, Cosquez, and Pena Blanca.  Approximately three quarters 
of Colombian emerald production comes from about 60 locations 
belonging to the Coscuez mine.  The Muzo mine is leased to 
the government for 10-year periods to the Sociedad de Mineros 
Boyancences.  The Chivor district, situated southeast of 
Bogota, contains two major mines, Chivor and Gachala.  The 
Chivor mine is the only major privately owned emerald mine in 
Colombia. 
 
---------- 
The Future 
---------- 
 
¶26.  Colombia's mining sector reforms have successfully 
enhanced the investment climate and paid off in increased 
demand for concessions.  The GOC has focused its efforts on 
streamlining regulatory oversight, reducing incentives for 
illegal activity, particularly in the gold and emerald 
industries, and most importantly, improving the contract 
terms for potential investors.  Thanks to these and similar 
reforms in the oil and gas sector, the mining and petroleum 
sector was the largest recipient of foreign direct investment 
in 2004 and is expected to remain the leading sector for 
foreign investment for the foreseeable future. 
WOOD