VZCZCXRO5841
RR RUEHAST RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHTM
DE RUEHBR #1504/01 3251507
ZNR UUUUU ZZH
R 201507Z NOV 08
FM AMEMBASSY BRASILIA
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UNCLAS SECTION 01 OF 05 BRASILIA 001504 
 
SIPDIS 
 
DEPT PASS USAID LAC/RSD,LAC/SAM,G/ENV,PPC/ENV 
INTERIOR PASS USGS INTERNATIONAL: JWEAVER; DMENZIE;AGURMENDI 
NSF FOR INTERNATIONAL: HAROLD STOLBERG 
 
E.O. 12958: N/A 
TAGS: SENVEAGREAIDTBIOECONSOCIXR
SUBJECT: SOUTH AMERICAN MINING SECTOR DOWNTURN CALLS FOR 
ENVIRONMENTAL VIGILANCE 
 
BRASILIA 00001504  001.2 OF 005 
 
 
¶1.  SUMMARY:  Between 2002 and 2008, South America experienced a 
sustained, successful expansion of its mining sector, with strong 
growth in Brazil, Chile, and Peru. This expansion brought 
environmental costs to some fragile ecosystems and public health 
concerns to vulnerable populations - impacts which are slowly being 
ameliorated by growing environmental transparency and stringent 
enforcement of environmental regulations. Although the current 
economic slowdown may signal some concern for these South American 
mining export countries, it is unlikely to serve as a negative in 
the environmental sector. 
 
¶2.  The current global financial crisis and associated market 
contraction has hit hard in the metals/mining sector, driving some 
large mining companies and juniors alike to reduce production or 
delay investments. Brazil's Vale iron ore producer plans to reduce 
mining of manganese and ferroalloys; Chile's State company Codelco 
is looking closely at investments; Peruvian miners are also 
evaluating future investments. However, China's long-term quest for 
Latin American natural resources is unlikely to be hindered by the 
current global economic crisis. END SUMMARY. 
 
MINING BOON DROVE SUCCESSFUL GROWTH 2002-2008 
 
¶3.  Between 2002 and mid-2008, rising global demand and subsequent 
increases in metal commodity prices drove a successful export market 
and sustained expansion of the mining sector in Chile and Brazil. In 
Peru, mining sector growth has been strong since the early 1990s. 
Starting in 2003, rising mineral commodity prices drove the 
extraction of diverse marketable minerals in underdeveloped regions 
through use of modern techniques and equipment. During this era of 
high mineral prices, mining companies earned substantial profits, 
recovering from the protracted downturn of the late 1990s, early 
2000s. 
 
¶4.  Brazil, Chile, and Peru are the lead mining product exporters in 
South America. In 2006, export values for mining products and mined 
construction materials totaled US$40.1 billion, US$38 billion and 
US$14.8 billion for these respective economies (USGS, 2008). In 
relative terms, mined products accounted for 29 percent, 66 percent, 
and 62 percent, respectively, of total export values for Brazil, 
Chile, and Peru. 
 
¶5.  Internationally, Brazil is the second or third leading global 
producer of: bauxite, alumina, iron ore, niobium, tantalum, and 
manganese. Mineral-based industries account for 6% of Brazil's GDP. 
In Chile, copper revenues have kept Chile's external trade balance 
solidly in the black for the past 5 years. Chile is the world's 
largest copper producer, accounting for more than one third of the 
world's copper. Chile is also the world's leading lithium producer. 
Peru is a world leader in exports of copper, gold, lead, molybdenum, 
silver, tellurium, tin, and zinc. Record high metal commodity prices 
in 2006-2008 drove Peruvian export values to unprecedented levels. 
Indicative of high metals prices, Peru's Central Bank reports that 
Peruvian mining export values for 2008 (January-September) were 20% 
higher than same period in 2007. 
 
¶6.  Among the other South American countries, Argentina, a 
relatively minor player in mining exports, is considered an untapped 
mineral resource. Bolivia, Colombia, Venezuela, Guyana and Suriname 
have smaller metal export markets. 
 
2008 FINANCIAL CRISIS STRIKES MINING SECTOR 
 
¶7.  The statistics above represent the mining sector situation 
before the September 2008 financial crisis, a crisis that created a 
global credit crunch, a reduction in global demand for construction 
materials/metals, and severe contraction in metals prices worldwide. 
 
BRASILIA 00001504  002.2 OF 005 
 
 
In recent months, copper prices have fallen from US$4 per pound to 
the current US$1.67, the metal's lowest value since 2005. Aluminum, 
Zinc and Lead have all fallen from peak prices in early and mid-2007 
to current values that are reminiscent of 2004-2005 pricing, with 
economic analysts forecasting further price slides. However, today's 
metals prices are still well above the low market values of the 
1990s and early 2000s. 
 
¶8.  In this climate of global contraction, reports of financing 
troubles and mining production cut backs ripple across the region 
and globe. Junior companies (exploration stage) are suspending 
projects and cutting investment. Major players, hit harder by 
falling demand, are cutting back production and delaying 
investments, although some companies in Peru are proceeding ahead 
with substantial capital commitments. International economic 
analysts consider the potential development of abundant metals 
stockpiles as an impediment to market recovery, and strongly 
recommend production cut backs. Furthermore, owing to technical 
problems, lower ore grades, labor unrest, and increased utility, 
equipment and other input costs, production costs for mineral 
commodities have risen sharply over the 2006-2008 period, greatly 
reducing profitability in a time of falling commodity prices and 
potentially encouraging delays or deferment of production (USGS, 
2008). 
 
¶9.  Brazil's Vale iron ore producer plans to reduce mining of 
manganese and ferroalloys, as part of its strategy to reduce 
worldwide output by 10 percent (US$2.2 billion decrease in the 
Brazilian export value) over a 12 month period. Internationally, 
Alcoa is curtailing aluminum output 15 percent in response to 
weakening demand. It is not clear if the company will maintain 
planned production at its new Juruti mine in Brazil's Para state 
when the construction phase concludes in early 2009. Chile's State 
company Codelco is looking closely at investments, particularly at 
marginal projects. In Peru, some large mining companies are reducing 
production and reevaluating project investments owing to low metals 
prices (Cerro Verde, Xstrata). However, these and other large 
companies are moving forward with other capital commitments, 
choosing a long-term investment horizon in preparation for commodity 
price rebounds. In the short-term, Peru's diversified production in 
the non-ferrous mining sector (copper, lead, molybdenum, silver, 
tin, zinc) may not reduce export values substantially; however, the 
recent 35 percent drop in metals prices is a concern (USGS, 2008). 
Moreover, both iron ore production and gold output in Peru may be 
scaled back, owing to reduced steel mill intake and depletion of 
gold reserves, respectively. 
 
¶10.  NOTE: The copper and metals industry relies heavily on Asian 
markets. China has emerged as Chile's top trading partner, and 
Peru's second largest trading partner and export market. It is 
possible that China's recently announced plans to offset adverse 
global economic conditions by boosting domestic demand through a 
2-year, US$600 billion infrastructure stimulus package (low-income 
housing construction, rural infrastructure, and transportation) will 
continue to provide short-term stimulation of the metals market, but 
how much remains to be seen. In the long-term, there is little 
chance that China's appetite for raw materials will diminish. END 
NOTE. 
 
ENVIRONMENTAL CONCERNS OF MINING 
 
¶11.  Although mining has proven a recent boon to economies in Latin 
America, mining sector expansion has also brought environmental 
costs to fragile ecosystems and public health concerns to vulnerable 
populations. Mining involves massive movement of earth and rock, 
disrupting topography, hydrology and vegetation. Mining 
concentration processes of flotation, hydrometallurgy (acid 
 
BRASILIA 00001504  003.2 OF 005 
 
 
leaching), smelting, zone temperature separation, and 
electrorefining create large reservoirs of process waters, 
quantities of depleted ore (tailings), and air emissions of 
particulate matter, greenhouse gases (GHGs), and sulfur dioxides. 
Additionally, mineral processing (mining, grinding, concentrating 
smelting, and refining) requires energy input, requiring 
thermoelectric power that also contributes to GHG emissions. 
 
¶12.  In the majority of South American mining countries, regulations 
controlling environmental protection and handling of mine processing 
wastes have existed for decades. However, in many regions, the 
environmental implications of mining go far beyond regulatory 
controls. In Brazil, even though Alcoa's new Juruti bauxite/alumina 
production center has been under close regulatory oversight, the new 
facility has taken over 1,500 hectares of rainforest land, required 
construction of its own landing strip and 57-km rail line, and drawn 
close to 5,000 new workers to the mining site alongside the Amazon 
River. For Brazil's iron ore industry, environmental concerns range 
from construction of new thermoelectric power plants (Vale 
Corporation) for steel production, to deforestation driven by wood 
charcoal demand among pig iron producers. 
 
¶13.  In Chile, the primary environmental concerns of the copper 
sector are related to water consumption, though mining companies are 
reluctant to talk publicly owing to growing awareness of water 
scarcity in domestic Chilean politics. Chilean copper production is 
a particularly thirsty business, an unlikely match for the dry 
Atacama Desert and regions north. According to Water Management 
Consultants, Chilean copper mines water used approximately 2.5 
million cubic meters of water per day (4.5% of the country's water 
resources), the equivalent to total domestic water demand. Most 
mines in Chile (Peru and Bolivia) are located on the leeward side of 
the Andes, and receive only scant rainfall. Historic mining 
operations have relied on glacial melt to furnish the water critical 
to mining operations. However, as glacial melt proceeds at an 
unprecedented pace, water supplies are predicted to diminish in 
coming years (REFTEL BRASILIA 1341). Other mines already affected by 
chronic water shortages, are starting to pump desalinated water from 
the Pacific Ocean high into the Andes for mining operations, an 
extremely expensive proposition requiring extensive capital 
infrastructure and energy intensive pumping. 
 
¶14.  The bi-national Chilean, Argentine Pascua Lama gold mining 
project recently raised tensions regarding glacial melt awareness, 
when it was accused of destroying 50 to 70 percent of local glaciers 
through gold prospecting and road construction. Further complicating 
this bi-national mining project was Argentine President Cristina 
Kirchner's recent veto of a law protecting Argentina's glaciers, 
giving pre-eminence to mining and oil drilling activities in the 
Andean peaks along the Argentine border. 
 
¶15.  In Peru, revised mining regulations were passed in the 
early-1990s; however, in some regions enforcement of regulations has 
lagged behind legislation. Peru's new environmental ministry counts 
1,900 areas in the country where liabilities from old mining 
operations, many prior to 1933, have left behind substantial 
contamination. Forty of these sites are considered highly toxic, 
while another 610 sites require treatment. Such wastes, with an 
estimated US$400M price tag for cleanup, have impacted drinking 
water supplies for rural and urban centers, including Lima. Heavy 
metal concentrations have been found in nearly every sediment sample 
analyzed along the Peruvian coast, as well as tested marine life 
(USAID 1995). 
 
¶16.  La Oroya, a central Andean smelter town, has a long history of 
contamination through its 80 plus years of operation. In 1999, 
Peru's Director General of Environmental Health reported that 99 
 
BRASILIA 00001504  004.2 OF 005 
 
 
percent of La Oroya's children had blood lead levels exceeding 
acceptable limits. In 2004, Peru's Health Ministry repeated the 
public health alarm, reporting over 90 percent of children with high 
blood lead levels. La Oroya made the Blacksmith Institute's list of 
the 10 most polluted cities in the world in 2006 and 2007. Recently, 
smelter-owner Renco Doe Run Peru invested US $157 M in improvements 
outlined in its environmental operating agreement with the Peruvian 
government. Current monitoring of La Oroya's air emissions 
demonstrates that reductions have been achieved in air levels of 
particulates, lead, arsenic, and other metals. Despite advancements 
however, sulfur dioxide emissions reached record levels in August 
¶2008. 
 
¶17.  Optimistic towards the future, the Peruvian Environment 
Minister suggests that large-scale environmental mining liabilities 
are not actively created today in Peru, owing to tough environmental 
standards. Instead, the Environmental Ministry believes that the 
majority of mining contamination today comes from independent 
artisanal gold miners, a group that falls through the cracks of 
environmental enforcement. Artisanal gold miners are responsible for 
the vast majority of mercury contamination of Amazonian rivers in 
Peru, Brazil, Guyana, Venezuela, and Suriname. 
 
ENVIRONMENTAL PROTECTION IN ERA OF CHANGING MINING OWNERSHIP:  THE 
ROLE OF CHINA 
 
¶18.  Lower base metals prices have caused broad contraction in the 
mining industry, and already forced project reevaluations in South 
American countries Brazil, Chile and Peru. Although the slowdown may 
signal economic concern for future exports of these countries, it is 
unlikely to serve as a negative in the environmental sector. In 
contrast, during an era of growing environmental transparency, 
increasingly stringent enforcement of regulations, and diminishing 
water resources (Chile and Peru), it is unlikely that the metals 
market slow down will result in a relaxing of attention to 
environmental controls. In fact, a decline in the mining fever pace 
of mineral exploration and expansion may allow regulatory 
enforcement to catch up with domestic laws that reflect 
international mining standards for best practices, public health 
protection, and pollution mitigation. Enforcement vigilance must be 
maintained. 
 
¶19.  It is important to note, that some multinational mining 
operations (including Chinese companies) do not receive positive 
environmental and health compliance reports. Osinergmin (Peru's 
mining environmental regulations enforcement agency) and Peru's 
General Directorate of Environmental Health have ongoing concerns 
regarding the health of iron-ore miners at the Chinese-owned 
Shougang mine. Osinergmin reports that health conditions are 
disregarded, resulting in higher rates of mine-worker illness, 
accidents and deaths at the Shougang mine, than at other 
foreign-owned open-pit mines in Peru. Recent announcements that the 
Shougang Group has further committed to a $1 billion expansion of 
the Shougang iron ore project as well as a pipeline extension from 
the Camisea natural gas field, are certainly cause for environmental 
and public health concern. Press releases of the planned Shougang 
expansion come in timed coordination with the China-Peru Free Trade 
Agreement (see NOTE below). 
 
¶20.  NOTE: Chile signed a Free Trade Agreement with China in 2006. A 
China-Peru Free Trade Agreement is expected to be signed this month, 
November, at the 2008 APEC summit in Peru. This trade agreement 
coincides with announcements of Chinese commitments for US$6 billion 
in investments in Peru's mining sector over the next three years. 
Existing Chinese investments in Peru include Minmetals Corp, Jiangxi 
Copper (Galeno project), Zijin Mining Group (Rio Blanco project), 
and Aluminium Corp of China (Chalco) to develop the $2.2 billion 
 
BRASILIA 00001504  005.2 OF 005 
 
 
Toromocho mine. These Chinese Peruvian acquisitions are part of a 
larger hunt for resources in Latin America. Chinese trade with Latin 
America has grown tenfold since 2000, and shows little sign of 
slowing. In the past five years, Chinese companies have made oil and 
mineral deals with Chile, Argentina, Brazil, Colombia and Venezuela. 
 END NOTE. 
 
SOBEL