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UNCLAS E F T O LA PAZ 001740 
 
SIPDIS 
 
NOFORN 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EMIN SENV BL
SUBJECT: UNCERTAINTY IN BOLIVIA'S MINING SECTOR 
 
Classified By: EcoPol Counselor Andrew Erickson for reasons 
1.4(b) and (d). 
------- 
Summary 
------- 
 
¶1. (SBU)  Proposed changes to the mining code and tax regime 
worry international and U.S. mining companies in Bolivia. 
Although the GOB's stated aim is a 50-50 split in profits 
between the GOB and private companies, the head of the mining 
association and U.S. company representatives have informed 
emboff that the actual government take if the proposed 
changes are passed will be more than 50 percent under 
reasonable economic assumptions and could rise to 100 percent 
under certain scenarios.  In addition, the GOB is using 
various tactics to encourage more value added to mining 
production in Bolivia.  The tone of government rhetoric is 
also raising concerns, especially regarding the role of the 
Bolivian Mining Company (COMIBOL) as a "partner" in all 
future operations.  Post will meet with executives of the 
three major U.S. mining companies in the next weeks and will 
attempt to arrange a courtesy call on the Mining Minister, at 
which time general industry concerns can be raised.  End 
summary. 
 
---------------------- 
Proposed Tax Increases 
---------------------- 
 
¶2. (SBU) President Morales' executive branch has submitted to 
the Bolivian congress a proposal to increase the tax on mine 
profits from 25 to 37.5 percent when metal prices are over 
certain levels (currently gold and silver prices are over the 
proposed levels, and thus the tax increases would take effect 
immediately upon passage of the legislation.)  The proposed 
tax changes also include the elimination of tax accreditation 
(currently companies can credit royalties against the tax on 
profits.) Mining contacts tell us that the proposed changes 
will raise their effective tax rates to between 55 percent 
and 70 percent and that their previous counterproposals seem 
to have been ignored by the GOB.  Humberto Rada, the head of 
the Bolivian mining association and General Manager of 
Newmont subsidiary Inti Raymi provided emboff with a series 
of economic models that show that, under certain conditions, 
the proposed changes could result in effective tax rates of 
over 100 percent.  To encourage greater refinement of 
minerals and therefore more value added, the new tax proposal 
includes an exception that allows companies that refine 
metals (such as Newmont's Inti Raymi and Coeur D'Alene's San 
Bartolome) to pay only 60 percent of the proposed 12.5 
percent increase in tax on profits.  Apex's San Cristobal, 
which will produce less-processed concentrate, would not 
benefit from this exception (paragraphs 4 and 5 discuss other 
GOB tactics to increase value added in Bolivia.)  (Note: 
President Morales has excluded cooperatives from the proposed 
12.5 percent tax increase, and they will also be required to 
pay only 60 percent of royalties.) 
 
--------------------------------------------- ------ 
Proposed Changes to Ownership of Mining Concessions 
--------------------------------------------- ------ 
 
¶3.  (SBU)  The current draft of the new mining code also 
includes changes which will codify President Morales' May 1st 
decree declaring all mineral reserves to be property of the 
government.  This change would mean that mining companies 
could not list reserves among their assets nor could they 
mortgage the concessions.  The change would have minimal 
effect on Coeur's San Bartolome (which leases concessions 
from cooperatives) and on Newmont's Inti Raymi, which is in 
the final stages of production.  The effect on Apex's San 
Cristobal, however, could be serious, since the company has 
mortgaged its concessions to raise money for start-up.  At 
the moment, current concessions are not being affected, but 
the new draft mining code could eliminate this exception. 
 
--------------------------------------------- -- 
Possible Elimination of Refunds on Import Taxes 
--------------------------------------------- -- 
 
¶4. (SBU) In another worrying potential tax regime change, the 
Finance Ministry has proposed the elimination of the current 
CEDOIMS program (in which exporters can claim rebates on 
taxes paid on imported inputs) for companies who are not 
exporting "value added" products.  Companies that produce 
metals will still be able to participate under the CEDOIMS 
program while companies which produce concentrate will not be 
allowed to claim rebates of their import taxes (note, this 
will apply to the hydrocarbons and lumber industries as 
well.)  According to mining association president Humberto 
Rada, only three of the fifteen member companies in his 
association (including Newmont's Inti Raymi, which produces 
gold, and Coeur D'Alene's Manquiri, which will produce 
metallic silver) will still be able to participate in the 
CEDOIMS program if this change takes place.  Apex's San 
Cristobal plans to export concentrate and therefore would not 
be able to claim rebates.  San Cristobal executives have 
explained that they have years' worth of back claims which 
will not be paid by the GOB until San Cristobal starts 
exporting (and, should this new law pass, might therefore 
never be paid.)  San Cristobal Corporate Vice President 
Gerardo Garrett states that he does not expect the 
elimination of CEDOIMS any time this year, but that if it 
does occur, it will "kill San Cristobal" and that it is a 
greater threat than the potential tax increases. 
 
¶5.  (SBU)  The GOB's push to encourage more value-added in 
the mining industry faces an uphill battle.  The GOB has 
pressed Apex's San Cristobal in the past to build a smelter, 
but Bolivia is not an attractive option for a smelter due to 
transportation difficulties both for the raw input and the 
finished products, which would include sulfuric acid (a 
byproduct of zinc smelting.)  The start-up time for a smelter 
would be approximately five years, and building a smelter 
would not be a good economic decision for Apex (which also 
rejected as unfeasible the possibility of refitting COMIBOL's 
Karachipampa lead-silver smelter, built in 1983 at a cost of 
approximately USD200 million and never fired.) 
 
----------------------- 
Nationalization Worries 
----------------------- 
 
¶6. (SBU)  Although the GOB's current rhetoric focuses on 
"partnerships" between private companies and the GOB (i.e. 
COMIBOL), some observers suggest that nationalization could 
be a threat in the future.  For example, when asked about the 
possibility of nationalization for Newmont's Inti Raymi 
operation, Humberto Rada explained that the mining situation 
at Inti Raymi (which has a very low-grade and complex ore) 
means that the operation is not an attractive prospect for 
nationalization, since COMIBOL does not have the expertise to 
run such a mine.  He warned that an operation like San 
Cristobal, with high-grade ore and extensive reserves might 
be more appealing.  According to Rada, San Cristobal has 
signed the mining association's letters of protest to the 
GOB, but in general is trying to keep a low profile and not 
confront the GOB because they have "everything to lose."  San 
Cristobal vice president Garrett confirmed that the company 
 
does not want to engage in threats or bluster, because they 
have very few options since they are fully invested in 
Bolivia.  He also informed emboff that after a mistaken 
declaration of intent to nationalize in May of 2006 by the 
former Mining Minister, San Cristobal received assurances 
from the Morales government that in fact no nationalization 
was planned for San Cristobal.  Garrett cautioned that if 
changes to the mining law require 50-50 joint ventures with 
COMIBOL, nationalization could be the de facto result if Apex 
can not arrange a viable joint-venture contract. 
 
-------------------------------------------- 
Wooing the GOB with ATPDEA and other tactics 
-------------------------------------------- 
 
¶7. (SBU)  In such a unstable and unpredictable political 
environment, US companies are looking for new ways to 
encourage reasonable decisions on the part of the GOB.  In a 
meeting on June 15, a top official of Coeur d'Alene 
subsidiary Manquiri informed emboff that Coeur d'Alene is 
working its ties in the U.S. Congress to push for extension 
of ATPDEA.  Meanwhile, Apex is trying to leverage the 
goodwill between Bolivia and Japan by approaching the GOB 
through its Japanese partner Sumitomo (San Cristobal 
executives report that their Japanese partners are having 
little success, and that Sumitomo has within the last few 
days sent a letter to President Morales asking, 
diplomatically, why the GOB is not living up to the promises 
it made during Morales' visit to Tokyo.)  Newmont seems to be 
relying on the fact that the Inti Raymi deposit is too 
complex and low-grade for the GOB to want it, and they are 
also encouraging the GOB's focus on value added since they 
already produce metallic gold.  All three companies report 
difficulties in arranging meetings with the Mining Minister 
(San Cristobal executives say they don't even get responses 
to their requests any more.) 
 
------- 
Comment 
------- 
 
¶8. (SBU)  Although the proposed tax regime and mining code 
changes have yet to be approved by congress and could still 
be modified, there is a sense of tense anticipation in the 
international mining community in Bolivia.  The GOB's 
heavy-handed attempts to manage the economy through 
differential tax regimes create an environment which is far 
more negative for some projects (such as Apex's San 
Cristobal) than others.  The nationalization of Swiss-based 
Glencore's Vinto smelter serves as a warning of potential 
future threats to US assets, although the GOB currently 
claims that all it wants is an "equitable" 50-50 share of 
profits and "partnership" status with mining companies. 
Executives of the three major U.S. mining concerns in Bolivia 
will soon meet with the Ambassador.  Subsequently, the 
Ambassador may call on Mining Minister Echazu.  Emboff has 
visited Coeur's San Bartolome project in the past weeks, will 
visit Newmont's Inti Raymi June 28, and is arranging a visit 
to Apex's San Cristobal as soon as possible.  Ecopol will 
also meet with Mining Ministry and COMIBOL officials. End 
comment. 
GOLDBERG