Peru - CENTROMIN Expansion Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. '02-E PROJECT COMPLETION REPORT PERU - CENTROMIN EXPANSION PROJECT (LOAN 1281-PE) October 25, 1985 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Currency Unit = Soles Average 1983 value US$1.00 = S/. 1,628.6 Average 1984 value US$1.00 = S/. 3,466.9 GLOSSARY OF ABBREVIATIONS Ag Price - Silver price CENTROMIN - Empresa Minera del Centro del Peru S.A. COFIDE - Corporacion Financiera de Desarrollo, a Government-owned development corporation Cu Price - Copper price EPD - Economic Analysis and Projections Department IDB - Inter-American Development Bank LME - London Metal Exchange PCR - Project Completion Report SAR - Bank Staff Appraisal Report WEIGHTS AND MEASURES Tons used in this report are short tons equal to 0.907 metric tons. CENTROMIN FISCAL YEAR January I - December 31 FOR OFICIAL USE ONLY PERU - CENTROMIN EXPANSION PROJECT Project Completion Report Table of Contents Page No. PREFACE ............. ............... o .......... i BASIC DATA SHEET............................. ........... ii HIGHLIGHTS................................ ........... iv I. INTRODUCTION..................................... ...... I II. PROJECT BACKGROUND ...................... I - Project Hi story.................. I - Role of the Bank During Implementation..... ............. 2 III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PCR.......... 2 - Cobriza Ore Reserves.................................... 3 - Increase in Production Capacity.......................... 4 - Consultants for Cobriza ........................ 4 - Capital Costs Adjustments of Cobriza Project............. 5 - Mine Water Treatment Plant .............................. 6 IV. FINANCIAL AND ECONOMIC PERFORMANCE................. . ... 6 - Metal Prices.... ......................................... 7 - Financial Rate of Return...... .......................... 8 - Cobriza Production Costs................................. 9 - Cobriza - Projected Income and Cash Generation........... 9 - CENTROMIN - Historic Financial Performance............... 11 - Financial Covenants..................................... 11 - Economic Reevaluation....................... 12 V. CONCLUSIONS AND LESSONS TO BE LEARNED....................... 13 ANNEX I : Completion Report - Cobriza Project 15 (dated August 1983) ANNEX II : Completion Report - Mine Water Treatment Project 67 (dated August 1983) ATTACHMENT : Additional Comments From the Borrower 102 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT COMPLETION REPORT WORLD BANK COMMENTS PERU - CENTROMIN EXPANSION PROJECT (LOAN 1281-PE) PREFACE The Bank approved a Loan of US$40 million equivalent in June 1976 to EMPRESA MINERA DEL CENTRO DEL PERU (CENTROMIN) to assist in financing the Cobriza Mine Expansion and the Cerro de Pasco Mine Water Treatment Plant. The Project constituted an important part of CENTROMIN's Stage I Program to expand copper production, to reduce pollution effects on the environment and to provide necessary industrial and social infrastructure to support the Project. Planning for the Project began under the company's previous ownership, the Cerro de Pasco Corporation. Initial feasibility studies were completed in 1975 for Cobriza and in 1974 for the Cerro de Pasco Plant. Project implementation was suspended from the end of 1977 to May 1979 due to shortage of Government funds. After reactivation, substantial project modifications were required. Consequently, the start-up of operations of Cobriza took place in November 1982, that of Cerro de Pasco in February 1981, i.e., about three years later than originally expected during the Bank Appraisal. IND Staff visited Peru in August 1983 to discuss the draft Project Completion Reports (PCRs) for the two subprojects prepared by CENTROMIN. The Borrower's final PCRs were received on November 14, 1983 and subsequently translated from Spanish. IND's comments on their PCRs were submitted on May 17, 1984. The project has not been audited by OED. Further comments, dated June 10, 1985, received from the Borrower, which are included as an Attachment, have been taken into account in the revised text. - ii - PROJECT COMPLETION REPORT PERU - CENTROMIN EXPANSION PROJECT (LOAN 1281-PE) BASIC DATA SHEET (US$ millions) LOAN POSITION As of June 30, 1985 Original Disbursed Cancelled Repaid Outstanding Loan No. 1281-PE 40.0 39.73 0.27 14.68 25.06 CUMULATIVE LOAN/CREDIT DISBURSEMENT FY77 FY78 FY79 FY80 FY81 FY82 FY83 (i) Planned original est. - 23.00 36.00 39.80 40.00 40.00 40.00 (i)a Planned revised est. - - - 19.10 36.00 40.00 40.00 (ii) Actual 0.27 2.37 3.38 7.90 24.41 35.12 39.73* (iii) (ii) as % of (i) - 10.3 9.4 19.9 61.0 87.8 99.3 (iv) (ii) as % of (i)a (revised est.) - - - 41.4 67.8 87.8 99.3 * US$0.27 million was cancelled as of March 1980, thus reducing the loan amount to US$39.73 million. OTHER PROJECT DATA Original Loan/ Actual or Credit Date Re-estimated Board Approval 04/76 06/76 Loan Agreement 07/76 12/76 Effectiveness 08/76 05/77 Loan Closing 12/80 12/82 Cerro Cerro Cobrizo de Pasco Cobriza de Pasco Date of Physical Completion 10/79 03/78 09/82 10/80 Completion Time (in months) 34 15 63 40 Time Overrun (in months) 29 25 Date of Start-up of Operations 12/79 03/78 11/82 02/81 Total Project Cost (USS m) 160.9 15.3 245.0 15.3 Overrun (%) 52.3 - Financial Rate of Return (%) 15.2 18.1 Neg. Neg. Economic Rate of Return (%) 16.0 20.0 Neg. Neg. - iii - MISSION DATA Month/ No. of No. of Date of Year Weeks Persons Manweeks Report Identification 03/72 1 3 1 03/72 Preparation 07/72 1 3 1 07/72 Preappraisal 08/72 2 3 5 09/72 Appraisal 04/75 3 4 12 05/75 Post-Appraisal 08/75 2 2 4 09/75 Post-Appraisal 12/75 0.5 1 0.5 01/76 Supervision 06/76 0.5 1 0.5 07/76 Supervision 10/76 1 2 2 11/76 Supervision 02/77 1 2 2 03/77 Supervision 11/77 0.5 2 1 12/77 Supervision 02/78 1 1 1 02/78 Supervision 07/78 1 1 1 08/78 Supervision 06/79 0.5 1 0.5 06/79 Supervision 11/80 1 2 2 12/79 Supervision 07/80 0.7 3 2 08/80 Supervision 10/80 1 2 2 10/80 Supervision 05/81 0.5 2 1 07/81 Supervision 08/81 1 1 1 09/81 Supervision 05/82 1 1 1 06/82 Supervision 09/82 1.5 1 1.5 10/82 Completion 08/83 2 2 2 12/83 OTHER DATA Borrower CENTROMIN Executing Agency CENTROHIN Fiscal Year of Borrower 1/1 - 12/31 -iv- PROJECT COMPLETION REPORT PERU - CENTROMIN EXPANSION PROJECT WORLD BANK COMMENTS HIGHLIGHTS 1. The IBRD Loan 1281-PE in the amount of US$40.0 million equivalent was approved in June 1976 to assist EMPRESA MINERA DEL CENTRO DEL PERU (CENTROMIN) to implement two sub-projects of its Stage I Expansion Project. The Cobriza Mine Expansion was designed to increase underground mine production to 10,000 tons of ore per day and to convert this ore to a concentrate product. Plans for the Mine Water Treatment Plant at Cerro de Pasco called for the construction of a solvent extraction and electro- winning plant to both replace the less efficient existing facility and to halt the contamination of the San Juan and Mantaro rivers. The project was also to provide the associated industrial and social infrastructure (see para 1). 2. Due to shortage of Government funds, which accounted for 57% of the total project financing plan, implementation of both sub-projects slowed down in late 1977 and was suspended from January 1978 until May 1979. After reactivation of the projects, a host of serious management and operational problems developed between CENTROMIN and its expatriate project management group. These problems are described in detail in CENTROMIN's Project Completion Reports (see Annexes I and II). 3. While CENTROMIN has prepared in general good Project Completion Reports for the Cobriza Mine Expansion Project and for the Cerro de Pasco Mine Water Treatment Plant, a number of clarifications and comments are warranted on the part of the Bank. These include the critical area of the Cobriza ore reserves which during project implementation required substantial modifications to the original mine and concentrator plans (paras.7-9). 4. Due to the loss of virtually two years during project suspension, substantial engineering modifications required on the basis of unexpected exploration results and the problems the company experienced with its project management group, original project cost estimates were exceeded considerably. Total project costs are estimated at about US$260.3 million, i.e., a cost overrun of about 48% over the appraisal estimate. Consequently, both the financial and the economic rates of return of the project based on the range of World Bank copper price projections are negative. Nevertheless, analysis indicates that keeping Cobriza operational is justified on financial and economic grounds (see paras. 22-29). PERU CENTROMIN EXPANSION PROJECT PROJECT COMPLETION REPORT I. INTRODUCTION 1. The IBRD Loan 1281-PE provided financing for two project components, i.e., the Cobriza Mine Expansion and the construction of the Cerro de Pasco Mine Water Treatment Plant of Empresa Minera del Centro del Peru (CENTROMIN). Both projects constituted an important part of CENTROMIN's Stage I Program to expand production and processing and to reduce environmental pollution. Specifically, the Cobriza project was designed to (i) increase underground mine production from 2,600 tons to 10,000 tons of ore per day and (ii) to treat this ore in a new concentrator with an annual output of 223,000 tons containing 25% copper and 5.5 oz. of silver per ton. In addition, industrial and social infrastructure was to be built to support the project. The main objective of the Mine Water Treatment Plant at Cerro de Pasco was to replace the existing cementation plant with a more efficient solvent extraction and electrowinning plant of the same capacity, which would produce refined copper in place of cement copper and halt the contamination of the San Juan and Mantaro rivers. 2. At full capacity both project components will represent about 64% of the company's total contained copper output compared to only 34% before the expansion, and therefore comprise an important share of the company's production and revenues. With total project costs estimated at about US$260.3 million, of which US$39.7 came from the Bank and US$66.4 million from the IDB, and revenues estimated to reach about 10% of CENTROMIN's gross sales, both projects also play an important role in the company's future. II. PROJECT BACKGROUND Project History 3. Plans for the modernization and expansion of CENTROMIN's operations were originally formulated by the Cerro de Pasco Corporation, owner of the company before nationalization on January 1, 1974. With the formation of its own planning department in May 1974, CENTROMIN began to modify and finalize a program to increase production of all major products (copper, silver, zinc, lead, gold and bismuth), improve productivity and to reduce environmental contamination. The company identified six projects as Stage I of a long-term expansion program: Expansion of the Cobriza and Casapalca mines, the modernization and expansion of the copper smelter/refinery, construction of a zinc refinery and a lead sinter plant at La Oroya, and the replacement of the copper cementation plant at Cerro de Pasco with a solvent extraction and electrovinning plant. Feasibility studies were prepared for all six projects. -2- 4. CENTROMIN requested the Bank to review the program and to assist in it: 4inancing. Because of their high priority to the country, their advanced state of preparation and their self-contained nature, the Bank selected the Cobriza Mine Expansion and the Cerro de Pasco Mine Water Treatment Plant for financingl/. For the Cobriza project a feasibility study had been prepared in 1975 by the U.S. consultant firm Ralph Parsons. In 1974 a feasibility study for the Cerro de Pasco project was carried out by the U.S. engineering firm Holmes and Narver, Inc. The Bank appraised the projects in April/May 1975 and August 1975. The Bank loan (1281-PE) for US$40 million equivalent was signed on December 6, 1976 and became effective May 24, 1977. Basic engineering studies for Cobriza began on March 11, 1977, those of the Cerro de Pasco project on May 26, 1977. Role of the Bank during Implementation 5. The Bank worked closely with CENTROMIN on the formulation of both projects. As a result of this work the scope of the Cobriza expansion project was increased from 7,000 tons of ore per day to 10,000 tons per day to realize optimal economy of scale and new investment capital cost estimates were prepared. Due to shortage of Government funds which were supposed to provide 57% of total project financing, implementation of the projects slowed down in late 1977 and was suspended from January 1978 until May 1979. Overall, virtually two years were lost. However, exploration work continued during this period showing that there were no economically viable reserves in the Pumagayoc area, from which ore was supposed to be mined for Cobriza's expansion. Thus, the basic engineering for the mining aspects of the project performed up to this point was no longer valid. After the reactivaf ion of the engineering contracts a host of serious management and operational problems developed between CENTROMIN's internal project administration and the expatriate project management group. The Bank attempted during its supervision missions and in special meetings to identify solutions to those problems aimed at reducing further delays and cost overruns. Nevertheless, some of the problems remained and could not be reso.ved. The most significant of these problems concerned the lack of coordination between CENTROMIN's project administration and the project managenent group and detrimentally affected mine design, the construction of the mine shaft and project scheduling. How CENTROMIN saw these problems is described in their Project Completion Reports (see Annexes I and II). III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PROJECT COMPLETION REPORTS 6. In general, CENTROMIN has prepared good Project Completion Reports for the Cobriza Mine Expansion Project and for the Cerro de Pasco Mine Water Treatment Plant covering almost all aspects required under the Bank's guidelines. However, a number of clarifications and comments are warranted on the part of the Bank concerning (i) the ore reserve question of Cobriza; (ii) the possibility of increasing Cobriza's mine output; (iii) the relationship between CENTROMIN and its project management consultants; (iv) CENTROMIN's capital cost estimates; and (v) technical, financial and environmental issues relating to the Mine Water Treatment Plant as follows. 1/ The other projects in the stage I program have also been completed with the major exception of the copper circuit for the La Oroya refinery. -3- Cobriza Ore Reserves 7. At the time of the Bank appraisal, ore reserves which were mined for the old Cobriza plant in the Coris area were estimated to total about 50 million tons with an average grade of 1.8% Cu and 5 oz. silver per ton of ore. At the proposed mining rate this ore deposit would have been sufficient for 14 years of operation. In addition, the ore deposit was believed to extend across to the Pumagayoc area where scout drilling and geological interpretation indicated another 60 million tons of possible ore of similar grade. Therefore, overall reserves were considered reasonably assured for the proposed expansion with over 20 years of mill-feed ore available. 8. Additional geological exploration, however, has not only been unable to confirm the earlier estimates but also found the mineralization at Pumagayoc to be economically unattractive owing to its very small size, lower grade and costly development requirements. In addition, the ore grade in the Coris area had to be revised downward to an average grade of about 1.3% Cu or about 72% of the grade estimated during the Bank appraisal. The higher ore grades and larger reserves originally estimated resulted from the erroneous assumption that the deposits were of stratiform nature, i.e., extending consistently to the West, increasing in depth, and reaching across the Pumagayoc ridge. This misjudgment was made by all parties involved in project preparation on the basis of insufficient physical evidence through adequate drilling necessary to at least intercept the assumed mineralized extensions. Drilling exploration to this effect should have been completed prior to the actual project implementation or by the latest at the time work on Cobriza was reactivated in late 1979. However, both CENTROMIN and Project Management personnel remained optimistic and little concerned about detailed reserve identification since project implementation itself required their fullest attention. As we now know, this proved to be an essential error. The lower ore grade has required considerable modifications of the processing circuits and increased reagent consumption, and thereby critically affects the financial viability of Cobriza due to the fact that processing facilities were sized, designed and constructed for ores with significantly higher copper content. 9. CENTROMIN has recently accelerated its efforts to discover other higher grade ore deposits in the area, but it appears doubtful whether this will improve the project's finances in the short to medium term because of both the usual risks associated with such exploration and the additional investment and time required to study, develop, and start mining a new large mineral deposit. Nevertheless, existing general geological trends indicate that over the longer term it appears likely that additional reserves similiar to the ore presently mined could be delineated through CENTROMIN's ongoing exploration efforts. These efforts are given highest priority by the com3any since they are needed to ensure the long-term future of Cobriza. _/ 2/ As of June 1985, CENTROMIN estimated that sufficient proven and probable ore reserves remain for a minimum of ten year production with significant potential- of an additional five years. -4- Increase in Production Capacity 10. A more immediate solution to improving the economics of the Cobriza project may be found in raising the utilization of installed facilities at a higher than the planned rate. The existence of some over-capacity of several major processing components due to over-design, such as two extra mills, suggests that a production increase of about 20% to 12,000 tons of ore per day could be achieved with relatively minor investment needed to remove some bottlenecks, such as expansion of the crusher discharge system, and addition of pumps and flotation cells. CENTROMIN is presently studying this solution for possible implementation as soon as project start-up difficulties have been fully resolved.3/ 11. At the time of the appraisal, CENTROMIN decided to expand its concentrating capacity at Cobriza by erecting a new plant and dismantling the existing concentrator which had been inaugurated only nine years before. The old plant was located on the side of the mountain and exposed to potential hazards from unstable slopes and local talus slides. For this reason it was decided to shut down the old plant. Unfortunately, the new much costlier plant was established also on the side of a mountain which may be subject to the risk of similar slides although the slopes are somewhat less steep and its base broader. In retrospect, it appears that more consideration should have been given to the tectonic conditions of the new plant location. This knowledge together with the uncertainty of the reserves may have resulted in a more modest expansion based on their existing plant facilities and infrastructure. Consultants for Cobriza 12. Although CENTROMIN had voiced concern during the Bank appraisal as to the Bank's requirement of retaining an expatriate project management firm to assist CENTROMIN in the implementation of the project, the company agreed to it before Board presentation. Nevertheless, the actual selection and participation of the expatriate project manager for the overall execution of the Cobriza project became a highly controversial subject. CENTROMIN felt that it could better implement the project by itself, and was not keen on contracting management services for this purpose. However, the Bank held that CENTROMIN's staff did not have sufficient project experience. The relationship between CENTROMIN's project administration and the Project Manager became increasingly difficult and deteriorated to the point where the parties did not talk to each other anymore. 13. There is little doubt that the project did suffer from this situation. And in fact some main project components clearly show major design and operational difficulties resulting from inadequate engineering and poor construction. 4/ Designwise, this situation is typically reflected by the apparently larger than needed milling section of the 3/ After further investigations, the borrower informed the Bank (see Borrower's Comments in the Attachment) that this alternative is presently difficult to implement because depressed copper prices and limited ore reserves could hardly justify the required expansion expenditures. 4/ Further details are provided in the Borrower's Comments (see Attachment). -5- concentrator. Operationally, the tailings thickener, for example, had to be abandoned due to leakage from major cracks resulting from settlement attributed to poor compaction. In addition, the mining component of the project had to be executed by CENTROMIN itself, since according to the company several activities under the responsibility of the Project Manager, such as mine plans, technical input and support for shaft sinking, were not satisfactory. CENTROMIN completed this work on its own although about 15 months after project inauguration in May 1982. This delay reduced the average mine capacity by about 40% during this period. In light of these problems, the question can be raised as to whether the Bank should have more positively considered CENTROMIN's request in April 1977 to retain a watch-dog" firm to monitor the performance of the Project Manager. Capital Cost Adjustments of Cobriza Project 14. When the projects were reactivated in May 1979, the Project Managers substantially modified the earlier basic engineering, especially with respect to mine development, mine equipment, an additional mine shaft, hydraulic fill, a transmission line and a new ore transportation system, estimating capital costs in the order of US$260 million for Cobriza and US$15.0 million for Cerro de Pasco. CENTROMIN decided, however, to keep total actual capital costs for the Cobriza Mine Expansion Project below US$240 million. This was achieved primarily by allocating only a minor portion of the required working capital to the project. 15. Since working capital was not directly assigned to the project, no exact information is available but on the basis of increases in concentrate and supplies inventories and in accounts receivable, incremental working capital neads for Cobriza have been estimated at abo*t US$14 million. 5/ Peruvian accounting procedures require that interest during construction be capitalized up to the time when the project has operated for three full months at a minimum of 80% of rated plant capacity. CENTROMIN anticipated that Cobriza would have met this test by the end of 1983. Thus an additional US$7.7 million would be chargeable to the project. These adjustments are shown in the following table: Table I PERU - CENTROMIN EXPANSION PROJECT Capital Costs (in USS millions) Cobriza CENTROMIN Adjusted Appraisal Final Final Estimate Estimate Estimate Total Fixed Assets 121.9 188.6 188.6 Working Capital 12.2 1.6 13.7 Interest during Construction 26.8 42.7 42.7 Total Project Financing 160.9 232.9 245.0 5/ Although Cobriza concentrates will replace to a certain extent purchased concentrates to be used in the La Oroya smelter, the net working capital requirement of Cobriza is believed to be considerably higher due to longer throughput and higher mining and processing costs. -6- Mine Water Treatment Plant 16. At the time of the appraisal, the main objectives of the project were to replace the existing cementation process with a solvent extraction and electrowinning plant that would neutralize discharges and effectively eliminate impurities. With the same production capacity but at lower costs the plant was supposed to recover copper in refined form with a high grade of 99.9% Cu instead of the -cement" product containing only 60-70% Cu. The new operation would eliminate the flow of polluting discharges into the San Juan and Mantaro rivers. These discharges, which took place over many years have been characterized as acidic, turbid and containing iron and other impurities. In addition, the old cementation process required scrap iron which was expected to become increasingly scarce in Peru. This assumption did, however, not materialize. 17. In terms of the project's pollution control objective, after detailed study the neutralization component of this project was eliminated with Bank approval in order to avoid cost overruns and was replaced by discharging the effluents to a tailings pond instead of the San Juan and Mantaro rivers. The full environmental impact of this short-term solution chiefly depends on the balance of discharges to the pond and actual evaporation rates. This is presently under study. To this end, CENTROMIN has requested that the Bank send an environmental specialist for a detailed review of possible options for the long-term disposal of both all effluents from the Cerro de Pasco mine waters and the proposed tailings disposal from the Cobriza concentrator. A Bank mission will be scheduled shortly. 18. The mine water treatment plant without the neutralization component was constructed within the original budget estimate of US$15.3 million. Data is not available as to the savings CENTROMIN realized on account of the scope change. Full production has not yet been reached. Output during 1983 is estimated at about 5,200 tons of contained copper representing about 86% of installed capacity. Full capacity output is expected to be reached some time in 1984. 6/ The relatively long start-up period, since June 1981, resulted primaril7 from major electrical difficulties with transformers and rectifiers which halted plant operations over a period of five months while they were replaced. 7/ Contrary to the SAR assumption, the new plant did not succeed in lowering operating costs, but is expected to require approximately US$1.0 million more per year in real terms in production costs compared to the old plant owing to higher electricity costs and larger use of costlier reagents. However, the present plant produces refined copper which does not require further processing. IV. FINANCIAL AND ECONOMIC PERFORMANCE 19. Since the financial section of CENTROMIN's PCR is limited to assumptions as to copper and silver prices and five-year projections of 61 As copper content in the mine waters decrease over the coming years, a 2% reduction of copper production per year is expected. 7/ See Borrower's Comments in the Attachment. -7- sales revenues and operating costs of each project, this section expands on essential financial and economic aspects relating to the Cobriza and Cerro de Pasco projects. Metal Prices 20. Copper aad silver prices as forecast in the SAR are compared in the following table (Table II) to the actual average prices for the period 1977 to 1982 and to the current price projections for the period 1983 to L988. Table II PERU - CENTROMIN EXPANSION PROJECT Copper ar.d Silver Prices Appraisal vs. Actual and Projected (in current terms) Copper (USs/lb.) Silver (US$/oz.) Present Projections Present Appraisal Actual By Appraisal Projections Year Estimate (LME) CENTROMIN World Bank Estimate Actual By CENTROMIN a/ b/ 1977 0.90 0.59 5.50 4.62 1978 1.04 0.62 6.20 5.40 1979 1.11 0.90 6.70 11.09 1980 1.20 0.99 7.75 20.58 1981 1.28 0.79 8.30 10.52 1982 1.37 0.67 8.90 7.95 1983 1.46 0.78 0.72 0.72 9.50 11.17 1984 1.57 0.98 0.76 2.80 10.10 10.50 1985 1.70 1.29 0.83 0.88 10.76 10.30 1986 1.83 1.24 0.80 0.96 11.46 10.09 1987 1.98 1.26 0.90 1.04 12.20 9.89 1988 2.14 1.28 1.00 1.07 12.99 9.69 A/ April 1984 EPD projections. b/ SAR Zambia Export Rehabilitation and Diversification Project. 21. The table shows that the actual price development of copper remained consistently well below the forecasts used in the SAR. For the six year period, 1977-1982, the copper price in current terms averaged 76 cents/lb. while the SAR had assumed an average of US$1.15/lb., i.e., a 50Z higher price level. CENTROMIN's price projections for the next five years exceed those by the Bank by an average of 31%. In contrast, CENTROMIN's silver price projections appear reasonable over the longer term. As proceeds from silver will amount to only about 6% of Cobriza's gross sales value, minor price variations of that metal are not very critical to the overall picture. -8- Financial Rate of Return 22. The SAR estimated the incremental before-tax returns in real terms for the Cobriza project at 15.2% and for the Cerro de Pasco Mine Water Treatment Plant at 18.1%. On the basis of the project capital costs estimated as of September 1983 and estimates for (i) future operating costs as predicted by CENTROMIN and (ii) net revenues based on the range of World Bank copper price projections, new cost and benefit streams have been prepared for both projects. 23. On the basis of the range of the Bank's price projections the recalculation of the Cobriza project yields an incremental rate of return before income taxes of between -10.5% and -8.5%, i.e., the anticipated benefits over the life of the mine and the plant are insufficient to recapture the initial capital costs, future asset replacement plus actual and future operating costs of the project. This very significant reduction in the financial outlook of the project stems primarily from the substantial capital cost overrun (about 62% over SAR estimate) and the considerably lower than expected copper price combined with markedly lower than expected copper grade (1.3% versus 1.8% assumed in the SAR resulting in only 170,000 tons of concentrate rather than the originally expected 223,000 tons). 24. In order to offset the actual, lower ore grade and improve the financial performance of the Cobrixa project, CENTROMIN contemplates the possibility of increasing ore produ,Lion by 20% to 12,000 tons per day (see paras. 11 and 12). Assuming that the exploration program, which is currently underway, will prove sufficient reserves within a long-term time frame, the increased production would generate about US$5.5 million in additional net revenues per year and improve the incremental financial rate of return to +1.2%. 25. In view of these rate of returns, the question becomes relevant as to whether CENTROMIN would not be better off financially to close down COBRIZA. To assess this option, the net cash flow after debt servicing of keeping COBRIZA operational have to be compared with the option of abandoning the operation. All historic capital costs are considered sunk for this purpose but interest and principal repayments of all relevant loans would be maintained as scheduled. The estimated effects on the rest of CENTROMIN's operation is considered to be negligible since it is assumed that it can expand its contract smelting business to the extent of COBRIZA's production. It is very difficult to estimate the cost of shutting the plant and to determine the exact write-off benefits. Nevertheless, our analysis indicates that keeping the operation going would over the period 1983-92 result in a rate of return of about 16%. 26. A similar conclusion can be reached using a different methodological approach as follows. Despite closing down Cobriza, loan servicing would have to be continued. On a per pound of produced copper basis this amounts to 39t in 1983 terms. Since total cash costs for one pound of copper amounts to 115t (para. 28), a copper price of 76t/lb. in -9- 1983 terms would equal the options of abandoning versus continued operation. This price is very close to the Bank's price projections. 27. While scope changes of the Cerro de Pasco Mine Water Treatment Plant allowed it to be completed at the original cost estimate (para. 18), the copper output of the plant is expected to be roughly the same as could have been expected if the old cement plant would have been retained. Deviating from CENTROMIN's PCR, for our analysis it was assumed that only sufficient copper bearing solution for the annual production of 5,200 tons of copper would be available compared to CENTROMIN's estimate of 6,000 tpa. Contrary to the SAR assumption, the new plant did not succeed in lowering operating costs but is expected to require in 1983 terms approximately US$1.0 million more per year primarily resulting from higher electricity and reagent demand. Consequently, in addition to the total capital costs of US$15.3 million, higher operating costs and equal revenues, the new plant cannot be expected to generate a positive incremental cash flow in any of the 22 years of construction (7) and operation (15). Cobriza Production Costs 28. On a per pound basis direct operating costs for mining and concentration8/ at full production (10,000 tpd) are estimated in 1983 terms to amount to 46t/lb. Depreciation expenses add about 19t/lb. and financial charges an average of about 21t/lb. Assuming headquarter overhead expenses applicable to Cobriza at about 10t/lb., the total production cost of one pound contained copper ex La Oroya amount to approximately US$0.96/lb. Taking account of sales commission, transportation, insurance, freight, smelting charges, export taxes, etc., and of a by-product credit of 8t/lb. a LME price of about US$1.16/lb. is necessary to break-even. On a cash basis (including principal repayment), the break-even price amounts to approximately US$1.15/lb. 29. Despite this dismal picture, the new, large-scale Cobriza project has been successful in reducing direct operating costs by 40% compared to the old installation. Thus, per short ton of ore mined, direct operating costs of the new facilities presently amount to US$9.64 (US$6.35 for mining and US$3.29 for concentration) in contrast to the US$16.30 (US$10.27 for mining and US$6.03 for concentration) of the old installation. On the basis of direct operating costs only, Cobriza ranks as the least cost producer of CENTROMIN's six mining centers. Cobriza - Projected Income and Cash Generation 30. Cobriza is projected on the basis of the Bank's copper price assumptions to incur an accumulated loss for the period 1983-88 of about US$20.4 million in current terms. During the same period Cobriza will have a cash deficit of USS40.1 million. Details are given in Table III. It 8/ Include direct mining costs and direct concentration costs but exclude refining costs, other charges (e.g., transportation, insurance, marketing, handling) and overhead expenses. -10- should be noted that these projections do not include the cost for additional financing required to cover the cash shortfalls. In addition, CENTROMIN does not include headquarter overhead expenses attributable to Cobriza in the operating expenses. Consequently, only direct mining and concentrating costs are covered. 31. The projections indicate that over the next few years Cobriza will unfortunately not be in a position to alleviate CENTROMIN's already strained financial position but rather will further burden the company's situation. Only from 1989 on, will Cobriza produce overall positive net income and net cash surpluses. By then, copper prices are predicted to generate net revenues in excess of operating and capital expenses. The new Cerro de Pasco operation is too small to have any significant influence on CENTROMIN's total financial picture. Table III PERU - CENTROMIN EXPANSION PROJECT Net Income/Cash Generation - Cobriza (in current US$ million) 1983 1984 1985 1986 1987 1988 1983-88 Cu Price (US$/lb.) b/ 0.72 0.80 0.88 0.96 1.04 1.07 Ag Price (US$/oz.) 11.17 10.50 10.30 10.09 9.89 9.69 Net Income COBRIZA Net Revenues 32.1 52.7 58.7 60.3 62.9 67.3 333.9 Operating Costs a/ 29.3 32.1 34.5 36.9 39.5 42.3 214.5 2.8 20.6 24.2 23.4 23.4 25.0 119.4 Interest Expense - 14.6 13.1 11.6 10.0 8.5 57.8 Depreciation - 16.4 16.4 16.4 16.4 16.4 82.0 Net Profit/Loss before 2.8 (10.4) (5.3) (4.6) (3.0) (0.1) (20.4) Taxes Cash Generation Cash Generation 2.8 6.0 11.1 11.8 13.4 16.5 61.6 Loan Repayment 7.7 15.3 15.3 15.4 15.3 15.3 84.3 Asset Replacement - - - - - 17.4 17.4 Net Cash Surplus/ (4.9) (9.3) (4.2) (3.6) (1.9) (16.2) (40.1) Deficit a/ Includes mining and concentration operating costs but excludes headquarter overhead expense allocation. b/ Bank projections: SAR Zambia Export Rehabilitation and Diversification Project. -11- CENTROMIN - Historical Financial Performance 32. Summary financial statements and their financial ratios for the period 1979-82 are presented in Table IV. The accounts reflect the company's deterioration of its financial position in 1981 and 1982, which was mainly due to the depressed international metal markets, a sharp increase in borrowings to finance the company's heavy investment program and cash deficits and large foreign exchange losses resulting from sol devaluations. PERU - CENTROMIN EXPANSION PROJECT Summary of Financial Position (Billion soles, current terms) 1979 1980 1981 1982 1983 Net Revenues 121.7 198.9 252.7 312.0 867.3 Operating Expenses 70.0 125.5 186.2 242.7 482.4 Net Income 18.2 20.0 0.7 (78.3) 89.0 Internal Cash Generation 23.2 30.7 19.8 (31.7) 232.5 Investments n.a. n.a. 8.6 9.0 13.4 Fixed Assets n.a. n.a. 164.9 392.8 752.1 Long Term Debt 15.5 32.5 72.2 255.3 427.5 Net Equity 53.9 82.5 118.4 141.5 337.1 Gross Margin, % 42.5 36.9 26.3 22.2 44.4 Operating Margin, % 38.4 31.6 18.8 7.3 26.1 Net Income/Revenues, % 15.0 10.1 0.3 (25.1) 10.3 Current Ratio 1.64 1.27 1.16 0.90 0.37 Long Term Debt/Equity Ratio 22:78 28:72 38:62 64:36 63:37 Financial Covenants 33. As a consequence of the worsening of CENTROMIN's financial position from 1980 on, the company was unable to meet the financial covenants relating to the financial ratios stipulated in the Loan Agreement (Sections 5.4, 5.5 and 5.6 of Loan 1281-PE). On December 1, 1982, CENTROMIN requested a waiver of these clauses for 1981 and 1982. However, in its latest long-term projections covering the period 1984-1987, CENTROMIN shows that it cannot meet the current ratio covenant (1.5 to 1) before the year 1986 and the debt/equity ratio (50:50) during any of the projected years. If the accounts are expressed in US dollars, in which CENTROMIN's products are primarily traded, the financial ratios would improve markably. 9/ A summary of CENTROMIN's financial projections is given in Table V. 9/ See also Borrower's Comments in the Attachment. -12- Table V PERU - CENTROMIN EXPANSION PROJECT Summary of Financial Projections for Centromin (including Cobriza and Mine Water Treatment Plant) (April 1983) (Billion soles, 1983 terms) 1984 1985 1986 1987 Net Revenues 1,187.9 2,175.6 2,844.0 3,700.3 Operating Expenses 720.5 1,153.5 1.610.8 2,090.1 Net Income (Loss) 72.8 280.8 329.0 450.9 Internal Cash Generation 201.8 493.8 664.9 922.0 Long Term Debt 842.9 1,349.8 2,007.7 2,790.0 Capital Stock 125.9 125.9 125.9 125.9 Accumulated Profit (Loss) 45.4 326.2 655.2 1,106.2 Assets Revaluation 316.5 518.1 750.3 1,000.9 Net Equity a/ 487.8 970.2 1,531.4 2,233.0 Gross Margin, % b/ 39.4 47.0 43.4 43.5 Operating Margin, Z 28.5 37.2 31.6 30.8 Net Income/Revenues, Z 6.2 13.2 11.6 12.2 Current Ratio 1.12 1.49 1.86 2.46 Long Term Debt/Equity Ratio 58:42 58:42 57:43 56:44 o! After revaluation of assets. b/ Gross margin, % = (Net Revenues less Operating Expenses) Net Revenues * 100 It must be emphasized that an even dimmer picture would emerge if the latest World Bank copper price projections are applied (see Table II). Economic Reevaluation 34. On the basis of the Bank's metal price projections the net foreign exchange surplus generated by Cobriza and Cerro de Pasco is estimated to gradually build up to about US$45 million in 1982 real terms. No income tax and no dividends for the projects would accrue to the Peruvian Government before 1990. Fiscal revenues will result nevertheless from increased export and sales taxes, import duties and indirect benefits. 35. The necessary adjustments to the financial benefits are not sufficient to make the incremental economic rate of return for the projects positive. The employment benefits from the projects are described in detail in CENTROMIN's PCR. -13- V. CONCLUSIONS AND LESSONS TO BE LEARNED 36. After an over three year delay caused primarily by the economic crisis in Peru beginning in 1977, both projects, the Cobriza Mine Expansion and the Agua de Mina plant in Cerro de Pasco, are now physically complete and in operation. Primarily due to the unresolved ore reserve question in Cobriza and the less than expected volume of copper bearing mine water to be treated in Cerro de Pasco, it is still very doubtful whether the projects will achieve their full technical objectives over the originally expected project period. Because of the very high cost overruns of the Cobriza mine expansion10/ together with the lower than antiripated ore grade, the project's eonomic objectives cannot be achieved unless production is increased substantially, a much more attractive mineralized area is found in the near future, and/or the Bank assumptions as to future metal price development turn out to be too conservative, i.e. copper and/or silver prices show a drastic upward swing. 37. The degree of uncertainty affecting the future of the projects is further heightened by the fact that Cobriza is located within an area of political instability. So far only limited terrorist activity occurred with an outlying communication station having been destroyed. 38. Timely and proper project implementation and avoidance of significant cost overruns can normally be controlled by the project implementing agency and its overseeing bodies. With respect to Cobriza, the country's economic crisis in the late Seventies played a dominant factor in the almost two year project suspension. Furthermore, the success of all mining projects is greatly dependent on the exogeneous factor of world market prices for their products. Thus, the accurate estimation of future metal prices for a mining project can reduce or altogether eliminate the financial and economic success of a project as to the same or even higher extent as capital cost overruns or delays in project completion. When applying the original SAR copper price projections (see Table II) to the actual capital expenditures and the latest projected sales and operating cost estimates over the life of the Cobriza project, the incremental rate of return increases from negative 8.5-10.5 (see para. 23) to positive 5.4%. Thus, the price forecasting error between the appraisal and the current assumptions aQounts to about 15 percentage points in the financial rate of return of the project. 39. At the time work resumed on the projects in May 1979, the Bank reviewed CENTROMIN's revised implementation schedule and capital cost estimates. Although no formal reappraisal of the projects took place at that time, the economic rate of return was reestimated for Cobriza at close to 20% using the then latest Bank projections for copper prices. Moreover, CENTROMIN advised the Bank on February 26, 1979 that although its 10/ The borrower points out (see Borrower's Comments in the Attachment) that the final costs of the project should not be compared with the appraisal estimate but rather with the estimate arrived at as result of the revised basic engineering. On this basis, Cobriza was completed considerably under budget. -14- exploration work in the Pumagayoc area could not prove out the expected reserves, the size of the proven and potential ore reserves in ths- Coris area would guarantee ample ore supply for the project. CENTROMIN's Project Management endorsed the company's contention and also concluded that the change in the area of the ore reserve did not justify a change in project scope nor an increase in '.he overall project costs. The average -,rade estimate at that time was given at 1.77% copper and 0.5 ozs. silver per ton of ore, almost exactly what the SAR had indicated. The downward revision of the copper grade took place much later. Consequently, on the basis of the then available information it was not warranted that the project be stopped and the incurred expenditures of US$13.8 million be written off. 40. Similarly, it could now be argued that it would be more beneficial to shut down Cobriza rather than continuing its operation while incurring large financial losses. CENTROMIN's management points out, however, that Cobriza is its lowest direct cost mining center and that it would have to serve its debts in any case. With 81.3% of total project costs borrowed from external sources, continued operation enables the company to generate at least the foreign exchange portion of the projected US$124 million debt service over the next five years. If Cobriza were to close today, its technical impact on the remaining CENTROMIN operation could be reduced by increasing its custom smelting operation. As in the past, the La Oroya smelter would then be available for an increased share of custom concentrates produced by Peru's large number of small and medium- sized mines. These concentrates are presently shipped primarily to Japan. Consequently, in addition to its financial implications for the company the closing of Cobriza would primarily eliminate most of the 650 direct jobs at the mine and impact adversely on the transport and general services sectors of the region. 41. CENTROMIN discusses in its PCR's the shortfalls of the projects and provides suggestions as to improvements in several areas. They need not be repeated here. There are a number of conclusions, however, which can be drawn by the Bank for consideration in future projects in the mining sector. In fact, most of these conclusions have been incorporated to a various degree in the selection/appraisal and supervision process of the Mining Division. 42. The main lesson to be learned affecting project identification and appraisal is that feasibility studies have to be reviewed and assessed in depth with a more critical eye as to whether the goals of the project have been set realistically on the basis of the underlying assumptions. Specifically, in mining projects this would require a high level of scrutiny of (i) the presented ore reserve data and its respective geological interpretation; (ii) the sizing of the proposed projects in light of given ore reserves and technical, financial or other constraints; and (iii) the actual detail design proposals in order to avoid unwanted over-design or under-design of the various project components. M12 - 15 - Annex 1 PROJECT COMPLETION REPORT LOAN 1281/PE COBRIZA PROJECT (PREPARED BY THE BORROWER) AUGUST 1983 -16- 1. IDENTIFICATICN OF THE PRQJECr, FEASIBILITY AND PREFEASIBILIY SJIES TEsGs (a) , (b),-TcTana-rd) At the end of 1974, the Cobriza mine produced 1833 tons of grade 2.2% copper ore, and plans were laid at that time to expand the output to 7,00 tons of grade 1.6% copper on the assumption that reducing the grade of the ore to be extracted would make the mining operation more efficient and less selective than at present. The ore produced would be treated in the existing concentrator plant (2,00 TPD) and in a new plant with an initial capacity of 5,000 TPD to be built in the Coris valley some 3 km from the present plant. The new concentrator would be constructed in modules of 2,500 TPD each so that it could easily be expanded to 7,500 or 10,000 TPD. The possibility of eventually closing the existing plant and centralizing concentration operations in Coris was considered. However, there was no discussion at that time about working the Cerro Pumagayoc or Level 10 of the Cerro de Coris (Cobriza Mine), alternatives that have been discussed only since 1975 and 1978, respectively, after the findings from studies on those operations -4ere in. The expansion project included a tailings dump in the Coris valley (to serve both plants) and the construction of the housing and services required. The electric power needed would be obtained from the Mantaro Hydroelectric Power Plant. The investment required was estimated at that time to be about US$42 million, to be disbursed between 1975 and 1978, when the expansion would be placed in operation. The feasibility study made by consultants at the beginning of 1975 defined the following parameters: - Operation at an average of 7,000 TPD. - Construction of the new 7,000 TPD concentrator in la Pampa de Corls, using some of the equipent and materials from the existing concentrator. - Construction of an access tunnel to the Pampa de Coris, crossing the Cerro Pumagayoc, which would help to evaluate the potential reserves in the area. - Alluvial material taken from the slopes of the adjacent area would continue to be used for mine fill, leaving for later the analysis of the alternative of using part of the tailings as hydraulic fill. - Installation of a tailings thickener to recover industrial water in the annual periods of fresh water shortage. - The.tailins would be dumped directly in Mantaro, with plans for later imiting tat activity by setting up a tailings dump in tile area of Banos de Coris. -17- - The auxiliary services, management, housing and welfare facilities would remain at their present location, and would be expanded as needed. - The project would begin in mid-1975 and would end in mid-1978. The amount of investment required would be USS67.6 million, and the internal rate of return on the investment, considering the costs and income differentials over the existing operation, would be about 5.6%, including tax deductions. Later, negotiations began with the World Bank and the Inter-American Bank to finance the project, and in order to improve its profitability, it was expanded to l0,w00 TPD, based on the potential reserves of the deposit located both in Cerro Coris and in Cerro Pumagayoc. With the aid of World Bank specialists, a new investment estimate was prepared, which increased it to US$160.9 million, including preoperation financing charges and a substantial escalation and contingencies reserve. The Bank's aid made it possible for the loan contract to be signed on December 6, 1976, that is, the negotiations lasted only a little over a year, and the basic engineering studies began imaiediately, since the management contract for the project was signed on March 11, 1977. II. PROJECT IMPLEMENTATION AND MMAGEMENT a). sco of the Project (1) Based on the need for selective mining if the 2,600 TPD rate was continued, the proven-probable reserves, the great potential of the mine, and the economic feasibility of the expansion, Centromin decided to expand the mine, concentrator and auxiliary facilities in order to operate it at the optimal level of production, which at the time of the evaluations was found to be 10,000 TPD. That expansion would make it possible both to make better use of the Cobriza mining resources without lowering costs and to produce concentrates at a rate consistent with the mine's reserves and potenti.10 To that end, a consulting firm was hired to conduct the feasibility study for the project. The study findings led to the adoption of the most appropriate alternative for implementing the project, which primarily consisted of: Mine Development and Preparation: Improve the mine system by constructing galleries, cross cuts, sublevels, chimneys, and ramps at the various levels of oj.eration to expedite ore extraction and hauling. To that end, the project called for the purchase of large capacity LHD mining equipment such as Scooptrams, hydraulic drills, low profile trucks, raise borers, etc. -18- The proposed mining system is a modification of the current system, with the major change being the almost vertical boring system, which will make it possible to have the entire length -* of the stope bored, improve the cycles within the stope and eliminate lost time owing to transfer of equipment. The ore extracted from the mine will be hauled to the concentrator plant by electric locomotives or mine cars. ore will be transported from the levels below level 28 through level 10 and from there will be hoisted to the main extraction level (level 10) by a 220 m shaft. Concentrator Plant: The ore processing plant consists of: a primary stone crushing plant, a 5,000 tons storage area for coarse stone, a fine crushed stone plant and closed circuit classification, and a 5,000 tons capacity storage area for fines; The grinding plant, consisting of two grinding circuits (primary and secondary), the flotation plant with conventional rougher scavenger and cleaning circuits. A two line giratory circuit, with thickener and filtering sections, is included. The concentrator plant will have a capacity of 10,000 tons/pd. - Urban Area: The project has built an urban complex of 450 multifamily buildings. The complex includes such community facilities as a civic center, schools, medical posts, shopping center and recreational areas. It occupies about 11 ha located adjacent to the concentrator plant in the esplanade of Pampa de Coris. - Mantaro-Cobriza Transmission Line: The present thermal energy plant in Cobriza has been replaced by the Mantaro Hydroelectric Plant of Electro Peru. The power will be transmitted by a 69 KV high-voltage line approximately 55 km long. - Auxiliary Services: The project has installed auxiliary services like: water supply, warehouses, repair and maintenance shops, internal conuunications system, electrical substations and the transmission line from Pampa de Coris to the mine. It has also built a concentrate transfer station in the town of Huayucachi 10 km from Huancayo. (ii) After the project was suspended in January 1978, it was reactivated in May 1979, at which time the location of the ore extraction was changed. The project originally called for extracting ore from Pumagayoc and Cobriza. The change meant that ore would be extracted only from Cobriza, which at that time was in production, although on a reduced scale. This change resultea from the discovery of additional ore reserves in the Cobriza area, while studies of the Pumagayoc area had found lower grade ore. Reactivating the mine was mutually agreed upon by the top level management of Centromin Peru and the project managers. -19- b) Project naement (1) To manage the project, Centromin Peru hired a foreign companv associated with a national consulting firm. Under this contract, the managers were responsible for implementing the project plan, organize, direct, coordinate and control all vities involved in the mine expansion and in the construction process, and install and operate auxiliary facilities and the concentrator plant until reaching standard operations. For all project business, Centromin Peru is represented by the project administration, working in coordination with the managers and supervising all aspects of compliance with the project management contract. In addition to representing the owner, the administration was in charge of planning, development and construction of the following areas: the urban housing complex, the Mantaro-Cobriza high-voltage transmission line, and the hydraulic fill plant, as well as mine planning. (ii) During the project, the project administration worked closely with the managers and third parties. Under the direction -3f the managers, Centromin Peru hired specialized companies to perform the detailed engineering, arranged for purchase of equipment and material through international calls for bids, and contracted for earth movement, and civil, electromechanical and mine development works, all supervised by the managers. it was also necessary to hire specialized firms to solve problems that occurred during the project. Aid was also obtained from technical representatives of the equipment suppliers. In general, they all provided aid as required. (iii) Management services were not satisfactory throughout the project, because a number of problems occurred in various stages of implementation. This was particularly true of basic engineering and as a result detailed engineering, because neither an adequate mine development plan nor a suitable project control system were prepared. Consequently, the technology employed was inappropriate for the characteristics of the project, and this situation was made worse by continually having to replace key personnel assigned to the project. Because of the terms of the contract with the managers, the CMP1/ had to rely almost entirely on their managerial ability and their responsibility for the work performed, which prevented the ChP from taking over sufficiently in advance the managers' contractual functions, which the financing agencies were informed about in the coordination and evaluation meetings held with IDe and IBD officials. The pragmatic solution to these problems would have been to rescind the contract, and hire an outside consultant. 11 CHP: entromin Peru -20- (iv) In its original conception, the project was reported to the World Bank through a prefeasibility study drawn up by a consulting firm, in cooperation with the CMP. Based on the prefeasibility study and the contract with the project managers, the US$40 million IBRD loan was extended for projects to expand the Cobriza mine and concentrator and the mine water treatment plant. That amount was maintained during implementation of both projects. After reactivating the Cobriza project, the World Bank required from the managers and the CMP periodic information on the status of the project. This was provided in a monthly progress report by the managers and a quarterly report by the CMP Projects Execution Division, which reported to the 1BRD and to the IDB on the most important agreements, progressr modifications or variations in the original plan and in the financing structure, among others. The CMP maintained close relationship with the managers, consultants, technicians and contractors that took part in the project, in order to achieve satisfactory solutions to the problems of conceptual changes in the design, technical specifications, programming system and progress control, the control system for costs and commitments, the disbursement schedule, and changes in the financial structure, which were reported to the financial institutions at the proper time. In light of the difficulties that occurred because of the managers' unsatisfactory performance, which resulted in delays and consequently higher implementation costs for the project, in addition to nonperformance of the contract for the development program and preparation of the mine, which had to be taken over by the CMP, it is of crucial importance for the CMP to be informed, in order to evaluate the project, of the results of the IBRD and IDB evaluation of the services provided by the project managers, C) Performance of the Consulting Foreign Firms (i) Through the managers, Centromin Peru hired several consulting firms. The detailed design engineering for the production shaft was performed by engineering consultants, whose work was regarded as satisfactory by Centromin Peru. The detailed engineering throughout the project was performed by local engineering consultants, under the direct supervision of the managers. It was necessary to hire soil specialists to prevent cave-in of the thickener wastes. In general, the consultants. satisfactorily met Centromin -eru' s requirements. -21- In the construction stage, technical aid for installation and/or assembly of the main equipsent was provided at plant testing and start-up by consulting firm experts, who gave instruction and training to the operating staff. d) Perforaence of the Suppliers (1) In general, the quality of service of most suppliers was above the acceptable average. While some of them did not meet delivery schedules, these delays were mainly due to consultations by the managers. In other cases, delays were caused by transportation strikes and tie-ups, and in a few instances, they were the fault of the manufacturers, in which case the penalties stipulated in the purchase orders were imposed. The project administration assistants visited the suppliers and found that manufacture and quality of the equipment purchased was satisfactory. In addition, it was determined that most firms maintain an adequate stock of repair parts. In summary, the suppliers, with some exceptions, met our requirements. Delays in equipment delivery did not in general result in significant delays in the project execution program. (i1) Problems or limitations in the suppliers' meeting our orders were mostly due to administrative and organization problems, as in the case of one supplier, where changes in the personnel initially assigned to fill our purchase order caused technical delays affected delivery times. Another reason was that some suppliers offered a project for working c,nditions different from our requirements. This situation could have been avoided by more effective and intensive follow-up by the managers. ) Examples are the following: Some suppliers did not provide antislipping controls and turbo-charger on the engines; other suppliers provided wrong shaft tubing; locomotives received were unsuitable for the installed unloading system; spare parts were not provided by some firms and there were defects in the pulley designs of others. (iv) Performance of the Contractors In evaluating the contractor proposals, it was noted that, despite doubts about the capabilities and/or performance of the low bid company, quantifying the company's performance compared to other proposals was difficult and subjective. So some companies that won the bid did not satisfactorily carry out their contracts, and this delayed the implementation ot the project. -22- e) Logistics (1) Purchases had to comply with the lending institutions' bidding rules on the purchase order amounts. The managers handled purchases abroad, while purchases in Lima were handled by Centromin Peru. The managers' responsibility for local purchases ended with delivery of the approved requisition. The following logistics management stages were handled by the CMP, except for the receipt of materials in the field, and later distribution to the contractors, which was handled efficiently at the warehouse. Similarly, materials and equipment purchased abroad were cleared through customs and hauled to the field under CMP supervision. Here the managers merely coordinated the follow- US) (ii) The Bank's regulations only caused difficulties when suppliers that won the bid were from countries not eligible under the lending institution's rules. In addition, the rigidity and strictness of general purchasie terms and conditions caused some suppliers to refrain from making bids. Moreover, the 15% preference margin for local suppliers did not enable local firms to win the bid, so most bids were won by foreign firms. In general, the regulations followed made it possible for purchases to be entirely flexible. (iii) There were really no reasons for blaming suppliers for delays during the project. (iv) Although the company has undoubtedly standardized certain equipment, international bids made it possible to expand our list of suppliers and obtain the specified equipment and materials of the proper quality, on time and at the lowest price. f) Implementation of the Program (i) Before and during construction of the works, Centromin Peru imposed strict controls over the work programs in each area to minimize possible defects in implementation. (Table 1). In the construction projects, bonuses and penalties were stimulated to encourage better performance and progress of the works. (ii) Table A summarizes the project of the Cobriza Expansion Project in May 1983. -23- The main reasons for progress and/or delay are as follows: Progress: Civil works and electromechanical assembly (EC-8 and EC-13): The- mechanical works of the concentrator plant were completed one and a half months early because of implementing the accelerated construction program submitted in 198L Delays: - Extraction shaft (EC-23): The delay in starting this work was due to management negligence, and underestimating the period of execution, in addition to excavation problems caused by water and terrain difficulties. Problems with the contractor owing to both his internal problems and work difficulties, . have caused the mechanical completion of the shaft to be rescheduled for August 1983. Because of this, several agreements were concluded to solve the field problems existing at the start of the work. - Mine services (EC-37): This contract was terminated and is being liquidated. Because of the late start, technical-financial deficiencies, and the inexperience demonstrated by the contractor, this contract was cancelled and the work was taken over directly by Centromin Peru. -24- STRETCH OUT OF COBRIZA PRITECr ACTIVITIES FROM THE ORIGINAL IBRD SCHEDULE - The actual date of signature of the contract with the project managers is May 26, 1977, which is two years after the date originally programmed by the Bank. - The services of the project managers were suspended from February 10, 1978, to May 22, 1979, because of lack of sources of tinancing. - For the above reasons, detailed engineering services began on November 1, 1979, and were completed on December 30, 198L - Because of the above delays, the plant's mechanical work was not completed until may 29, 1982, despite the CmP's development and implemention of a crash program. - Procurement and civil works began in 1980 and were completed in May 1982. - Mine development and services began in 1980. Work has continued to date and is expected to be completed by lateSeptember 1983. The delay in the mine preparation and development activities scheduled by the managers is due to the inefficiency of the project managers, and its failure to meet its work schedule, particularly the min,- development works (this work was taken over directly by CENTROMIN. - The Mantaro-Cobriza electric power line was completed in May 1981, with a slight delay because of slippage in the supply of substation equipment. - Mine development continues under way, and design capacity is expected to be reached when the production shaft is completed. -25- TABLE A SUMMRY *PRRESS CHART MAY 1983 THIS REPORT TAGE Project Procure- Construc- Mine Urban 69 KV MC Eng.&Adm. ment tion Devel Center Trans.Line Total 7 0- 70- -so- 10- 20- Percent. of Total Project 16 32 24 17 6 5 100 Project Engineering and Administration continues to be under the CMP Administration. Procurement: Some purchase orders, mainly for mine equipment, are pening. Construction: Awaiting only the tailings thickener. Mine Development: Will be completed in October 1983, according to the CmP- Cobriza operations time schedule. Urban Center: Completed in June 1983. Mantaro Cobriza 69 KV Transmission Line: Work completed. -26- - Mine Planning: Because of deficiencies and delays in the mine planning submitted by the managers, the company had to intervene in preparing it when this activity was already in a critical phase. This caused delays in start-up of the development work and preparation of the mine, so that these works had to be taken over by Centromin Peru. In aodition, the contractor, did not meet contract deadlines. - Tailings thickener: The design and supervision of the thickener works were entirely the responsibility of the managers. Because of ground faults, bad compacting and design errors, the structure collapsed twice. For that reason, the CMP decided on another system for water supply, and abandoned the thickener system. The new system involves pumping water from the Mantaro river and is fully under way. Legal action has been taken against the firms responsible for the problems. Table 8 lists the contractors and shows the contractual and actual completion date, comments on progress, delays, penalties and incentives. TABLE B COBRIZA EXPANSION PROJECT STATUS OF MAIN CONTRACTS As of Hay 31, 1963 Actual Contract Extension Actial CONTRACT start*up completion of delivery cnmpletion AMOUNT No. Date DESCRIPTION date date deadline date Bonus Penalt) COMENTS EC-1 12/19/79 Excavations and 01/09/80 05/28/80 07/27/80 10/14/80 No penalty for explorations transaction arrangement F.C-2 03/26/80 Mine Development 04/15/80 01/31/82 02/28/82 Under way, to be completed in June 1983 EC-3 06/26/80 Production of aggregate 07/18/80 12/31/81 --- 11/30/81 Completed and cement blocks KC-5 01/02/80 Development of detailed 02/04/80 08/04/82 07/31/82 engineering EC-7 09/26/80 69 KV Mantaro-Cobriza Lines 11/03/82 09/03/81 01/03/82 02/04/82 4.412,870 32-day delay EC-8 07/22/80 Civil construction 08/01/80 05/10/82 --- 11/30/81 123,704,098 130 days early 01/15/82 --- 12/02/81 15 days early 05/07/82 --- 12/31/81 127 days early 05/30/82 --- 12/31/81 50 days early EC-10 04/18/80 Construction of 8 type 04/18/80 09/15/80 10/30/80 12/22/80 --- 1,466,438 52 days delay 2/3 buildings, uncompleted 01/17/80 --- 2,932,877 receipt 3 bldga. 78 days delay. receipt 4 bdgs. EC-10A 09/15/80 Completion of one type 2/3 09/16/80 11/15/80 - - 01/31/81 509,295 76 days delay C-23 building EC-13 01/01/80 Electromechanical 01/15/81 07/31/82 --- 06/14/82 272,945,732 --- 47 days early installation Table B - continued Actual Contract Extension Actual CONTRACT start-up completion of delivery completion AMOUNT No. Date DESCRIPTION date date deadline date Bonus Penalty COMMENTS EC-14 09/05/80 Urban housing 10/02/80 03/01/81 03/26/1al 9/15/81 --- 8,Ui,779 61 days delay 06/26/81 07/15/81 EC-17 10/10/80 Structural steel fabrication 11/10/80 06/25/81 --- 06/10/81 EC-23 04/20/81 Raise between levels 10 and 04/20/81 06/30/82 04/20/83 Freezing of 28, Including installations 06/18/83 indices from 07/09/83 06-19 to 07/09/83. Scheduled date of delivery August 198? EC-29 05/24/82 Construction of Collpa- 06/01/82 09/30/82 10/25/82 10/25/82 For longer length IIuancayo transfer station of excavation and late delivery of terrain EC-33 03/11/81 Structural steel fabrication 03/21/81 10/21/81 01/20/82 01/20/82 EC-34 33/18/81 Construction 31 buildings 03/28/81 11/22/81 02/03/82 01/11/82 10 type 3/4 D-23 bldge. 01/21/82 and 21 type 2/3 C-23 b1dge. 02/08/82 1,939,992 4-day delay 02/16/82 3.243,960 12-day delay BC-37 07/09/81 Complete assembly and under- 08/03/81 05/09/81 Scope of work wes ground services reduced, balance was turned over to CMP Operations to complete the work, which was delivered June 1983. RC-39 05/25/81 Structural steel fabrication 07/10/81 11/10/81 08/28/82 08/28/82 7.221,420 Delivery extended according to (illeg.) 10/03/82 2,413,680 Penalties imposed EC-46 04/30/81 Urban equipment 05/01/81 01/25/82 03/02/82 03/01/82 2,858,960 for not meeting assigned quota. EC-50 12/07/81 Construction housing and 12/07/81 08/04/82 Taken over by the CMP, will be delivered in June 1983. -29- g) Cost of Capital, Financing and Disbursement (1) Table 2 shows, by investment category, the original, actual and forecast cost, in both local and foreign currency. (1i) The cost of the projects, partially financed by the World Bank in 1976, was US$176.2 million, of which USS160.9 million went to the Cobriza Project and US$15.3 million went to the Mine Water Project. After a suspension of about 16 months because of financing problems in the project for expanding the Cobriza mine and concentrator, the Peruvian government, the international financing agencies and the company itself took a number of actions and decisions to enable the project to be resumed. In fact, after exhaustive studies to determine the amount of investment, taking into consideration among other factors 1) cost increases because of the time elapsed, 2) addition of required project items that had been omitted in the original study, 3) and complete maintenance of the concentrator plant in Pampa de Coris, in April 1979, the investment was adjusted, since the project was to resume by July 1, 1979. The project estimate at that time was US$18L3 million, a figure used for the economic analyses. The breakdown for this amount is shown in a table. In December 1979, the managers prepared and submitted to Centromin a new investment budget of USS240,661,000. This new estimate was substantially increased over the one drawn up in April 1979, mainly because of: -- Revision of the mining plan. -- Escalation during the months the project was suspended, which was reflected in a considerable increase in the equipment, materials and spare parts to be purchased abroad. - Variation in the exchange rate of national currency against foreign currency, because of the high local inflation forecasted for the project execution period. As is usual in investment projects of this size, the managers readjusted the estimate monthly according to the direct cost trends, but without substantial variations, except for the estimate submitted in November 1980 to the CMP, which was exhaustively reviewed by the GEP and cut from USS277,053,000 to US$261,242,000 in March 1981. Later, at the suggestion of the GEP, closer participation in updating the estimated-costs for project completion was established, which made it possible to cut the budget submitted by tie managers to US$240 million. This forecast was estimated based on the CMP commitments as of May 31, 1983, which amounted to US$222.98 million. -30- TABLA No. 2 COBRIZA MINE EXPANSION PROJECT PROJECT COMPLETION REPORT EXPENDITURES & COMMITMENT (US$ Millions) Appraisal Estimate Actual * Foramst Ioa Foreign Total Local Foreign Total Local Foreign Total rm Development & Sift Preparation 7.5 1.9 9.4 37.721 0.051 37.72 42.479 -0.209 42.688 Plant & Equipment (including spare purts) 6.9 26.5 33.4 22.019 31.317 53.336 22.359 3.335 60.694 Civil Construction & Erection 10.4 &7 161 43.210 6.805 50.015 46.200 10.438 56.638 Freight & Transport 1.0 3.5 4.5 1.292 5.691 6.983 1310 6L190 7.500 Engineering, Project Manage- flent & Supervision 2.0 65 85 16.405 16.963 33.368 17.959 17.211 35.170 Total Base Cost Estimate 27.8 44.1 71.9 120.647 60.827 181.474 129.957 12.233 202.190 Physical Contingencies 4.2 5.9 10.1 - - - - - -- Price Escalation 211 18.8 39.9 - - - - - - Total Fixed Assets 53.1 68.8 121.9 - - 130.307 12.383 202.690 Working Capital 12.2 - 12.2 0.030 1.376. 1.406 0.034 1376 1.410 Project Cost 653 68.0 134.1 120.677 62.203 182.880 130.341 73.759 204.100 Interest During Construction 15.8 11.0 26.8 8.000 21.538 29.538 8.900 27.000 35.900 Undistributed Suspense Accounts 4.077 6.486 10.563 Total Financing Required 81.1 79.8 160.9 132.754 90.227 222.981 139.241:180.759 240.000 As of May 30 1983 -31- (iii) To cut the cost increases resulting from the programming prepared by the managers, which scheduled the mechanical completion of the plant in November 1982, the Centromin Department of Project Execution prepared and implemented a crash program and offered financial incentives to the contractors to advance the completion dates of civil construction and electromechanical assembly. This made it possible to complete those works before the date set in the crash program (June 1983). The congruence of these factors and the establishment of proper budget control by the GEP, through analysis, review and direct participation in the periodic updating of the forecast final cost for completion of the project, made it possible to cut project costs substantially. As mentioned in the above paragraph, this reduced the budget submitted by the managers in November 1980 from US$277 million to US$259 million in the first revision, a figure that was succe ssively adjusted through the cost control procedures pre-established by the GEP. In addition, Centromin Peru used its own resources to design and execute the hydraulic fill system, redesigned the mining plan, and constructed the railways throughout the mine. In addition, it hired local engineering services for the detailed design of several industrial buildings, such as surface and underground workshops, locomotive workshops, painting and tires shop, and so on, which made it possible to begin construction of them before the scheduled time. Moreover, when it was found that the project management was not entirely satisfactory because of the characteristics of the project and because qualified personnel was not available, especially for mine discipline, and taking into consideration that a cost plus contract had been concluded with them, which because of its characteristics would increase the expected final cost, the demobilization of the management staff was rescheduled so that it would take place as soon as possible. (iv) Comparison between the original and actual financing plan The original financing plan estimated the total investment of US$176.2 million, of which US$160.9 million was for the Cobriza Mine Project and US$15.3 million went to the Mine Water Plant Project. These amounts are covered with funds from the IBRD, ID8 and COFIDE loans, and the project's own funds (See Table 3.3). In implementing both projects, it was found necessary to make substantial chanyges in the financing plan, mainly because of cost overruns, especially for Cobriza, and the sizeable reduction in the COFIDE loan from US$99.8 million to US$5.4 million. The resulting financing gap brought the Cobriza project to a halt early in 1978. -32- Because of the increased fund requirements, Centromin Peru, after getting the authorization required, arranged for additional loans in foreign and local currency and for contributions from the federal government through direct support and support for capitalization of taxes and through IDB loans (48/IC-PE) and (352/OC-PE). The latter loans became part of the company's capital. In addition, the disbursement deadlines for the IBRD and the IDS loans were expanded from four to six years for %orld Bank loans and from four and a half to six and a half years for the IDB loan. Table 3.3 shows the current financing plan for both projects. Table 3.4 shows the characteristics of the loans extended for participation in financiny both projects. (v) System for management of financial resources The system used to manage the financial resources provided by the World Bank takes into consideration the two opposing currents represented by the agencies providing and using those funds. In this connection, the project management negotiated the form of payment with suppliers, and the procedure adopted was to make payment for goods and/or services against submission of documents, letters of credit, etc. Having defined these conditions, they were reported to the financing agency concerned to request payment through disbursements (direct and/or reimbursement) or to request guarantees of reimbursement for letters of credit. In most commitments, bridge loans have been used for timely disbursement of the amount due the supplier, and these amounts have been paid with the reimbursement from the financial agency of the project. While this system raised the project's costs, the increases were justified by the discounts received, and for that reason, incurred costs were lower. In addition, this made early delivery of the equipment purchased possible, which was of great importance in implementing the project. Letters of credit were used when required, and commitments were made from the time credit was opened with the financing agency, as established. In handling financing from the IDB, the above-mentioned system was employed, and advance payment for future exPenditures were made, which substantially lowered the amount of the bridge loans required. -33- Freely available credits were used as required (expenditures in local currency), and the same was true for buyer's credits (Swiss loans in the Cobriza project), in which the mode of payment was defined when the loan was extended. In addition, Peruvian Government funds were used to cover local costs, particularly customs duties and income taxes on noidomiciled firmse, for which notes were employed as the form of contribution. (vi) The disbursement programs of the World Bank loans were altered substantially because of changes in the execution program of both projects. For the Cobriza project, this shift became substantial, because of the approximately one and a half year suspension of this project from early 1978. Based on the foregoing, extension of the loan disbursement period to 31 December 1982 was negotiated (the original date was 31 December 1980). The loan disbursement program coincided with the progress of the projects, and the largest disbursement for CObriza was in the second half of 1980 up to the end of 1981 and in the Mine Water Project from the start of 1979 to the second half of 1980 (see Table 3.1). The amounts budgeted by category varied with the actual fund requirements for specific categories, due mainly to higher costs for the project's goods and/or services, and the terms of the additional loans extended, particularly regarding the nationality of goods purchased. The latter compromised the amounts of certain equipment with some financial resources. The pari-passu percentage financed was maintained throughout the project, as originally established (see Table 3.2). -34- TABLE 3.1 PERU: CENTROMIN EXPANSION PROJECT PROJECT COMPLETION REPORT DISBURSEMENTS OF BANK LOAN (US$ Milliors) BANK FISCAL APPRAISAL ESTIMATE ACTUAL YEAR AND QUARTER DISBURSEMENT CUMULATIVE DISBURSEMENT CUMULATIVE 1976 III 2.5 2.5 - - IV 2.5 5.0 - - 1977 I 2.5 7.5 - - II 2.5 10.0 0.3 0.3 III 3.0 13.0 0.6 0.9 IV 3.0 16.0 0.7 1.6 1978 I 3.0 19.0 0.4 2.0 II 4.0 23.0 0.4 2.4 III 4.0 27.0 - 2.4 IV 3.0 30.0 0.3 2.7 1979 1 3.0 33.0 0.1 2.8 II 3.0 36.0 0.6 3.4 III 2.0 38.0 0.5 3.9 IV 1.0 39.0 1.4 5.3 1980 I 0.5 39.5 0.6 5.9 II 0.3 39.8 2.0 7.9 III 0.2 40.0 3.0 10.9 IV - 40.0 3.6 14.5 1981 I - 2.7 17.2 II - - 7.1 24.3 III - - 1.9 26.1 IV - - 4.2 30.3 1982 I - - 1.5 31.8 II - - 3.3 35.1 III - - 0.8 35.9 IV - - 3.2 39.1 1983 I - 0.6 39.7 I/crp. -35- TABIE 3.2 PERU: CEWTOMEN EXPANSION PROJECT PROECr OMPIETION REPORT ALLOCATION OF THE BANK LOAN (US$ Millian) % of Foreign % of Foreign Amount of Expenditures Amount of Expenditures the loan to be financed the loan to be financed j. Solvent Extraction Electro-Winning Plant Cerro de Pasco 1/ 3.0 55% 1.9 55% 2..Mining Equipment-Cobriza (load-haul - dump units, raise borers, drilling e quipment) If 6.0 55% 2.9 55% 3. Concentrator Plant (Crushing and grinding equipment, flotation and settling tanks, associated utilities and buildings) 1/ 15.0 55% 17.8 55% 1. Engineering, Project Management, Technical Assistance 4.0 55% 5.8 55% i. Miscellaneous Equipment and Services 2.0 100% 5.3 100% i. Interest and Other Charges Accrued on IBRD Loan 7.0 Amounts due 6.0 Amounts due 7. Unallocated 3.0 - 40.0 .39.7 1/ Including spare parts and foreign freight. -36- Table 3.3.a PRUW: Cw EXPANSION PROJECr PROJECT EMPLSTION REPORT. FINANCIIG L Millions of uS$) A) ORMGINAL PLAN SOURCE m E T Cobriza Mine IBRD 36.447 36.447 IDB - 30.446 30.446 COFIDE 79.800 11.707 91.507 cmp 1.800 1.200 2.500 SUBTIWAL 81.100 79.800 160.900 Mine Water Plant IBRD 3.553 3.553 IB - 2.954 2.954 COFIDE 6.500 1.793 8.293 cMP 0.200 0.300 0.500 SUBTOfAL 6.700 8.600 15.300 TOAL (A) 87.800 88.400 176.200 -37- Table 3.3,b PERU: CP EXPANSION PROJECT PROJECT COMPLETION REPORT FINANCDG (Ir Millions of USS) B) CURRENT PLAN SOURCE MN ME T Cobriza mine IBMD - 36.318 36.318 IDB 2/IC-Pe - 31.069 31.069 IDB 48/IC-PE 18.600 11.400 30.000 IDB 352/OC-PE 3.000 - 3.000 COFIDE I 4.792 - 4.792 (1) COFIDE II 14.500 - 14.500 (2) Peruvian Government 25.110 - 25.110 (3) EXIMBANK - 3.102 3.102 SEB - 1.573 1.573 WELLS FARGO 35.088 6.852 41.940 CMP 38.151 10.445 48.596 Subtotal 139.241 100.759 240.000 Mine Water Plant IBRD - 3.413 3.413 MDB - 2.331 2.331 COFIDE 0.655 - 0.655 (1) Peruvian Government 1.280 - 1.280 (3) CMP 6.765 0.856 7.621 Subtotal8.700 6.600 15.300 TOTAL 167.041 88.259 255.300 NOTES (1) The contribution of the credit for the originally agreed upon amount of US$99.8 million. (2) Loan extended in national currency for S/. 9.46 billion (US$14.5 million equivalent). (3) The Peruvian Government"s contribution of S1. 9 billion, of which S/. 3.1 billion was a direct contribution and S. 5.9 billion was used for capitalization of taxes. LOANS FINANCING TERHS Table 3.4 Grace Useful Amount Interest Additional Commitment Guarantee Period Life Contract LENDER ('000 t Rate Rate Commission Commision (Year) (Year) Date IBRD 40,000 8.5 biannually - 0.75 1.50 4 15 12/06/76* Inter-American Development Bank 33,400 8.6 biannually - 1.25 0.25 7 15 12/06/76 (1) Fximhank (2) 3,102 8.75 - (3) " - 0.5 0.75 5 8-1/2 06/02/81 Wells Fargo Bank (4) 64,500 Libor-quarterly 1.125-1.25 (5) 0.375-0.5 (6) 0.25 3 8 08/25/80 Skandivanistka Enskilda Banken (7) 15,000 7.75 biannually 0.25 0.1 (8) (9) (10) (10) 11/21/80 Cofide 1I- Oper. "A" 8/.4,730.0 MM 54 -quarterly 1.5 1.0 - 4 (11) 8 (11) 03/01/82 Oper. "B" S/.4,730.0 MM 54 -bimonthly 2.0 (12) - - 1 2/3 4 (11) 03/01/82 advanced (11) Cof ide I - S/.1,263.8 MM 54 -biannually - 0.75 - 6 12 04/20/77 (C) The contractual disbusement deadline was amended an 21 Sept. 79. (1) Deadlines were changed on 31 Hay 79. (2) Participants in financing 42.5% of capital goods and/or services of the Cobriza project. (3) Was changed to 10.75Z as of 15 Dec. 82. (4) Financing of the Cobriza project and others. (5) 1.125% for the first 36 months. (6) .375% for the first 18 months an 80% of the balance of the unutilised loan. (7) Financing of 852 of capital goods and services of Swedish origin (includes other projects). (8) For unutilized balances from acceptance of the SEB of delivery contracts. (9) Flat commission - 0.5% management commission and 2.5% credit insurance comission. (10) Repayment in ten biannual quotas, beginning with the equipment delivery date. (11) Starting with the effective date of the first disbursement. (12) Was changed to 32 starting December 1982. -39- (vii) Problems in the World Bank's Disbursement Procedures Several problems have been found in the IBRIWs loan disbursement procedures regarding the timing of disbursements. Specifically, some disbursement requests were only partially met, apparently because purchase orders and/or exchange orders were not submitted or because bidding documents were not approved, so that receipt of the amount requested was delayed. In addition, confirmation of disbursenents has been received after their effective date, which prevented -the net amounts available in the project's account from being known. We believe that these problems can be solved in time if there is better coordination between the areas involved, and regarding the problem in the previous paragraph, the borrower should be informed by telex of the tiwe of each disbursement. These measures will enable funds to be obtained on time, and therefore, to reduce the gap between submission of the disbursement request and confirmation of it. There is one aspect of this subject that deserves special attention, and that is the length of processing of a disbursement request. The problem begins with the inappropriate method of remission by mail. On average, a disbursement takes 40 days from the time the request is sent. This has caused bridge funds to be preferred for paying suppliers, and these funds were later reimbursed by the bank. On the other hand, we recognize that the disbursement system has produced good results where there has been appropriate coordination. (viii) Performance of other lenders Commercial loans extended to finance the projects have been freely available and have required a simplL disbursement procedure. Therefore, the more complicated requirements for disbursement requests, such as the World Bank procedures, and to a considerable extent those of the IDB and EXIMBANK, were eliminated. However, EXIMBANK deserves special mention because of the rigidity and more complicated requirements of its procedures, which has caused delays in receipt of clsbursements. The timeliness of disbursement by the financing agency has been the difficulty encountered with this type of credit. In addition, the reduction in the amount of the COFIDS loan caused a substantial change in the projects' financtng plan. This reduction was brought about by Perus difficult economic and financial situation in 1977-78, when the government was forced to cut its capital contributions to COyIDE and that agency had to decrease its contributions of funds earmarked for implementing projects. -40- After this situation, a loan in national currency was agreed upon with COFIDE for US$14.5 million equivalent, which has not been entirely disbursed because of that agency's liquidity limitations. It should also be mentioned that, while the World Bank granted an extension in the loan disbursement deadline because the project completion date was deferred, the Bank did not grant an extension for starting the repayment period, or in any case, a reduction in the amount of initial amortization payments, since the loan had not been entirely disbursed. This caused an additional cost, which Centroain Peru had to cover. (ix) Table 4 shows the disbursement schedule for 1976-83. III. OPERATIONS PERFORMANCE a) Plant Tests and Star (1) The major problems encountered in the plant startup were as follows: the electric locomotives had to be modified to pass through the loading station of the bottom dump cars. The low capacity of the hopper under the crusher did not permit continuous unloading of the mine cars if the ore contained the usual amount of fines, so that cars had to be unloaded intermittently instead of continuously. The delays in developing and working the mine shaft prevented Centromin Peru from exttacting the ore below level 28. As a result, mine production is not up to design capacity because only the stopes above level 28 can be worked. A large amount of fines dust originating in the storage zone has caused the electric substation equipment to malfunction. Large breaks occurred in the concrete cone slap of the tailings thickener because of subsidence under the structure. (ii) One problem in the plant startup, the modification of the locomotives, caused a delay of about one month. However, the problem has now been entirely solved. In the primary crushing system, the problem still persists, so that ore has to be hauled in three shifts to make up for the time lost in unloading the trains. A claim has been made against the managers who are responsible for designing the primary crushing system, and the performance bond is being executed. The ore from the level 10 stopes cannot be extracted at this time because the mine shaft and its installations are not yet ready. This means that the amount of ore needed to reach the desiyn capacity of the concentrator plant cannot be extracted yet. Starting July 9, 1983, the CtM1P will impose a contractual penalty on the contractor which performed the work. -41- TABLA 4 COBRIZA MINE EXPANSION PROJECT PROJECT COMPLETION REPORT CAPITAL COST DISBURSEMENT SCHEDULE" (US Ml1ions) Appraisal Estimate Acftul Tae freign Local Totalocal Total Accuated 1976 7.588 7.712 15.300 - - - 1977 18.797 19.103 37.900 3.102 3-153 6.2!5 6.M5 1978 26A35 26.865 53.300 3.051 3.101 6.152 1237 1979 24,9 25.101 49.00 4.256 4.326 8.582 20.1 1980 2.281 2.319 4.600 21.144 21.489 42.633 63J2 1981 - - - 17.877 61.859 79.736 143.58 1982 - - - 32.831 35.672 68.50 211.31 JardMayla3 - - - 7.966 3.154 1.120 222.t Concllijation Accounts" - - - .452 2.587 12.019 235.160 hsrVDecl83 - - - 1.080 3.920 5.000 240.10 TOTAL 79.800 81.100 160.900 100.759 139.241 240.000 Sasd upon final forecast of $240.000 MM. laciudes financial charges up to May 19S3. ** Appraisal frrm concilliation between CMP's and DMK's costs registered. Tbese 4uantities have already been expended but not registered correctly yet. -42- Pollution in the fines storage area continues to cause malfunctions in the adjacent substation, which has compelled Centromnin Peru to install a pressurization and air conditioning system. The tailings thickener cannot be used because of the serious settlement that occurred during its construction, which compelled Centromin Peru to install another water suply system for low water periods. Payment for damages to the th1ckener have been negotiated with one contractor, and a claim has been made against the contractor responsible for the compacted filL In addition, a claim has b en made against the managers of the project, responsible for the design and supervision of the thickener construction. (iii) The managers drew up the plant test and startup program in coordination with Centromin Peru. Specialized experts of the managers were assigned to the various areas to carry out the program, and they were entirely responsible for this work. The technical staff of Centromin Peru and contractors gave full support to the managers in providing equipment, labor and sup4lewentary facilities needed to achieve this objective. The coordinated work of the managers, Centromin Peru and the contractors made it possiole to carry out the crash construction program to start up the plant on May 30, 1982. b) Work Force (i) The project was managed on the basis of a time schedule for personnel requirements, both for managers and their national associates. Project activities were implemented in the USA, Lima and Cobriza. The managers had to hire specialized personnel in each field, and the national firm provided additional technical staff in Peru. In addition, Centromin Peru provided through its Project Administration the experienced technical staff required to represent the enterprise and coordinate the work. For some of the main plant, mine and services equipment, the managers and Centromin Peru assigned technical personnel for inspection and final delivery. In addition, they were given training in some areas of their specialized field. In implementing the project, the managers encountered many personnel rotation problems, since many of the managers' technical staff had to be replaced because of deficiencies. The main staff problem was in the mine area, because needed specialists were not available. This gap was filled with the aid of Centromin Peru specialists. The Cobriza Expansion Project for the Mine and Concentrator required a hutaan resources infrastructure in keeping with the volumie of work and the amount of investutent involved. -43- In may 1979, a staff organizational chart was defined with dynamic criteria, taking into account that minor changes would be required in the structure during the perfornance of the work. The firm selected to manage this project provided the foreign staff required for the organizational structure mentioned, and asked Centromtin Peru to take charge of all human resources management, as stipulated in our labor laws. So in September 1979, Centromin peru providec, through its Industrial Relations Department, an agency in charge of recruitment, selection, hiring, training, and other personnel management functions. From 1979 to date, this department has also been responsible for the already specified functions of wage administration, labor relations, and social welfare and education program's. An important achieveent is tne fact that during this period (1979 to date) no interruption in the work occurred for reasons of work stoppage or strikes. The following tables summarize the Cobriza Project personnel management: - Project Organization Chart for the Lima managemuent Office-- Table C-1. - Project Organization Chart for the Field. - Summary of recruitment, selection, hiring and mobilization of personnel contracted: (see Table C-2). . December 1980 . December 1982 . June 1983 - Annual summary of man hours worked for the project in the USA, Lima and in the field -- Table C-3. In implementing the Cobriza Project, no specific CMP staff training program was set up for a specified period, but actions were established to be carried out on resuwaption of basic engineering extension by the project managers, such as: - Appointment of a CMP representative in the U.S. offices, who would approve and return all plans, documents and technical information to the project managers within five days. This action was taken to speed up the basic engine.ring. The -2 representative, a specialist in structural design, was at that post from July 1979 to September 1980. Also during that period, the CMP specialized staff were assigned to the managers' offices, both in the Operations Division, and in the Project Execution .ivision to participate in review and determination of the final scope of the project expansion in various fields, such as: -44- - Mine Engineering (2 professionals) - Electrical Engineering (2 professionals) - Civil andi Structural Engineering (2 professionals) - Mechanical Engineering (2 professionals) - During the period for procurement of materials and equipment, follow-up of purchase and inspection of the manufacturing of both foreign and national suppliers was the responsibility of the aanagers, who, through their offices in USA, and their affilix:es in other countries, sent specialized technicians for inspections and tests. -45- Table C-2 SUuEARY OF RECRUITMENT AND SELECTION COBRIZA EXPANSION PROJECT SEPTEMBER 1979 - JUNE 83 SEPT. 1979 to 1983 1983 1983 1983 DEC. 1982 JAN-MARCH APRIL MAY JUNE TOTAL Personel interviewed 2,168 - - - - 2,168 psychological evaluation of 875 - - - - 875 applicants SUMMARY OF HIRED PERSONNEL ALUST 1979 - JUNE 1983 WHITE COLEAR Lima 102 - - - - 102 Cobriza 151 - - - - 151 253 BLUE COLLAR Lima 25 - 25 Cobriza 933 - 933 958 PERSONEL SUMMARY COBRIZA EXPANSION PROJECT INCOME AND EXPENDITURES SEPTEMBER 79 - JUNE 83 INCOME EXPENDITURES ToAL ACUAL NET WHITE COLLAR Lima 102 75 27 Cobriza 151 135 16 43 BLUE COLLAR Lima 25 22 3 Cobriza 933 833 100 103 146 TABLE C-3 COBRIZA EXPANSION PROJECT PROJECT MANAGER'S PERSONNEL (IN US$) SUMMARY OF MAN HOURS AND COSTS PERU (*) U.S.A. - ADMIN. BASIC ENG. EST. (U.S.A.) BILLINGS SOCIAL GENERAL PERIOD MANHOURS AMOUNT MANHOURS AMOUNT MANHOURS AMOUNT AMOUNT BENEFITS SUBTOTAL COSTS TOTAL 1977 2,088.00 35,449.31 11,929.35 127,849.53 - - 163,298.84 51,599.80 214,898.64 136,507.36 351,406.00 1978 2,144.00 42,086.78 7,481.50 84,109.81 126,196.59 40,742.70 166,939.29 100,231.30 267,170.59 1979 6,928.00 150,908.91 19,113.00 257,959.41 43,596.25 540,939.40 949,807.75 326,023.62 1,275,831.37 720.371.05 1,996,210.42 1980 27,254.50 623,635.72 44,408.25 574,279.74 43,997.50 549,172.78 1,747,088.24 636,990.12 2,384,078.36 1,309,557.67 3,693,636.03 1981 30,123.00 763,031.59 31,998.75 480,096.71 - - 1,243,128.30 464,758.19 1,707,886.49 881,847.11 2,589,733.60 1982 21,267.00 540,209.04 12,593.75 232,780.09 - - 772,989.13 303,364.23 1,076,353.36 513,843,61 1,590,196.97 TOTAL: 89,804.50 2,155,321.35 127,524.60 1,757,075.29 87,593.75 1,090,112.21 5,002,508.85 1,823,478.66 6,825,987.51 3,662,366.10 10,488,353.61 0\ (*) Personnel in Lima and Cobriza Lima, June 27, 1983 GEP - Projects Control -47- Only in a few cases did the CMP assign technical and professional staff to some countries for final inspection and training in the equipment purchased for the project, such as: - Xray analyzer 2 Engs. 7 days - Electrical Equipment 2 Engs. 5 days - Electric Locomotives 1 Eng. 7 days - Raise Boring 1Eng. 7 days - Transmission Line Substation 1 Eng. - In addition, practical technical training courses were givqn in Peru by the CMP training department for mine area personnel, operating in maintenance work on the various equipment purchased for working the mine. This training proqram involved the following personnel: Men in Class Man Course Hours Hours Mine Operators 334 620 -3,340 Mechanical maintenance 642 930 6,420 Electrical maintenance 184 260 1,840 TOTAL 1,160 1,810 11,600 Note that this training program was conducted by the CMP training department, whose staff translated manuals, drew up the training plan, selected wine operators, coordinated the mechanical and psychotechnical examinations, and set up a mine school for this purpose. In addition, the suppliers of some equipment for both the mine and the concentrator plant sent representatives to Peru for startup of operations and tests with and without load. After startup, some equipment suppliers instructed the CMP technical- professional staZx on maintenance of the equipment. c) Organization of the Borrower (I) The Project Administration provided coordination between the managers and Centromin Peru and acted as the official representative of the company. It was composed of experienced professionals in the fields of management, engineeri., -48- procurement, and so on. This organization was maintained with slight changes throughout the project, and help was provided by the specialized offices of Centromin Peru in engineering, logistics, f inance9, and so on. The organization tables of the administration and the managers are included, and in general have not changed their structure to date (Tables 0-1 and D-2). However, it should be noted that Centromin Peru substantially increased its participation in the mine development and preparation work, for which purpose it had to establish a field unit to take over the managers' responsibilities in the mining area. (ii) To carry out the Cobriza Project, the Company had to set up and improve theproject accounting area. In addition, Centromin had to create in both Lima and Cobriza specialized areas such as financing, logistics, industrial relations, information science, traffic and customs clearance and an operations division for the mine, plant and services. The Project Execution Division participated actively in coordinating the work performed at the company leveL d) Work Force Increase Project activities required an increase in the Cobriza work force, as broken down below: 2600 IM 2 1,r T S Top Management 21 33 White Collar 8 116 Blue Collar 337 500 TOTAL 438 649 -49- d) Production and Capacity EstImt& () The following table shows production for may-December 1982 and January-June 1983 (Table E).. (11) The main problems that prevented the program estimate from being attained are the following:. Mine Problems Failure to complete the production shaft (contractor). Failure to complete mine development work-ore pass, stopes, zig-zagsv etc. (contractor). - Failure to complete mine services works-underground workshops, ventilation, etc. (contractor). - Technical difficulties with the DU low profile trucks (supplier). - lAw grade of the copper ore. Plant Problems Primary crusher (design). - Ore transport system (supplier). - Primary and secondary crusher belts (supplier). - Tailings thickener (design-contractor). - Filters (supplier). In all cases, the company solved the problems through the Project Execution Department and the Operations Division, made the changes required, and took alternative steps to permit continuous operation of the concentrator plant. The problems that prevented meeting the production schedules were due in some cases to engineering design errors and in others to poor performance and quality of the equipment as well as poor performance of the contractors. (111) The project's future production is as follows (in tons of 26% CU concentrates). 1983 117,000 TCSA 1984 170,000 TCSA 1985 .170,000 TCSA 1986 170,000 TCSA 1987 170,000 TCSA 1988 170,000 TCSA TABLE E MONTHLY PRODUCTION MAY 1982 - 1983 MINE PRODUCTION CONCENTRATOR PRODUCTION Tons Month Tons ore % CU Ag (oz) Concentrate % Recovery % CU Ag (oz) H20 % May 78,128 1.38 0.37 3,839.1 87.70 24.63 4.09 12 June 95,990 1.19 0.34 4,227.5 89.15 24.16 4.68 12 July 117,808 1.31 0.38 5,506.3 87.40 24.10 4.66 12 August 131,367 1.40 0.37 6,444.8 87.44 24.95 4.39 12 September 150,181 1.33 0.40 6,692.2 83.06 24.79 5.30 12 October 156,352 1.26 0.33 7,136.4 91.17 25.17 4.27 12 November 167,113 1.14 0.32 6,699.9 90.12 25.63 4.25 12 December 154,115 1.22 0.34 6,698.5 89.87 25.23 4.73 12 January 182,209 1.18 0.33 7,425.0 87.93 25.46 4.76 12 February 107,855 1.46 0.40 5,393.3 89.57 26.15 5.39 12 March 157,642 1.23 0.36 6,502.7 87.43 26.07 5.58 12 April 179,898 1.13 0.33 6,965.0 86.69 25.30 4.67 12 May 194,499 1.33 0.41 8,721.1 86.84 25.76 5.58 12 -51- IV. FINANCIAL-ECONOMIC ANALYSIS a) Income The project's income depends on the production level and the year- to-year copper and silver prices. Our forecasts for these prices are as follows: Price of CU Price of Ag Year in US$/1b. in US$/oz. 1983 0.782 11.170 1984 0.981 10.500 1985 1.292 10.300 1986 1.240 10.090 1987 1.259 9.890 1988 1.278 9.690 Based on this data, the total value of year-to-year production is as follows: Value Copper Concentrates (in USS) 1983 1984 1985 1986 1987 1988 Payment Copper 375.121 470.880 620.160 595.200 604.320 613.440 silver 45.719 42.977 42.158 41.298 40.480 39.661 Total 420.839 513.857 662.318 636.499 644.800 653.101 Deductions Base rate 54.431 54.431 54.431 54.431 54.431 54.431 Freight and Ins. 37.500 37.500 37.500 37.500 37.500 37.500 Insurance 0.916 1.149 1.520 1.455 1.476 1.497 Handling and packing 2.000 2.000 2.000 2.000 2.000 2.000 Wastage 1.214 1.557 2.105 2.010 2.040 2.071 ENAPU 4.000 4.000 4.000 4.000 4.000 4.000 MINPECO 4.920 6.312 8.533 8.147 8.271 8.395 Tax (3%) 4.920 6.312 8.533 8.147 8.271 8.395 Transportation 18.200 18.200 18.200 18.200 18.200 18.200 Subtotal 128.100 131.460 136.822 135.889 136.189 136.489 Contingencies (10%) 12.810 13.146 13.682 13.589 13.619 13.649 TOTAL 140.910 144.606 150.504 149.478 149.808 150.138 Net Tons 279.929 369.251 511.814 487.021 494.992 502.963 TOTAL VAWE 32.752 62.773 87.008 82.794 84.149 85.504 ThWSA -52- b) Operating Costs Operating costs for the coming years are shown below: Total Operating Costs (In US$) 1983 1984 1985 1986 1987 1988 Mine Cost 6.350 6.350 6.350 6.350 6.350 6.350 Concentrator Cost 3.290 3.290 3.290 3.290 3.290 3.290 ST Cost Operations (thous.) 26.510 33.740 33.740 33.740 33.740 33.740 Contingencies (10%) 2.651 3.374 3.374 3.374 3.374 3.374 Total Cost Operations (thous.) 29.161 37.114 37.114 37.114 37.114 37.114 c) Financial Statements (i) The income statement (F-1), the assets balance sheet (F-2), the liabilities and net worth balance sheet (F-3) are attached. (ii) Table G-1 shows the financial projects for 1982-87. Table ?-j 1982-1987 PROFIT AND LOSS STATENTNT (In Millions of Solas and Dollars) 982 --- 1941987 ITEMS ORIGINAL BUDQ1 CURRENT PROJECT SOLES Dr;!.LARS SOLES US$ SOLES US$ SOLES US$ SOLES US$ SOLE$ US SOLES Us. Net earnings 300.143 434 594,780 496 729,346 476 1572,832 563 3275,51o 7t6 4909,984 69r 7'398,407 730 Sales expenses (226,523) (405) (402,072) (374) (398,727) (316) 890,327) (366) (1'597,6e9)(395) 2'557,209)(404) (3'848.589) (414) Gross Profit 73,620 29 192,708 122 330,619 160 682,505 197 1'677,821 321 2352,775 294 3'549.418 3.12 Margin 24.5t 6.7% 32.4% 24.6% 45.3% 33.62 43.40 35.0t 51.2% 44.5t 47.9t 42.1t 4S.o1 43.32 Depreciation ( 12,776) ( 1S) ( 30,69A ( 26) ( 25,520) ( 17) ( 95,412) %34) ( 208,153) ( 45) 435,405) ( 61) ( 717.q26) (7-) Compensations and pensions ( 33,846) ( 20) ( 35,890) ( 30) ( 58,849) ( 38) ( 68,115) (24) ( 108,984)( 24) 163,476)( 23) ( 228.,66) (23) Operating profit 26,998 ( 6) 126,125 66 246,250 105 519,978 139 11360,684 252 1175G,894 210 2*S71,026 219 Margin 9.0% (1.41) 21.2% 13.3% 33.8% 22.12 33.Ot 24.7% hi4.5% 35.2W 35.8% 30.1% 31,37 3002 Earnings and financing ( 83.371) (57.1) (146,876) ( 96) (196,920) ( 46) ( 309.379) (80) ( 452,308) ( 67)( 459,226) ( 3) ( 50)4. 1#59) (50) X expenses 27.8t) (13.1%) (24.7%) 09.4%) ( 27.0) (9,74) (19.73) (14.21) (13.3%) (i4t ( 9.4*) (7.6% (6.84 (6.3X) Interest ( 40,785) ( 57) ( 62,53]) ( 52) ( 88,909) (58) ( 131,318) (47) ( 288,221 ( 631 C 365,976) ( 52) ( 456,0v8) (45) iCchange and/or conver-() ann profit (loss) e-2,586) (0.1) 84,337) (44) (108,011) 12 ( 178,061) (43) ( 164,083) ( 4) ( 93,250)( 1) ( 4,18i () Profit (loss) before ( 56,373()'(63) ( 20,751) ( 30) 49,330 59 209,599 59 908,376 185 I'299,668 157 2*068,168 169 talces Taxes and appropriations .- - - - (1,78 (1) ( 85.079) (31) ( 400,228) (87) ( 407,619) (87) ( 1o33.660 (102) Speial expnditurms ( 21,893) (I8.9) - - ( 33,090) (26) - - - * - - Net profic (loss' ( 78.266) ( 82) ( 20.751) ( 10) 14,462 12 124.520 28 508.148 98 692,049 70 1'034,506 67 I8 Table F-2 1982-1987 GENERAL ASSETS BALANCE SHEET (In Millions of Soles and Dollars) 1 9 _ 2 i 9 9 19 1984 1985 1986 as87 ASS ETS REAL ORIGINAL BUDGET CURRNT PROJECT . SOLES USF- SDLUA US$ S0LEs US$ SOLES USm 0LS uSn SOLES US Sts US CURRENT ASSETS Cash and banks 5,425 6 3,000 2 3,500 2 5,728 2 10,492 2 16,653 2 24,977 2 Accounts receivable 24,159 25 91,843 63 107,110 52 350,809 o100 717,393 127 I052.455 125 I'548,566 131 inven. of Prod. in Processing 52,067 63 75,684 61 127:410 74 168,433 57 308,517 65 489.695 68 734,41 72 Inven. of finished products 17,929 22 35,162 27 41,400 23 63,955 20 111,733 22 180.780 23 273.381 25 Inven. or raw material 52,466 65 85,679 65 93,600 61 108,465 36 192,292 * 39 302,196 42 500,566 45 Misc. currant assets 1,808 2L 4.500 3- ,,,-- .Z.- TOTAL CURRENT ASSETS 153,854 183 295,868 221 378,020 212 697,390 215 1'340,427 255 2059,779 260 3*081,931 275 NONCURRENT ASSETS Fixed gross assets 488.007 773 761,546 834 1136,112 833 2175.805 902 4.030.343 1,000 71033,4%1 1,122 II'692.593 1.273 (Depreciation) (95,208)(368) (153,882)(393) ( 234,392)(385) ( 467,878) (419) ( 956,757) ( 464) (11847,748) ( $25) (W'24 ,081) ( 55) Fixed net assets 392,799 405 607,664 441 901,720 448 1707,927 483 3073,586 536 S1235,693 597 8'446,512 61 Invest. In securities 8,982 2 10,356 30 13.568 30 91,923 52 195,346 70 252,941 81 371.181 St Misc. noncurrent assets 11,474 18 16,162 11 21,000 10 21,210 6 21,422 4 21 636 3_I _ 21.853 2 TOTAL NONCURRENT ASSETS 413,255 452 634,182 482 936,288 488 14821,060 541 3'290,35.4 610 5'510,270 68l 31839,546 767 TOTAL ASSETS 567,109 635 930,050 703 1'314,308 700 2'518,450 756 41630,781 865 7*570,049 91 11*921,477 1,042 UI Table V-3 1982-1987 GENERAL LIABILITIES BALANCE SHEET AND NET WORTH (In Millions of Soles and U.S.$) I 9 8 2 I 9 8 3 I E 1 6219.! J1981. 1915 1986 1981 ITEMS REAL ORIGINAL BUDGET URRENT PROJECT 50LES USS SOLEs US 50s s SOLgs USW &6LEsR Ust Sntut Aa S .. CURRENT LIABILITIES Short-term debts: 128,567 1L0 264,617 182 317,487 153 57,352 jL56 702,050 126 828.973 11)192,297 101 Overdrafts 2,981 3 - - 3,500 1 - - * * * * - * Free-exports - * * * 137.248 66 - - * - - * * - Working capital 98,472 99 177,441 122 62,200 40 353,807 101 38,1140 69 313,828 37 482,9517 41 Input (raw) materials 6.4511 7 14.370 31 16,560 8 70,380 20 112,600 20 168,900 20 236,460 20 Long-term debt (current portion) L0 2 2 , 806 0 7379 I 133j165 5 209310 jL 3 5I 2 0 Commercial accounts payable 29,883 30 30,198 21 47,238 23 60,453 17 112,992 20 159.942 20 223,775 19 Other accounts payable Taxes payable and misc, 6,624 7 8,705 & 8,000 4 11,823 3 53,866- 10 79,986 9 132,845 Il Misc. current liabilities 5,267 -5 8.200 6 17.09. 8 16,937 5 17,887 _1 18,890 2 19,950 2 TOTAL CURRENT LIABILITIES 170,341 172 311,720 215 389,809 188 636,605 181 893,795 159 l097,791 129 I'568,867 133 NONCURRENT LIABILITIES Long-term debt 181,212 183 386,166 266 425.580 206 890,309 253 11616,726 287 2709,125 32I 0117.55k 348 V1 Reserves, compensations & pensions 52,776 53 60,435 42 98,625 42 153,117 43 240,304 43 371,085 44 554,178 417 Hining community 3 3,838 3 ,88 2 11,82 3617 89,106 I 161.491 It Misc. noncurrent liabilities 1_ _92. 1 - -___ U06.575 TOTAL NONCURRENT LIABILITIES 255,318 257 450,451 311 575,268 278 1101,825 TT l III 9 31215,893 382 41879,798 412 NET WORTH Capital stock .25,94 - 128,361 Treasury contribution- - - - - - -- ---- Profits from prior FY & reserves 725 - (62,066) - - - 1,462 138,582 - 67,130 - 1339178 - get profit (loss) (78,266) - (20,751) - 14,462 124:520 - 508,148 - 692,049 I'034,506 - Revaluation, fixed assets, prior yr. - - - - - - 203,627 - 509,896 - I'011492 - '786,04A Revaluation, fixed assets, year 93,450 - 122,33$ - 203,627 - 306,269 - 501,596 - 7714,552 - 1981,942 - TOTAL NET WORTH 141,450 206 167,879 178 3149,231 234 780,020 - 1789,76k 360 3'256.365 430 51472,812 497 TOTAL LIABILITIES AND NET WORTH 567,109 635 930,050 703 314.304 700 2'518,450 756 4*630,781 865 71570,049 S11 II921.11 1,at2 Table 0-1 1982-1987 OUTSTANDING STATISTICS (In Millions of Sales and U.S.S) 1982 I 9 8 3 1984 1985 1986 1981 I T E M s ORIGINAL BUDGET CUR"ET PROJECT SOLES U%1 SOL V SOLES SOLES U s5ES US -SOLES. US SOLES UST REVENUES 300,143 434 594,780 496 729,346 476 I572,632 563 3'275,510 716 to909,984 698 7'398,401 730 SALES EXPENSES 226,523 405 402,072 374 398,727 316 890,327 366 I'5976,89 395 2'557o209 t40 3a8,69 1t FINANCING INCOME AND EXPENSES 83,371 57 146,876 96 196,920 46 303,379 80 452,308 67 459,226 53 50akaSS so NET PROFIT (LOSS) (78,266) ( 82) 20,751 (30) 14,462 32 124,520 28 508,148 98 692.049 70 1034,506 67 OPERATING CASH FLOW L,6441.(4 458 2 26 58.81I 87 288,047 86 825.285 167 11285,910 154 2#011 298 164 TOTAL BORROWING 42,2659 2 6, 16507 466 '1*73 ' .4 0 64 0.1 1.S '6 Non-banking liabtiltties u m " 30,1 Banking liabilities 565IM 1.6 4 6 5 1'67 661 6 41 353812 i1 4 49 Short-term NI;1 -W 3 1t 0,4'0,2 2 *1,S 4 Long-term 181,212 13 386,166 266 425,580 206 890,309 253 i'616,726 287 .2709,t29 32) 4 117,554 348 NET EQUITY 141,450 206 167,879 178 349.231 234 78,020 262 1'789,76% 360 31256,36S 430 51472,812 4497 Ratio btl. total debt & net worth 3.01 2.08 4.54 2.96 2.76 1.39 2.23 1.89 1.59 1.t0 1.32 1.19 1.18 1.10 'atio btw. Long-term bank debts 1.28 0.89 2.30 1.49 1.22 0.89 1.14 0.97 0.90 0.80 0.83 0.75 0.75 0.70 and net worth Ratio btw. drt-terbk debt h nt wort i.o 0.63 1.58 1.02 . 0.91 0.65 0.70 0.60 0.40 0.35 0.25 0.22 0.22 0.20 Rat4o btw. tot. debt & tot. assets 0.73 0.68 0.82 0.75 0.73 0.67 0.69 0.65 0.61 0.58 0.57 0.54 0.54 0.52 1 RATIO BETWEEN CURRENT ASSETS & 0.90 1.06 0.95 1.03 0.97 1.13 1.10 1.19 1.50 1.60 1.88 2.01 1.96 2.07 CURRENT LIABILITIES foTAL TAXES PAID 44.760 9.7 42,891 29 40,841 31 139.120 4 162 607 104 7W 69 105 1119.72h 120 Income tax . - - - . . 7,.uW5 .4 341',17% 99,.31 D.L. 33, D.L. 215281233-21529 16,182 21.6 1233 8 10,538 7 - -- - -- - Import duties & misc. 28.578 32.1 30,578 28 30.303 24 67,665 28 121:424 30 194,348 31 292 1,9 ) NUMBER, OF WORKERS 18,120 17,880 17,880 17,880 17,880 171,880 -57- d) Envirlnental Pollution (1) The possibility of solving the problem of tailings disposal of the new concentrator plant by building one or more dumps to store the solids is limited or almost nonexistent because of the number of major and even overwhelming difficulties and/or technical complexities and risk factors, the extremely high cost, or shortage of capacity. Dumping tailings into the Mantaro river has some impact on the river but it would not be major. In the present circumstances, that would be the least damaging and most practical course of action. In addition, using most of the tailings (55 to 65%) as mine fill means that the tonnage of unutilized tailings dumped by the new plant is only 70% higher than the tailings dumped by the old plant. (1i) The physical-chemical analyses of the plant tailings shows that the impact of the liquid tailings on the Mantaro water course would be completely negligible (Table 10. For example, when manganese, one of the major components (.860 milligrams/liter of sample) is diluted in the river water, the result is .29 micrograms/liter of river water, which is.about 1/2000 of the permissible level for class III water courses, under the Peruvian Waters Act. Several - components of the solid wastes would exceed the permissible ceilings for class III water courses. Bowever, it should be noted that the high density (3.6), the moderate water velocity and the long length of the river before it flows into the Apurimac River promote sedimentation of these materials so that farming areas along the river would not be affected. -58- TABL H PHYSICAL-CHEMICAL ANALYSIS OF THE COBRIZA UNIT TAILINGS Sample collected on May 20, 1982 Analysis made by the Centromin Peru Safety Department Liquid Phase Solid Phase ELEVdITS MG/Liter % of Total Arsenic 0.038 1.27 Cyanide 0.010 0.03 Copper 0.160 0.57 Chrome equivalent 0.010 0.01 Iron 0.170 55.55 Fluorine 0.010 0.09 Manganese 0.860 0.24 Aluminum 0.03 0.63 Nitrates 0.180 - Silver 0.020 0.43 Lead 0.020 0.03 Selenium 0.010 0.07 Sulfates 393.400 0.29 Zinc 0.070 0.66 Carbonate 50.000 2.86 Chlorine 0.02 0.09 Si0 0.36 28.63 Antimony Tr 0.04 Calcium 150.00 5.01 Sodium 20.00 2.86 Potassium 13.00 0.63 Others pH= 7.70 0.51 TOTAL 100.00 - Liquid phase: 160 ton/hr. Equivalent to a maximum of .337 milliliters per liter of river water. - Solid phase: 160 ton/hr Equivalent to a maximum of 337 milligrams per liter of river water. -59- V. HOLS OF THE A The World bank took an active part from the outset in 1976 in arrangements with other foreign and local financial institutions and recommended that Centromin take direct or indirect action to implement the loan as soon as possible. To achieve that goal, it coordinated, through the CMP, expansion of the Cobriza mine to 18,600 tpd with Peruvian government and financial agencies and the LI. In addition, it drew up with specialists of that financial institution and the IDB an investment estimate of $160.9 and concluded a loan contract on 6/12/76. During the project, World Bank staff members held coordination meetings with the project managers to improve their efficiency in carrying out basic engineering extension, procurement, detailed engineering and plant construction, and particularly, mine preparation and development works. In addition, it coordinated procurement procedures for material and equipment dirctly with Centromin Peru, so that Bank staff members travel to Lima and Cobriza to inspect the progress of the work under way and supervise appropriate use of its loan to Centromin Peru6 -60- TABLE 6 MPRTWr PROJECT DATES March 11, 1977 Contract awarded to project manager provide services for the Cobriza mine and concentrator expansion project. January 20, 1978 Notification to project manaser to suspend work. April 25, 1979 Letter to reactivate the project and extend the basic engineering. may, 22, 1979 Project manager begins mobilization in the USA Startup of basic engineering extension. July 27, 1979 PrcJect and site manager arrive in Lima to plan startup of construction. The site manager will remain at the camp. August 13, 1979 Resident representatives of the client arrive in the USA. August 21, 1979 Opening of proposals begin in San Mateo. November 28, 1979 The first rurchase order for major plant equipment (Ball Mills is issued in the USA). December 27, 1979 Leveling and platform contract signed 0E0-1). March 26, 1980 Mine development contract signed (EC-2). April 15, 1980 Contractors start mine development. April 22, 1980 Revised mine development plan submitted to the CMP. May 19, 1980 Proposal for the mine hydraulic fill system submitted to the client. June 19, 1980 Change in purchase order for the transportation system appLroved. June 26, 1980 Contract for the aggregate and cement plant is signed. - June 26, 1980 Effective date for opening letter of credit in favor of project managers. -61- July 22, 1980 Civil Construction Contract signed (EC-8). August 29, 1980 Basic engineering extension in San Mateo completed. September 29, 1980 Cement preparation plant comes onstream. October l, 1980 Contract let for concentrator steel fabrication. December 15, 1980 Purchase orders issued for mine cars and locoaL-tives. December 22, 1980 Contract for electromechanical works awarded. December 31, 1980 impl1mentation of the compressed program is decided, and 6/6/82 is set as the key date for mechanical completion of the concentrator. January 15, 1981 Contract awarded for fabrication of steel beams.for the mine. February 2, 1981 First steel structures for the warehouse fabricated. March 11, 1981 Contract signed for structural steel fabrication. March 23, 1981 Mill installation begins. April 3, 1981 Call for bids on Mine services contract. April 11, 1981 Ball mill erection begins. April 20, 1981 Mine shaft construction contract awarded. May 22, 1981 Contract for mechanical fabri of structural plates awarded. May 30, 1981 Fines crusher installation begins- July 9, 1981 Mine services contract awarded. July 17, 1981 Proposals received for building transfer yard. July 31, 1981 Mine services contract begins mobilization. -62- August 21, 1981 Priary crusher installation begins. August 26, 1981 First work areas earmarked for mine services contractor. September 16, 1981 Civil construction for concentrate thickener and supports for pipina between concentrator building and thickener are accepted. September 30, 1981 Cleanup at the 28S level and tunnel for water pipes installation is completed. October 19, 1981 Aggregate production contract completed - EC-3. November 16, 1981 Civil construction for water recovery well accepted (Area 06A). November 30, 1981 Civil construction for tailings thickener accepted (Area 06). December 1, 1981 Civil construction for fines storage area (Area 03), coarse storage area (Area 02A),, and lime plant (Area 07) accepted. December 31, 1981 Civil construction for primary crusher (Area 02) and concentrator (Area o5) accepted. December 31, 1981 Contract awarded for construction of chimney AS. January 15, 1982 Contract awarded for Chute A2 and Level 28N. January 22, 1982 Preparation of first 600 a of the 28S level tunnerl for installation of pipeline and trolley line awarded to contractor. February 28, 1982 Engineering offices in Lima are closed. March 19, 1982 Specialized staff of project managers arrive in Peru for plant start-up. April 8, 1982 First fines crushed in primary crusher. May 29, 1982 Processing plant and urban area inaugurated by President of the Republic, Fernando 0elaunde Terry. e -63- June 24v 1982 Mechanical completion and startup of plant. August 16, 1982 Start of telephone system for plant and mine. August 20, 1982 Code account opened for control of mine develonent and services. October 5, 6, 7, and 8, 1982 Full capacity tests conducted at plant (18,0u tpd). October 30, 1982 Mobilization of managers staff responsible for supervising Cobriza project; supervision of work in charge of Deputy Administrator. November 1, 1982 CMP takes charge of project cost and accounting control, replacing manager's staff. November 11, 1982 Hydraulic fill system comes onstream, facilitating movement of tailings to the mine for fill. November 19, 1982 Total demobilization of manager' s staff responsible for administration in Lima, with CMP staff placed in charge of administration. December 15, 1982 The Collpa transfer station contractually completed, including additional work. January 17, 1983 Negotiations begin with representatives of consultant Project Manager to terminate the contract, and conciliation of accounts is performed. May 17, 1983 Telephone system installation completed at concentrator and mine, June 20, 1983 Last housing units and community works in urban area completed. June 24, 1983 Startup of works for pumping water from hantaro river to recovery wells of cancentrator plant. June 28, 1983 Completion of production shaft excavation. -64- Table 7 1 of 3 MAIN EQUIPMENT AND MATERIALS FOR THE COBRIZA PROJECT PRINCIPAL EQUIPMENT FOR MINE AND PLANT Requisition Estimated FOB Country of No. Description Amount ($) Origin W:2027-35 Ts* S*e* jamb* I'377.95e Swale v 2403-2S Lead maul Dump Trv.b 03570,800 U.S.A. -24095-65 U.derersd *ump Trucks 6*98I Canaa0.5.A. 13-0245-65 oeotr grader 6t,0th U.S.A. W-20226-25 A/Ue TruCL Culpment 213.371 U.S.A. U*20222-26 Shtcf*eo TrucL a Equirment 188.96* U.S.A. -20167*35 esslity Trucks U23*S30 e.s.A. W-20173-35 Lare. Trucks L Equipment 123.520 U.S.A. U-20184-25 Meelift gasket Truck 1*210 Can/USAIFINl. U-2017*25 Front End Leader S27*2%2 U.S.A. U-20220-65 RaIlse oring tquipment 19355.93 U.S.A. W-20207-25 Tracter Mounted impacter 170,710 Cenada W-20631-85 Asieal Plai gans *5FS10 Pri W-20261-25 Coector 55,680 U.S.A. U-202562s Hydraulic Scaler 362.U3 USA/Can/Flal. 1-202S7-25 11se Locomotive 93.050 U.S.A. V-20328*65 Rubber Tired Dozer 167.056 U.S.A. W-2020-65 Dall Mlls 3137.300 U.S.A. W-24004-64 Coaveyer belting G VolcenIter 113,247 JApOn -2218-65 Ciratery 9 Come Crushers 4675,040 U.S.A. W-20362-65 Coswever Drivers 304.734 U.S.A. 1-20231-65 vibratiag Screens 208,603 U.S.A. W-20212-65 wibrating Feeders 8 $3.220 U.S.A. W-20210-65 Eydreciclenes 2s.76 U.S.A. *2-0230-65 Florecle" machine 1139*080 U.S.A. V-20260-65 aradge Ceanes 629.820 U.S.A. -202346-65 Thickeneer Mechaaisen 77,298 U.S.A. 1-20251-65 rerirft Trucks . 89.t02 U.S.A. V-20263-65 Track Moneted Hydraul Crane lat.525 U.S.A. W-2104-65 Hiting machine 53,361 U.S.A. V-22l03s Starter NWs for sell Mills 20.950 JAPON W-22022-65 Reck suckets 62.727 W-20258-65 ars Maters 90.388 U.S.A. U-20231-45 Vertical Turbine Pumps 84,470 W-2024-65 ertical Sump Pumps 82.870 U.S.A. W-20266-65 Hortontal Slurry Pumes 76."0 U.S.A. W-20267-65 herizental Slurry Pumps SS.150 U.S.A. W-24050-65 Norizontal Slurry Pumos G5.600 U.S.A. W-20266-45 Ali CoPuSSes PAC"Cst 72.709 ITALIA V-2903-65 Seireleach Air Duct machine 60.303 W-24087-65 Electric eulage Locomotive I577.686 JAPON -24008-25 Mine Ore Cars 110,030 SUECIA V-2%003-S ine Exhaust reas 655,370 South Africa W-20233-65 Drum hest 19047,147 U.S.A W-20393*25 Cever Hardware 354.890 V-20249*86 Conveyer hardware 16I.51u U-24032-65 Wet Surabbers 188.960 U.S.A. 1-20811-25 Hest a Trolleye 83.930 V-20513-8 mist 9 Trelseys 279.246 U.S.A. W-26106*65 Eagle Lathers 72.771 U.S.A. W*21107 mine Shop tElment 65.306 JAPON -21104 mine Shop Eouoent 360.563 EsoaAa/Trancia V-24808 tridge Cranes 73,161 Leine Unie V-20235-85 Agitator echanisms 98.180 PTIU U-21569-IS Canaletas de Jese 248.294 PERU V-21460-85 Cast Wear Liners 151.180 PERU V-2111-6S Idrealic lack Dreker 53.950 W-21320-65 grinding Blis 427.3139 V-22109-65 Relacement Stators 136.000 W-22542*2S Egive Telef6mise 10S.827 W-22564-as Cable relodace 55.340 TAL 23657,.907 -65- Table 7 2 of 3 ELECTRICAL EQUIPMENT AND SUPPLIES Requisition Estimated FOB Country of No. Description Amount ($) Origin V-24034-64 gilt A.B.C. 01 166.739 CANADA -1,4O76-65 Wire 6 Cable 63.3s W-24080-5 Uire & Cable 396.356 U.S.A. W-24041-65 Mire & Cable ass.as SUECIA W-24131-65 Wire & Cable 68.250 U.S.A. W-2410**6S Rectifier Power Center 232.604 U.S.A. W*20547* 300 EVA Mine Power Center 84,442 U.S.A. -2415- sulk Elecrical 78.568 U.5.A W-240sA-5 noteres Elictrices 330,46 PERU V*at0l-85 Subescaciones A 460 V 711915S PERU W-24006-84 Ned. vettage Switch Units 128,820 PERU W-21313-85 Tran2formadores 102.674 PERU V-24to1-85 4 KU unit Sebstatton 175.810 PERU u-025-65 Electrical Package 1*370.276 U.S.A. V-24059-65 Motor Control Center 258,357 U.S.A. -24072-65 Vire & Cable 1*226,931 U.S.A: W-24054-65 sulk Electrical slN 59.289 U.S.A V-24133-65 I/M Electrical 28.014 U.S.A. W-24145-S Electrical Nal 5/M "J" 277.005 U.S.A. V-24084-64 Types K. X. & B. Cable 330.02 U.S.A. V-21188-64 Cable Trays 73.157 U.S.A. W-24210-64 Cables 57.00 U.S.A. -21891-86/b Cables de Energra Tipe NTT 64.726 PEU V-21866-65 Subestaciones 79.091 U.S.A. V-2k264-65 Subesaclomes 70r023 U.S A. TOTAL 6$842.935 PIPES AND ACCESSORIES W*20725-64 Rubber covered pipes 0.348SA W-22226*64 Unison and accessories og.903 A W*24126-64 ng 07 PERU W-24188-64 Nechanical coupling. 78.807 PERU W-24200-64 Hydraulic UnLans 51.657 U.S.A. W-24013-64 Valves 61.000 UND W-24052-64 Valves 64.730 CApon W-240146-6b Pipes 55165 su W-24037-6 Base@, complings. etc. 64.906 SUECLA W-24159-64 Unions and accessories 225.A50 ITAIA/USA TOTAL t*80.s3s STRUCTURAL AND BOILER STEEL 632,6168 JAPOnI *24030-64 Wide flage beas 227.11 JAPON Su24011-64 stnctural shapes 150.75a -2032-6 Steel plates SO.7115 JAPON W-2037-643.1 JAPOM V-24039-64 nuts and bolts 206.499 JAPON W-24132-64 Steel plates 5S,606L jAPo :-21100-6 stel plates pltsj4 U POA 66.00S U... V-24152-64 Profile and Plates JAPON V-24173- 4 steel plates 16.506 ALEMAXIA W-24038-64 Steal girt and Purlings 6.6P4 steel plates ;p530 V-26174-LJs steel plates 67.38 JAPON. WI-24193-64i Structural sbpe 78.513 U.S.A. w-241IS-64 Steel Pipes 1641BL,LZ W-24083-84, 1ide Clause bases 141.10 U.S.A. W-29921-64 Design and fabrication workshvP0 74i.111 U.A. Wi-24166-64 Wids flange baeus S2.169 U.. A. W-24165-65 stel 1661 PEU.A W-21460-84 uear liners emd bars* A&i7Pa TOTAL. 7fiG.530 -66- Table 7 3 of 3 RAILWAY MATERIALS Requisition Estimated FOB Country of No. Description Amount ($) Origin e-2e53-4 Steel .. accessouies sa2,se U.S.A. V-a266e7-g ado tes 354.570 U.S.A. Wa-g4g-44 tall acessorles 58.236 U.S.A. TSTAL I1*34.49u INSTRUMENTATION -2400065 I*asy Centret soft W-2403)*$5 estruimenats of Centrel 3,g U.S.A. TOTAL. 834,111 TOTAL SEICAL *$353.512 NOTES: 1) 55% of the general total was financed by the IBRD (US$20,294,236). 2) Only purchase orders over US$50,000 were considered. 3) The 0/C amounts do not include spares. 4) The amount financed by the IBRD for purchases under US$50,000 and spares amounting to US$3,138,762 are not included in the breakdown because their investment amounts are not important. 5) Since the IBRD loan (1281-PE) is for US$39,731,215, it has been used for the Cobriza and Mine Water projects. The attached sheets explain how the engineering and services, plant and equipment, transportation, freight and insurance and commissions items were utilized. - 67 - Annex 2 PROJECT COMPLETION REPORT LOAN 1281/PE MINE WATER TREATMENT PROJECT (PREPARED BY THE BORROWER) AUGUST 1983 -68- centromin--PERU Project Execution Management Office I. PROJECT IDENTIFICATION, PRELIMINARY FEASIBILITY AND FEASIBILITY STUDIES The Cerro de Pasco Mine Water Treatment Plant was a necessity that had been strong- ly felt in order to replace a cementation operation that was excessively contamina- ting the basin of the Mantaro [River] and that furthermore, in medium-range terms, would suffer from a shortage of its main input items [scrap iron] nation- wide. For these reasons, Centromin Peru contracted consultants in 1974 for preparing a technical-economic study to replace the existing process with another extraction process using solvents and electroplating whose operating capacity would be as follows: (a) Treatment of 13,600 lit/min of impregnated solution for extraction by means of solvents; (b) 0.8 g/lit of copper concentration for 1976 0. g/lit of copper concentration 1986; (c) 480 metric t of copper recoverable monthly by the middle of 1976 366 metric t of copper recoverable monthly by the middle of 1981 276 metric t of copper recoverable monthly by the middle of 1986. Furthermore, the feasibility project took into consideration the fact that the new plant would be located in the immediate vicinity of the Excelsior Cement Plant, that there would be a preliminary neutralization stage to treat the products from the solvent extraction stage, and that, finally, the waste would be subjected to a neutralization process prior to being dumped into the San Juan River. The amount earmarked for investment came to U.S.$ll,818,000 at constant 1974 dollars. These proposals were amended throughout the project and the design was completed with the following features: Output capacity 540 metric t of Cu per month; Location in the area of Quiulacocha due to the fact that the previously selected area did not have the kind of soil that was suitable for the construction work that had to be started; Elimination of the preneutralization phase, improving the quality of impregnated solutions through the construction of new copper mineral cells; -Temporary substitution of the neutralization process through the storage of waste in Yanamate Lagoon; The investment amount rose to U.S.$15,300,000 at current dollars. The World Bank expressed its interest particularly in financing this project by the middle of 1975 and, after the corresponding negotiations and the updating of the budget, loan contract 1281-PE was signed on December 6, 1976. * 1 -69- During this period of time, prior to the start of work, our enterprise had the resolute cooperation of specialists from the consultant and frosm the World Bank in spelling out the project's scope. MINE WATER TREATMENT PLANT PROJECT Legend: 1--Warehouse; 2--Copper-impreg- nöted solution tanke; 3--Electric power substation and distribution panel; 4-- Electroplating plant; 5--Extraction by --- means of solvents; 6--Tank farm; 7- No. 1 Engine control center; B--No. 2 Engine control center; 9--Dining room-- and locker room; 10--Rectifier and Compres.._ sot; 11--SuPervisory offices; 12-Laboratory and control panel; 13--Materiaj dump. -71- 11. PROJECT IMPLEMENTATION AND MANAGEMENT (a) Project Scope The project's objective and scope are designed mainly to contribute to the decontamination of the tributaries of the upper basin of the Mantaro River by eliminating the dumping of acid-ferrous solutions, waste from cementation operations of copper with scrap iron, thus making the transfer of water from that river to the Pacific feasible. The above is made possible through the installation of an integrated extraction circuit using solvents, electroplatiag, and related operations, this will permit the production of 99.96% electrolytic copper as finished product, directly saleable as cathodes with a higher added value, replacing 925 metric t of copper cement; it will thus be possible to eliminate the use of scrap iron and to release the treatment capacity in the La Oroya Foundry and Refinery Circuit. During project execution, we saw the need for partly amending the originally planned scope, mainly relating to the subsequent treatment of plant waste; this appreciably increased the cost of the copper that was produced. In this way and following approval by the financing agencies, it was decided to discharge said waste into che Yanamate Basin. The main changes that were made along these lines were as follows: Reject the preneutralization unit; Eliminate the solvent extractionwaste neutralization unit; Eliminate the limestone preparation unit; Include -a system for pumping SX -- solvent extraction - waste from the.discharge point in the plant to the closed basin of Yanamate. (b) Project Administration- The system employed in project administration included the project management system on the level of the foreign consultant outfit under the supervision of the Projects Execution Management Office of CMP. For this purpose, we contracted for the services of foreign consultants, who, associated with a local consulting firm, were responsible for project management. The work of the managers basically included activities dealing with basic engineering, detail engineering, purchasing management, construction supervision, training, start-up and standardization of the plant. This work was distributed primarily as shown below: -72- OPercentages) Basic Detail Purchasing Activity Engineering Engineering Construction Management Total General Facilities 1.200 9.550 6.863 17.613 Extrac. by solvents 2*425 8.350 15.261 26.036 Electroplating 3.550 7.100 15.375 26.025 Mec. prep. of limesme3*1l3 3.13 Neutralization 1.050 1.050 Preneutralization 0.863 0.863 L-cil purchases 14.250 14.250 .mported purchases 10.750 10.750 Z 12.50 25.00 37.50 25.00 100.00 Parallel to the work done by the managers, Centromin Peru, through its Operations Division, was charged with doing the work necessary outside the battery boundary which included work relating to the activities initially planned. Project execution was appreciably influenced by the effort and coordination of the outfits responsible for the project with respect to management activities dealing with suppliers of goods and/or services as well as contractors for the a.velopment of works projects activities. This facilitated acceptablt and timely planning for project implementation (c) Manager Performance In general terms, the work of the managers was done in accordance with estimates; however, some inconveniences arose during project development and led to stricter supervision by CHP. This was particularly true of work outside the battery boundary since this activity had not been conceptualized from the project study, done by the managers, on; this meant that these work operations were taken over by the Enterprise. On the other hand, concerning equipment design, specifically in the case of the electroplating rectifier transformer, there was a mistake in the dimensioning and this caused problems at the moment of plant start-up so that the plant had to be shut down for a period of 5 months, approximately, during which CHP was able to solve the above-mentioned problem. This type of deficiency became evident basically in the electromechanical equipment items. Another significant aspect of managerial performance relates to the shortcoming that emerged in project control and supervision--activities which were directed without standards that would be acceptable to the Enterprise. This caused the intervention of CPM in terms of the takeover of these administrative activities. -73- (d) Contractor and Supplier Performance The activities carried out by contractors and suppliers were in line with the terms agreed upon between them and the project managers. Generally speaking, the job was done properly, under realistic working conditions, featuring the delivery of equipment units and the completion of work activities; the latter were accomplished with greater difficulty due to environmental conditions in the project area. It must also be pointed out that the quality of most of the equipment items acquired is adequate for a project of the kind that involves mine water, except for the rectifier transformer which failed on two occasions and the centrifugal pumps. (e) Logistics The system used for the purchase of goods and/or services for the Mine Water Project was standardized in accordance with the outlines established by the project financing entities. In this respect, purchasing management was under the control of the project managers who made good recommendations during the bidding competition carried out for the procurement of goods and/or services. The information was analyzed by the CMP and forwarded to the Bank for approval prior to the award of these purchasing contracts. Procurements, as far as foreign suppliers were concerned, were handled mostly through letters of credit which committed the funds from the bank loans in the respective proportions (IBRD 55Z,BID 45%). In this sense, purchasing management--through established bidding competition regulations-did not present any major difficulties. A separate sheet contains the diagram for the procedure involved in getting supplies and approving purchasing orders in excess of U.S.S100,000. (f) Execution Program Implementation Table 1 shows comparisons between the estimate and the actual programming. The major factor that caused problems in plant operation was the failure of thel rectifier which caused the plant to be closed down. After the changing of th rectifier transformer operationswere actually started on January 11, 1982, in other words, the plar.t was started 65 days ahead of time compared to the planned starting date of March 17, 1983 [sic]. Here are the main activity scheduling dates: Contract signing with consultant firm May 26, 1977 Detail engineering completion May 30, 1979 Mechanical completion October 30, 1980 Start of operations February 7,-1981 Operations Division receives plant June 16, 1981 Rectifier failure July 24, 1981 Start-up January 11, 1982 i is la, lile _TTtiL Fyn' EW TRI IMPLEMENTATION SCHEDULE L E G E N D : r g i n aas c"ed u l eC E - .............. CERRC gau"wrV V JEUIPMENT AT S8TE A A Sboe on#W owem'wdiffe-wr boM Ofifina Scheda ITEM of O 1 I b _4 -MJIAISOI fjDJ I ENGINEERING 2 Process Desi n 4 - Detailed Desiqn - - -s S I 7 PROCUREMENT 3 Advertising Bid Specifications -o arreal Invitation to Bid s1 e 13 15 - - I II II I 1 Rpcobipr of Bids 156A 17- ia Equipment De i very it p 19 . 20 -o 21 CONSTRUCTION . 22 - - - - i i m 23 Limestone Mining 24 - i i l i 2s Solvent Extraction 01o IIIllit 271 Electro Winning 281 29s Waste Neutralization 1111111 710 1 40I 2 INFRASTRUCTURE Electrical Distribution I I I 38 - - - - - I I I I I 11111 -76- Annex for Table 1 MINE WATER PROJECT ACTIVITY SCHEDULING CHANGES ACCORDING TO IBRD PROGRAM The effective date of the contract with the managers was May 26, 1977; compared to the date initially scheduled by the World Lank, this was a delay of almost to years. However, basic engineering was newly started on September 1, 1977, due to the fact that the requirement for its official start by the managers involved the metallurgical tests that were carried out by CMP so that this project stage was finished on March 31, 1978. In the light of the above, detail engineering was started on January 30, 1978, and was completed on May 30, 1979. Procurement began 2 months after the start of detail engineering and the delivery of equipment and materials was completed in October 1980. The mechanical completion of the plant came on February 7, 1981. I■ →－.’昭口国■■■曲口■自■■■■■国‘－咽国■加■■自■口－－ー． -&--－わ日園■■■国月国日■■日国■■国国■■■■国園国■申国 ● り . 1 苛ジ． . &_- りJk ,. &. - （一－- －自自■国■曲日園■園国目月月月■ . CENTROMIN - PERU S.A. CERRO DE PASCO MINE WATER TREATMENT PROJECT MAIN CONTRACT STATUS REPORT REAL CONTRACT REAL TOTAL AMT., CONTRACT STARTING COMPLETION COMPLETION REFERENCE DATE DESCRIPTION -DATE DATE DATE CONTRACT COMMENTS 04-21-80 Line to Yanamate 04-21-80 08-26-80 10-25-80 172,100 Additional work in the amount of US$27,854 12-03-79 Structural work, electro- 01-14-80 05-1 09-06-80 486,168 B-80 Additional work in the amount mechanical assembly, of US$181,453 miscellaneous 08-20-79 Making and erecting 08-20-79 12-17-79 12-17-79 131,607 Additional work in the Amount steel structures for of US$26,039 electroplating building 12-04-79 Prefabrication and 12-04-79 06-04-80 06-04-80 168,418 Additional work in the amount installation of tank of US$25,331 lining 12-28-79 Prefabrication and 12-28-79 04-10-80 08-20-80 88,023 assembly of steel tanks 04-11-79 Civil engineering 04-11-79 03-25-80 09-15-80 603,764 Additional work in the amount construction work of US$228,786 02-02-79 Construction of plant's 02-02-79 02-29-80 02-29-80 50,561 perimeter fence and others 01-24-79 Excavations, foundation 01-24-79 04-24-79 09-19-79 48,191 Additional work in the amount drainage, and dining of US$9,840 room and locker room buildings 11-07-77 Construction of pre- 11-07-77 09-07-77 09-07-77 108,434 fabricated houses -79- (g) Capital Expenditures, Outlays, and Financing The project's final cost came to U.S.$15.3 million according to the budget esti- mate, of which U.S.$8.7 million went for expenses of local origin while U.S.$6.6 million were connected with expenses of foreign origin. Table No. 2 presents a comparison between the project's estimated and actual costs, broken down by investment items and identifying the origin of the expend- iture for each one of them. In this connection it is necessary to mention the fact that, although the project's scope was reduced with regard to plant waste treatment, the total cost remained the same due to a considerable increase in the engineering, administration, and supervision items, as well as in the corresponding civil engineering work and electromechanical assembly and installation; the latter items led to increased spending in local currency. The project investment schedule is shown in Table No. 4 and indicates that the major expenditures for the project were made in 1979 and 1980. The amounts invested in 1981-1982 correspond to the payments and to unexpected amounts arising from the plant's start-up. As far as project financing is concerned, it was covered by funds from the World Bank, from the Inter-American Development Bank, Financial Development Corporation, the Peruvian government, and in-house funds. Table 3.3 shows the funding source for project financing, broken down by expenditure origin. A significant aspect of project finance management was rooted in the reduction of_the COFIDE [Financial Development Corporation] loan which meant that Centromin- Peru, together with the Peruvian Government, closed the financing gap caused by the difficult economic situation of that corporation. Funds from the above-indicated sources were controlled through the Enterprise. In relation to that, payment requests were filled out with the financing enti- ties and we opted mainly for repayment guarantee procedures based on letters of credit for the payment of suppliers of goods and direct payment in the case of, payment for services. Parallel to that, in the specific case of the BID [Inter- American Development Bank] loan, we used the rotating fund procedure through which said entity, by way of an advance, paid out a sum of money which was then authen- ticated during the corresponding period of payment. This latter procedure was chosen for direct purchases involving smaller amounts. As for COFIDE funds, they were used mainly by way of reimbursement of payments made while funds coming from the Peruvian Government were used basically to pay for import duties and for the income taxes cf companies not domiciled in the country. Coordination with these financing entites and the broad range of procedures used made it possible to implement acceptable management at the time of the outlays with the exception of direct payments that took a longer time than anticipated, causing problems of an administrative character. Another aspect worth mentioning --which emerged during this project-sprang from the rather slight eontrol on the part of the World Bank on the occasion of the repayment of letters of credit to the correspondent bank. This caused an increase in financing expenditures -80- that had to be paid out for the period during which the outlays of the correspondent bank remained unpaid. We believe that it is advisable to suggest that deadlines be established for the correspondent banks when it comes to requesting the cor- responding reimbursements from the World Bank. -81- TABLE 2.2 PERU: CENTROMIN EXPANSION PROJECT CERRO DE PASCO MINE WATER TREATMENT PLANT PROJECT COMPLETION REPORT PROJECT COSTS (US$ Millions) 1/ APPRAISAL ESTIMATE ACTUAL 2/ Local Foreign Total Local Foreign Total Plant and Equipment 3/ (ncl. spare parts) 2.1 3.9 6.0 1.980 2.770 4.750 Civil Construction and Erection 0.3 1 0.6 0.9 2.358 - 2.358 Freight S Transport 0.1 0.3 0.4 1.420 0.368 1.788 -ineering, Project ..agement & Supervision 0.5 0.7 1.2 2.492 2.413 4.905 Total Base Cost Estimate 3.0 5.5 8.5 8.250 5.550 13.800 Physical Contingencies 0.3 0.5 0.8 - - - Price Escalation 1.4 1.5 2.9 - - Total Fixed Assets 4.7 7.5 12.2 8.250 5.550 13.800 Working Capital 0.2 - 0.2 - - - Project Cost 4.9 7.5 12.4 8.250 5.550 13.800 Interest During Construction 1.8 1.1 2.9 0.450 1.050 1.500 Total Financing Required 6.7 8.6 15.3 8.700 6.600 15.300 / Exchange Rate: S/. 45.00 - US$1.00 ./ Includes US$1.9 million indirect foreigh exchange cost 3/ Includes Local duties and taxes -82- i -PERU: CENTROMIN EXPANSION PROJECT TABLE 3.1 PROJECT COMPLETION REPORT DISBURSEMENTS OF BANK LOAN (U$Millions) BANK FISCAL APPRAISAL ESTIMATE ACTUAL YEAR AND_gUARTER DISBURSEMENT CUMULATIVE DISBURSEMENT CUMULATIVE 1976 III 2.5 2.5 - . IV 2.5 5.0 . - 1977 I 2.5 7.5 - II 2.5 10.0 0.3 0.3 III 3.0 13.0 0.6 0.9 IV 3.0 16.0 0.7 1.6 1978 I 3.0 19.0 0.4 2.0 II 4.0 23.0 0.4 2.4 III 4.0 27.0 - 2.4 IV 3.0 30.0 0.3 2.7 1979 I 3.0 33.0 0.1 2.8 11 3.0 36.0 0.6 3.4 III .2.0 38.0 0.5 3.9 IV 1.0 39.0 1.4 5.3 1980 I 0.5 39.5 0.6 5.9 II 0.3 39.8 2.0 7.9 III 0.2 40.0 3.0 10.9 IV - 40.0 3.6 14.5 1981 I - - 2.7 17.2 II - - 7.1 24.3 III - - 1.9 26.1 - IV * - - 4.2 30.3 1982 I - - 1.5 31.8 II - * 3.3 35.1 . I - - 0.8 35.9 IV - * 3.2 39.1 1983 I - - 0.6 39.7 -83- TABLE 3.2 PERU: CENTROMIN EXPANSION PROJECT. PROJECT COMPLETION REPORT ALLOCATION OF THE BANK LOAN (US$ Million) % of Foreign % of Foreign Amount of Expenditures Amount of Expenditures the Ican to be financed the loan to be financed Solvent Extraction Electro-Winning Plant Cerro de Pasco 1/ 3.0 55% 1.9 55% .Hining Equipment-Cobriza (-load-haul - dump units, raise borers, drilling e quipment) 1/ 6.0 55% 2.9 55% Concentrator Plant (Crushing and grinding ipment, flotation ak.i settling tanks, associated ut*1ities and buildings) 1/ 15.0 55% * 17.8 55% Engineering, Project Management, Technical Assistance 4.0 55% 5.8 55% Miscellaneous Equipment and Services 2.0 100% 5.3 100% Interest and Other Charges Accrued on IBRD Loan 7.0 Amounts due 6.0 Amounts due . Unallocated 3.0 - 40.0 39.7 / Includifig spare parts and foreign freight. -84- PERU: CMP EXPANSION PROJECT TABLE 3.3a PROJECT COMPLETION REPORT FINANCING (In millions of U.S.$) (A) ORIGINAL PLAN SOURCE MN ME T COBRIZA MINE BIRF - 36.447 36.447 BID - 30.446 30.446 CDFIDE 79.800 11.707 91.507 CMP 1.300 1.200 2.500 Sub-Total 81.100 79.800 160.900- MINE WATER PLANT BIRF - 3.553 3.553 BID - 2.954 2.954 COFIDE 6.500 1.793 8.293 CMP 0.200 0.300 0.500 Sub-Total 6.700 8.600 15.300 TOTAL (A) 87.800 88.400 176.200 BIRF-IBRD; MN- National currency; ME-Foreign currencyi BID-Inter-American Development Bank. -85- Table 3.3.b PERU: CP EPANSIs PROTWr PROJECT MIMPLETION REORT FINMNCDG (In Millions of USS) B) UWRRENT P scumC M ME T Cabriza Mine IBD - 36.318 36.318 IDB 2/IC-P. - 31.069 31.069 IDB 48/IC-PE 18.600 11.400 30.000 IDB 352/0C-PE 3.000 - 3.000 CCaIDE I 4.792 - 4.792 (1) CFIDE II 14.500 - 14.500 (2) Peruvian Government 25.110 - 25.110 (3) EXIBANK- 3.102 3.102 SEB - 1.573 1.573 iELLS FARGO 35.088 6.852 41.940 CH 38.151 10.445 48.596 Subtotall39.241 100.759 240.000 Mine Water Plant IBRD - 3.413 3.413 IB - 2.331 2.331 COPIDE 0.655 - 0.655 (1) Peruvian Government 1.280 - 1.280 (3) CMP 6.765 0.856 7.621 Subtotal 8.700 6.600 15.300 T0AL 167.041 88.259 255.300 VDTES (1) The contribution of the credit for the originally agreed upon amount of uS$99.8 million. (2) Lan extended in national currency for S/. 9.46 billion (US$14.5 million equivalent. (3) The Peruvian Governments contribution of S/. 9 billion, of which /. 3.1 billion was a direct contribution and S/. 5.9 billion was used for capitalization of taxes. LOUS FINANCING TV" Crace Useful Amount Interest Additional Commitment Guarantee Peted Life Contract LNDEn ('000 US$) Rate Rate Comission Commision (Tear) "Oear Date IRD 40,000 6.5 biannually - 0.75 1.50 4 15 12/06/76* Inter-American Development Bank 33,400 8.6 biannually - 1.25 0.25 7 15 12/06/76 (1) Eimbank (2) 3,102 8.5 - (3) " - 0.5 0.75 5 8-1/2 06/02181 Wells Fargo Bank (4) 64,500 Libor-quarterly 1.125-1.25 (5) 0.375-0.5 (6) 0.25 3 6 0812510 Skandivalaks Onakilds Banken (7) 15,000 7.75 biannually 0.25 0.1 (6) (9) (10) (10) 11/21/80 Cofide It- Oper. "A" 9/.4,730.0 HH 54 -quarterly 1.5 1.0 - 4 (11) 8 (11) 03/01/82 Oper. "B" 8/.4,730.0 N 54 -bimonthly 2.0 (12) - - 1 2/3 4 (11) 03/01/82 advanced (11) Cotide 1 - 8/.1.263.8 HN 54 -biannually - 0.75 - 6 12 04/20/77 (*) The contractual dimbusament deadline vae amended on 21 Sept. 79. (1) Deadlines were changed on 31 Nay 79. (2) Participants In financing 42.52 of capital goods end/or s*rvices of the Cobria project. (3) Was changed to 10.75X as of 15 Dec. 82. (4) Financing of the Cobrisa project and others. (5) 1.1252 for the first 36 months. (6) .3751 for the first 18 months on 802 of the balance of the unutilised loan. (7) Financing of 852 of capital goods and services of Swedish origin (includes other projects). (8) For unutilimed balances from acceptance of the 83B of delivery contracts. (9) Plat .commission - 0.52 management commission and 2.5X credit Insurance commission. (10) Repayment in ten biannual quotas, beginning with the equipment delivery date. (11) Starting with the effective date of the first disbursese. (12) Was changed to 32 starting December 1962. -87- TABLE 4 PERU: CENTROMIN EXPANSION PROJECT PROJECT COMPLETION REPORT CAPITAL COST DISBURSEMENT SCHEDULE (US$ Millions) APPRAISAL ESTIMATE ACTUAL Year Foreign Local Total Foreign Local Total 1976 1.500 2.367 3.867 - - - 1977 3.600 5.767 9.367 0.521 0.204 0.725 1978 1.600 0.466 2.066 0.759 O.c7l 1.330 1979 - - - 1.620 2.306 3.926 1980 - - - 2.811 3.649 .6.460 1981 - - - 0.839 1.950 2.789 1982 - - - 0.050 0.020 0.070 6.700 8.600 15.300 6.600 8.700 15.300 -88- III. OPERATION PERFOLANCE (a) Initial Start-Up and Start of Operations According to the project's development as planned in the Projects Management Contract with the managers on February 7, 1981, the plant was ready as far as the mechanical part was concerned. This marked the beginning of the period of running trials which lasted until the 14th of that month; at that time it was necessary to shut the plant down due to the deadlock with local public agencies over the use of Yanamate Lagoon. Due to these difficulties, it was possible to start the standardization period only on April 24, 1981; following the construction of an alternate system of tributaries to Quiulacocha Lagoon and to Yanamate Lagoon, using a pumping system, the project was turned over to the Operations Division of Centromin Peru on June 16, 1981; during that period, around 500 t of electrolytic copper with 99.98% purity had been produced; this period extended until July 24, 1981, at which time due b serious breakdowns in the commercial cell circuit transformer, procured by the management firm from the supplier, the plant had to suspend normal production until January 11, 1982; this was because the rectifier transformer had to be manufactured all over again by another firm; the latter had taken over the assets and liabilities of its predecessor. While the plant was shut down, it was necessary to restart the production of copper cement due to ion drift in the CU [sic] cementation plant, which is why there were no losses in the production of copper. During the time the plant was shut down, moreover, plant maintenance personnel performed various minor repairs and modifications, such as: Modification of electroplating cell crane, repair of electroplating cells, system of sulfuric acid addition, among others. (b) Labor Force Development Project management as such was implemented in accordance with the organiza- tional structure submitted to Centromin Peru by the project managers after the contract with Centromin Peru had been signed. The project managers, as well as the project administration recruited professional and technical personnel on the basis of a requirement timetable which was adequately met; in accordance with the project execution stages, detail engineering, local purchasing management and construction supervisian were executed by the managers. Parallel to that, Centromin Peru selected experienced and technical personnel through the Project Administration for the purpose of representing the Enterprise. The training program for personnel who would be responsible for operating the Cerro de Pasco Mine Water Treatment Plant was carried out and supervised by the project managers in coordination with the project administrator. This program's scope included familiarization with the new plant's Operating Manual, with the operation of other plants, both in the United States and in Peru. The preparatory effort was worked out with the proper headstart in terms of the scheduled completion uf the mechanical part. -89- The following staff personnel stood out in this program in the United States: General manager, assistant general manager, metallurgists and guard detail leader; the training period in that country extended from July 21 until August 10, 1981. The outstanding staff personnel at Arequipa (Cerro Verde) and at Cerro de Pasco included the following: General manager, assistant general manager, metallurgist, maintenance chief and four guard detail leaders; their training courses extended from August 18 to 29, 1981, and from September 2 to 6, 1980, respectively. (c) Centromin Peru Personnel Organization There were no changes in the original organizational structure of the Project Administration as well as in the Projects Execution Management Office. Through its Administrative Division, the Projects Execution Management Office substantially improved the general information systems and procedures on request of the financing entities and in coordination with the project managers a manual procedure was implemented for recording costs, obligations, and the final estimated cost of the project; computerized programs were also used for programming and checking on project progress, using a computerized package implemented by Centromin Peru. Likewise, accounting procedures were established for the recording of expenditures as well as foreign and local purchasing procedures which would meet the requirements established by the financing institutions. In coordination with the Finance Management Office, the projects execution management office prepared a manual procedure for requests and recording of foreign and local currency disbursements which met the requirements of the fi- nancing entities. Plant operation and maintenance were taken over by the Centromin Peru Operations Division through adequate organization once the plant was ready to go into standard operation. -90- () output Estimate Copper Cathodes Copper Cement Months 1983 1982 1983 January 185.9 367.088 93.95 February 122.7 272.3 137.5 Marchu- 165 269.5 April 175.6 385 May 176 313.5 20.02 June 264 385 July 334.4 August 308 11 September 345 October 313.86 17.607 November 345.301 8.34 December 374 5.6 Here is the projeet's future output (output figures given in tons of copper cathodes with 99.96% purity): 1983 5,200 short tons 1984 6,000 short tons 1985 6,000 short tons 1986 6,000 short tons 1987 6,000 short tons 1988 6,000 short tons -91- IV. ECONOMIC-FINANCIAL ANALYSIS (a) Revenues Project revenues are determined by the output level and by copper prices prevail- ing from one year to the'next. In keeping with these factors, here, then, are our expectations: Year Copper Price U.S.$/lb 183 0.782 1984 0.981 1985 1.292 1986 1.240 1987 1.259 1988 1.278 Using these basic data, the total, year-by-year output value is determined in the following manner: MINE WATER OUTPUT ANALYSIS (U.S. Dollars) PAYMENTS 1983 1984 . 1985 1986 1987 1988 Copper, TCS 1,564 1,962 2,584 2,480 2,518 2,556 Quality Discount (11.50) (11.50) (11.50) (11.50) (11.50) (11.50 Total CIF value 1,552.5 1,950.5 2,572.5 2,468.5 2,506.5 2,544.5 DEDUCTIONS Freight charges 71.00 71.00 71.00 71.00 71.00 71.00 Insurance 3.88 4.88 6.43 6.17 6.27 6.36 ENAPU 4.02 4.02 4.02 4.02 4.02 4.02 MINPECO 32.55 40.53 53.00 50.91 51.68 52.44 Tax 46.81 60.79 79.50 76.37 77.51 78.66 Transportation 9.10 9.10 3.10 9.10 9.10 9.10 Sub-Total 167.36 190.32 223.05 217.57 219.58 221.58 Contingencies 10% 16.74 19.03 22.31 21.76 21.96 22.16 TOTAL 184.10 209.35 245.36 239.33 241.54 243.74 Net, TCS 1.368.4 1,741.2 2,327.1 2,229.2 2,265.0 2,300 Total value, in 7,115.7 10,446.9 13,962.8 13,375.0 13,589.8 13,804 thousands -92- (b) Operating Costs The operating costs for the next several years are shown in detail in the attached table. Cost of eration 1983 1984 1985 1986 1987 1988 Cost, copper, TCS 700.0 700.0 700.0 700.0 700.0 700.0 1OZ contingeunies 70.0 70.0 70.0 70.0 70.0 70.0 Total cost, TCS 770.0 770.0 770.0 770.0 770.0 770.0 Total cost, in 4,004.0 4g620.0 4,620.0 4s620.0 4,620.0. 4,620.0 thousands (c) Financial Statements (W) We are enclosing the profit and loss statements, Table F-1, general assets balance- sheet, Table F-2, and general liabilities balance sheet and equity [net worth], Table F-3. (ii) In Table G-1, we add the financing projects for the -period of 1982-1987. Table p-1 19s2-ig8 PRonT AND wsø STATØMET (In Hillione of Soleg and Dollars) 1982 ' i 8 1984 1985 , 1986 1987 I T E M S ORIGNA. 1UDGET cUærwt notaCTj 50LES DOLLARS 0LES US OLES , U$ES Uø$ SO u$ LES US SOLES US Net Garnings 300,1413 F-3t 94,7560 5'6 729,31k6--~476 1'5721 ffi ~~563 ~3175,510 716 ;'909,18 6 9 7'398, 07 730 Sales expenses (226,523) (405) (402,072) (374) (398,727) (316) ( 890,327) (366) (I'59,689)(395) 2'557,209)(10 ) (3'849,589) (414) Gros. Profit 73,620 19 192,708 122 330,619 160 682,505 197 1'677,821 321 2'352,775 29 3'549,.41 3.1% Marsin 24.5% 6.7% 32.% 2k.6% 45.3% 33.6% 43.#% 35.0 51.2% 4.5% 47.9% 42.1 45.01 41.3Z Depreciatton ( 12,776) ( 15) ( 30,6W ( 26) ( 25,520) ( 17) 95,.412) (34) ( 208,153) ( 49 430,405) ( 61) ( 747,926) (7-) Compensations and pansions ( 33,86) ( 20) ( 35,890) ( 30) ( 58,849) (38> ( 69,115) (236) ( 106,984)( 251 163,46)( 23) ( 228,j66) (23) Operating profit 26,998 ( 6) 126,125 66 246,250 105 519,978 139 1,360,694 252 I'75.S,9t 210 2'573,026 219 Mar8in 9.03 (1.4%) 21.2% 13.3% 33.8% 22.1% 33.0% 24.7% kr51.S 35.2% 35.8% 30.It 34.3t 30.02 Earninge and financing ( 83,371) (57.1) (146,876) ( 56) (196,920) ( 46) (309,37) (80) ( 452,308) ( 67 459,226) ( 53) ( 504.95) (s) z e( 27.es) (13.1%) (24.7) 09.4) ( 27.0%) (9.73) (19.73) (14.23) (13.3%) (9,W ( 9.%) (7.63 16.8) <6.32> Intereat ( 0,785 ( 57) ( 62,59) ( 52) ( 88,909) (58) ( 131,3l@ (k7) ( 288,229 ( 631 ( 365,9») ( 52) 5608) Exchange end/ar conver- <5298) 0.)(ff)i2 1 I Ean profit Gas ) 42,586) (01) ( 84M,3) ) (108,011) I ( 178,060 (3) ( 164,083) ( 4) 93,250)( 1) Profit (lods) before ( 56,373) (63.1) ( 20.751) (30) 49,330 53 209,595 59 908,376 ls 1'299,46% 157 2'068,168 169 taxes Tax*9 and appropriations . - I 1,71, (I) ( 85.079) (31) I 400,228) (87) (607,619) (87) (1'033,6U (102) -arpp.a ..neaLturm. ( 1.833) (18'9)- - - 3.090) (26> - • • • - Net profit (loss) < 7.266 82) ( 20.751) <10) 14,462 13 124.520 28 508.1k8 8 692,049 70 I'@34,506 67 y 織 口 頸轟霹， 《．a,t!O0鬨•二［叩浮0．如下tl州•1》 ．珊•．－山，”憫酒o&,6t’蓄，.1 t哺叮勺颼 1942-1967 GO~ LIffigLilrIgg ~ 88= AM M NOM (la Nållions of sola& md 9.8.0 T S %OLE$ U- Elis ut uss - SKES uss M e ut §Mot __Um- CUR ~3 LIABILITIRS 264.617 L92 31&487 53 &,312 a M.050 'Låt U8,973 _a 16122.PI 101 Ovardrafta 3 3m0 i rrfl~port a 1:214 m - Warking capttal 58,472 YI i #Al b ko 353,907 ini 388 140 63 3!2,828 37 02,917 41 input (rav) =tårtala 6,454 7 x916 3é &:öa 74 9 360 m 112:648 20 IN.9% 20 2» 29 UWCCGM Ubt (current portion) 20-660 A 32,- -a 7L 3ZI ål 133.165 J£ 20.310 -2 3 6,1% «LI 472,= 0 ~ r0141 accouflem Pcymbje 231a3 30 »,114 21 47,238 23 60,453 17 112,392 20 159,9k2 a 223'71$ 19 ocker accounte Payahlm « « » « 4 Tauc pdychtoa «d *Lee. 7 8.7% 4 11,523 3 SLUG- 19 73.586 9 132,845 11 141m- eurrant 8.100 6 17,04 6 16M t 17,818L -1 11-012 1 Mrål, CKFUffr LUNILITIU 170,341 172 311,724 215 389,809 IN 636,605 181 193,735 153 1@0701 113 183087 133 NOKOUffl LIMILIT125 4 LoaV-tem debt, 181,212 183 384,166 2* 423.5% 206 850JU 253 1#616,726 297 2#709,129 321 4#1170554 30 52,776 60 44 55 174 mmrTgö. canq~ t~ & ~ "" 53 3:8435 42 98,615 42 133,11 43 240.304 43 361-1445 4 Klåtm co~ ty 3,638 4 03 2 11,829 43,617 9 9106 1 141:491 et Klac. macurmt liabilittec 17.431 ALM IWAL WKTL~ LUKLITEU als 1,3347,222 Till- 255,318 257 450,451 311 575,264 278 '101, 342151C a 8 0799 Iwrr Lom capltal utock 124.361 131,142 131 el ta 1310142 131,142 1310142 trumry coutributim 382 7,130 Nain 1260ý..<705411 sk.költ 124,520 fag la 1 09 103406 me& profit (1069) »0266) : - - 203,61 - ffl,ags 16011 92 l 17 U:Okk bevaluctim. fixad dådet@. prior yr. - 7 el Revaluatim. f~ aemts. year 33.40 - 366,269 7740532 rroffts from prior FY 6 recarves 725 1 ma 138: ffi l:, %TAL ffl wate 141.450 30,331 234 7110,020 18789,764 00 3*256,365 438 5@412181& 491 2,518,458 in 4'630,751 Iffi 74570.4 sihl 111111.01 ma WUL LUNILLUN 567,183 6» 939.8% 703 1314,300 7901 Table 0-1 1982-1987 OUTSTANDING STATISTICS (1o Hillions of Soles and U.S.$) 198818 1985 19 1986 1987 . I T E H S . ORIGINAL BUDGET CURRENT PROJECT SOLES US$ S0LES. IUSV.. SOLES ,.SLUS! 50ES. r USa 50 E 1 s s USr sotns Uss asvRnu300 ,143 434 5941,780 496 729,3s 476 I'S125832 563 3175,t 716 t909,984 698 I'398 401 l30 SALES EXPENSES 226,523 405 402,072 374 398,727 316 890,327 346 157,389 3sS 2'57,20 404 3'848:589 1I FINANCING INCOHE AND EXPENSES 83,371 57 146,676 96 196,920 16 309,$19 80 452,305 67 159,226 Set 656 5o NET PROFIT (LOSS) ( 78,266) ( 82) 20,751 (30) 14,462 33 12 ,520 28 508,148 98 692,049 70 -034,506 67 OPERATING CAS FLOW 411 45.812 is 58.811 87 288,047 '86 8a.285 167 11285.330j 240 *1a98 16 TOTAL BORROWING 125,1 1126 965.197 166 a' 310,4 if1 4'1,017 41 1364V4865 k oon-bankidg Liablities 31841 a A* 1, Banking liabilities Short-tem 2556 61117 1W PN%461 To1 5 3517 --7 099050 TIe E U, 11191:171 Lans-tars 181,212 183 38666 266 . 25,50 206 890,309 253 1'616,726 287 21709,129 32 117 I,5SO 348 MET EQUITY 141,450 206 167,879 178 349,23) 234 78,020 262 10789,74 360 30356,365 430 5$472,812 491 Ratio btm total debt 6 not worth 3.01 2.08 4.54 2.96 2.76 1.39 2.23 1.69 1.59 1.40 1.32 1.1 1.18 1.10 Ratio btv. long-term bank debtes 1.28 0.89 2.30 1.49 1.22 0.89 1.1 0.97 0.90 0.80 0.83 0.75 0.75 070 and net worth Ratio bt.diart-terubkdebt6 ntwor I,08 0.63 1.58 1.02 . 0.91 0.65 0.70 0.60 0.t0 .3S 0.25 0.22 0.2 0.to0 Ratio btw. tot. debt & tot. asts 0.Z 0.68 02 .81 0.75 0.71 0.67 0.65 0.65 0.61 0.58 0,57 O_t2t 0.4 .IS2 RATIO SEWEEN CURRENT ASSETS 6 0.90 1.06 0.95 1.03 0.97 1.1) 1.10 1.19 1.50 1.60 1.88 2.01 1.6 2.0 CURRENT LLABILITIES TOTAL TAXIES PAID 4 4 j3.012.891 40,64 j1~j 132,120 54 462,60 101 1 zjpl'1 2117 ISO Income tax 7145 -AO- 71 $2,14 Il 93 D.L. 33, D.L. i1528-21529 16,182 21.6 12,313 8 10,538 1 - - - * - . Import duties & misc. 28.578 32.1 30,578 21 30,301 24 67.665 28 121,t24 30 194.3%8 II 392,493 31 HUMBER OF WORKERS 18,120 17,880 17,880 17,850 17,880 17,880 -97- (d) Environmental Pollution The objective of decontaminating the Mantaro River was accomplished 100% since the acid tailings from the plant were no longer discharged into that river follow- ing the final start-up of the plant which happened in January 1982. 1. Water Lejel in Yanamate Lagoon The lagoon has been receiving acidic-ferrous solvent extraction waste since January 12, 1982. The information supplied covers the period of January to April, in other words, the period of greater rainfall. The water level rose from 4,345.51 to 4,347.08 m above sea level, in other words, 1.57 m for a period of 77 days or 2 cm per day. This is apparently very fast which is why we must point out that the area that currently gets the waste resembles an inverted cone which explains this rapid increase; however, it must be mentioned that the receiving area's surface will increase since this cone is located in the lagoon's center. We are also studying alternate processes for recycling the tailings. 2. Rainfall Statistics for a period of 15 years give us an average of 855 mm/n2 per year while the annual evaporation on the lagoons in the area reveals a similar evapora- tion rate which is why the precipitation and the evaporation compensace each other annually. 3. Waste Flow and Makeup Solvent extraction waste at design capacity is deposited in the Yanamate Basin at a rate of 3,200 gpm, with the following makeup: Component Content, gpl Compcnent Content, gpl pH ................... 1.2 Zn ................ 1.1 Cu ................... 0.05 As ................ 0.10 FeJT ................. 11.0 Cr ................ <0.01 Fe . ................. 8.6 CI ................ 0.03 Si ................... 0.09 Mn ................ 0.25 Al ................... 0.05 Sb ................ 0.01 Ni ................... 40.01 Ca ................. 0.02 Pb ................... 0.01 Ga ................ 0.01 H2S0 ................. 10.0 Na ................ 2.6 TI .................. <0.01 Bi ................ < 0.01 Co ................... < 0.01 Mg ................ 0.26 Cd ................ < 0.01 4. pH of Water in Yanamate Basin The natural water stored in the Yanamate Basin has a pH of 1.8. The influx of waste from extraction by means of solvents at this time has not managed to bring about a uniform content in the lagoon. In any case, the volume that has been mixed indicates a pH of 1.8. -98- 5. Precipitation of Iron The sedimentary layer that forms the basin's bed is a very fine chalk with 51% CaO or 91% Ca C03, a reagent that acts as a neutralizer of the acid and a pre- cipitator of the iron, both of which are contained in solvent extraction waste. It must be noted that this process is partial and of a limited nature. The possible reactions take place in the following kinetic order: a. H250 + CaCo + H20 -# CaSO4.2H20 + CO2t b. Fe2(S04)3 + 3CaCo3 + 9H20 - 2Fe(OH)3 + 3 CaSO .2H20 + 3CO2f c. CuSO4 + CaCo3 + N20 -- Cu (OH)2 + CaSo4 + CO2 t +'3 In the course of contact between the solid and the liquid, Fe precipitates with a pH of 2.6 to 4.5 in a colloidal form at ambient temperature; the coagula- tion improves starting at a pH of 3.7, a condition which is attained in the interphase and the samehappens in the case of copper. The precipitation of other polluting ions takes place at a pH above 5.0 which would appear to take place for a very short time in the interphase; this is why we do not expect any greater impact on the makeup; in any case, the sequential activiry would be the same with zinc and cadmium. Fe2+ does not change since it requires oxygenation and a pH above 5.0, something which does not materialize. The gels produced here, mechanically supplemented by crystallized gypsum, bring about a diminution in the penetration of the solution through the chalk bed and the bed rock; it eventually turns out to be zero and therefore the reactivity is terminated. This is a good thing since it makes the bed of the Yanamate Lagoon completely impermeable, thus preventing the filtration of acid solutions at other points. 6. Apparent Porosity of Lagoon's Bottom Geophysical methods were used to determine the depths of the bed rock and its nature; we did not expect any percolation of contaminants due to the behavior described in point 5. However, to be absolutely sure, we have a monthly sampling grid here and the composition of those samples is bound to increase to the presence of contaminants. As of this date, there have been no reports of leaks due to filtration and this enables us to say that there is practically no possibility of filtration in the future. We likewise do not expect any percolation due to the permeability of the rock as we go toward the subsoil. 7. Effect of Waste on Animal Life in Yanamate Lagoon The species in Yanamate Lagoon do not correspond to unique species but rather to a wide range of species common in the ecological nucleus; this is why the -99- effect of waste dumping in Yanamate can in no way threaten the extinction of any species; nevertheless, the species will continue to exist in adjacent lagoons, such as in the lagoons of Junin, Huascacocha, and Cunrun. It must of course be understood that the fauna species in the lagoon will be wiped out due to the effect of the impounding of contaminating waste. 8. Useful Life of Yanamate Lagoon-for Waste Dumping To confirm the useful life of the Yanamate Basin as a receptacle of SX waste, statistical on-rhe-spot checks will be performed for at least two precipitation- drought cycles, in the following manner: Rise in lagoon water level, Rainfall, Evaporation, Temperature: Of water in Lagoon Of environment, Flow of waste. The best estimates give us a useful life of 5 years which is why the information will be in the nature of a confirmation. V. BANK'S FUNCTION The Bank's participation during the final design of the project as well as during the configuration of the project's investment structure was quite signi- ficant since it required the ChP to speed up the governmental administrative processing for the purpose of obtaining supplementary foreign (BID) and local (COFIDE) financing so that the project's execution could be launched as soon as possible. During project execution, it became necessary to reduce the project's original scope, replacing the limestone and preparation and neutralization units with a waste pumping line running from the plant to Yanamate Lagoon so as to eliminate the pollution of the San Juan and Mantaro rivers. This modification had the approval of the World Bank. This institution furthermore participated in coordination meetings with the project managers, a cooperative effort which signified support for the determina- tion of administrative alternatives in project management; as a result of that, there were deviations in the project which turned out to be contributing factors in the project's investment costs. -100- TABLE 6. MAIN DATES Effective contract date May 26, 1977 Approval of soil study (time calculation) December 17, 1977 Real start of detail engineering January 30, 1978 Completion of basic engineering (real) March 31, 1978 Completion of basic engineering (planned) June 17, 1978 Completion of detail engineering (planned) March 17, 1979 Completion of detail engineering (real) May 30, 1979 Completion of mechanical portion (real) October 30, 1980 Completion of mechanical portion (planned) December 17, 1980 Start of operation (real) February 7, 1981 Start of operation (planned) March 17, 1981 Start of trial runs April 24, 1981 Reception of plant by Operations Division June 16, 1981 Breakdown of a rectifier and plant shutdown July 24, 1981 Re-start of routine operation and placement in service January 11, 1982 End of technical assistance and attainment of operational standard March 17, 1982 -101- TABLE 7 Xan squmerr rrMS Ao WATInaU.s yft M ME VAT nEATHIT PROJECT AT CERAD DE PASCD ESTIMATE 70M COURM OF MEQISION v0. DESCRECTWG VALUE CS) ORGtIN T-00003-65 Electromacbenical crae 55.74" U.S.A. T-00028-65 Compressed air unit 34.510 U.S.A. T-00031-64 Talves for pipes 8122 U.S.A. T-00074-64 Steel section piece 72.663 U.S.A. T-077-4 Reinforced pLsti pawls 33.764 U.S.A. T-00013-65 Pneumatic uanchi cools 23.140 U.S.A. T-00030-64 Pipeasnd accesoriea of S-S. 1640145 U.S.A. T-00006-65 Pumps and aI*S 14.524 U.S.A. T-0010Z-64 Pipes and duct accesori 22,336 U.S.A. T-00103-64 Electrical accessories 21.234 U.S.A. T-00021-64 PVC protection devics 24.476 U.S.A. T-00025-64 Steel plate and section pieces 62.526 U.S.A. T-O01-64 Accessories for babars 32.550 U.S.A. T-0020-64 Special accessories for pipes 23,526 U.S.A. T-00104- Chemical preparations 386,925 UGLAD T-00114-64 Pipes 168.919 U.S.A. T-00024-65 Separators, rolypropylens 26893 U.S.A. protection devia9. T-00044-65 Check valves (butterfly) 20.874 U.S.A. Sulldo 20.,42 U.S.A. T-00034-651a Borizontal centrifugal pump 34.451 U.S.A. T-00114-64 Pipes and accessories of S.S. 20.020 U.S.A. T-00034- Centrifugal pump 46,109 U.S.A. T-00129 Copper bare 49.211 U.S.A. T-00034-65 Centrifugal package 33.356 U.S.A. T-0035-65 Tranaformer 241.250 U.S.A. Centrifugal package 70.056 U.S.A. Pipes and accessories 248.944 .S.A. TOTAL 2.186.458 Notes: 1) Out of the total. 55% were financed by the 3RF (U.S. $1.202.552) 2) Here we considered only the purchasing orders in excess of U.S. S20*000.00 3) These expenses do not include space parts 4) The amount financed by the BIRF for purchases of less than U.S.$20.000 and mpare parts add up to U.S.S167.501; this table does not include a detailed breakdown of those items because their investment smounts are not relevant 5) The BIRF also financed the freight charges which came to U.S.S131.232 ATTACHMENT E-1223/85 June 10, 1985 Spanish (Peru) OED TS:cc ADDITIONAL COMMENTS ON THE PROJECT COMPLETION REPORT PREPARED BY WORLD BANK OPERATIONS STAFF I. HIGHLIGHTS The last two lines of para. 2 are subjective so we do not feel that Para.2 their inclusion adds anything to a factual assessment of the project but is Text more likely, on the contrary, to prejudice recipients of the'report against amended. the project. II. PROJECT BACKGROUND On the basis of a feasibility study prepared by R.M. Parsons in 1975, which calculated an optimum production scale of 7,000 tons of ore per day and an investment of US$67.7 million excluding escalation and finance charges, CENTROMIN and the World Bank prepared a report in May 1976 which estimated that a higher return could be obtained by expanding production to 10,000 tons/day. A capital cost of US$160.9 million was considered for this expansion, regarding which we felt there was a considerable degree of uncertainty because no feasibility study for 10,000 tons/day had been made, which led to a budget in which direct costs were US$71.9 million and contingencies and escalation were estimated at US$50 million. Owing to financial problems the project had to be suspended at the end of 1977, after the Project Managers had completed the basic engineering. Para. 8 and was subsequently reactivated in May 1979. During the intervening period major exploration work was carried out which showed there were no economically producible reserves in the Pumagayoc area, so that the basic engineering performed was no longer valid for execution of the project. When the project was reactivated, the Project Managers were obliged to substantially modify this basic engineering, especially as regards mine Para.14 development and preparation and additional procurement of mining equipment, Text construction of a mine shaft, hydraulic fill and the Mantaro-Cobriza amended. transmission line, and to include a new ore transportation system, estimating a capital cost of the order of US$277 million, together with a new execution schedule putting mechanical completion of the project in November 1982. -103 - It is important to note that this figure was the first realistic estimate, since it was prepared after the final basic engineering for the project which, in any event, remains valid at the estimated US$160.9 million already referred to and included in the contract documents with the World bank as the base budget for the project. CENTROMIN has carried out various projects with foreign consultants, always working in close collaboration with them, and has satisfactorily completed execution of these projects: by way of examples, mention may be made of the Zinc Plant Modernization Project, the Mine Water Treatment Plant Project, the Lead Agglomeration Plant Project and the Interconnection Project, all of which were satisfactorily completed as a result of the good work by the foreign consultants. Because of shortcomings of the Cobriza Project Management in certain areas, especially the mining area, CENTROMIN had to perform directly the planning of the mine working and calculation of the mining equipment, design of the ore transportation system, design and construction of the hydraulic fill system, supervision of the construction of the shaft, part of the execution and supervision of the mine development works and services, thereby reducing the scope of the work for which Project Management was responsible. However, the fact that the project was completed six months ahead of the date programed by the Management and at a cost of approximately US$44 million less than the Management's estimate, indicates that coordination must have been good, notwithstanding certain conflicts of interest between the two companies as a result of the reduction in the scope of the services, a situation that was not exceptional in a project of this size. It should be noted in this respect that the World Bank staff members assigned to the project collaborated actively toward improving, at certain times, the relations between CENTROMIN and the Project Management which had deteriorated owing to the latter's deficient performance of certain services in the areas mentioned. III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PROJECT COMPLETION REPORTS Ore Reserves During appraisal of the project in 1976, the proven and probable reserves at Cobriza were estimated at 20 million tons of ore, with an average Para.7 grade of 1.8% Cu and 5 oz silver per ton of ore, with an additional potential of 90 million tons of ore, of which 30 million tons was thought to be located at Cobriza and 60 million tons at Pumagayoc; however, it is important to note that these reserves are geological; moreover, it must be borne in mind that there are considerable losses during the mining process because pillars and bridges have to be left for suppport, together with the dilution caused in the blasting phase, especially in a bulk production system. These losses can be of the order of 10-15%, which appreciably reduces the proven and probable reserves and their respective grades. Finally, because of its low percentage of certainty, potential ore cannot in any event be considered in calculating the economic life of a mine. -104 - The present grade being mined at Cobriza today is of the order of 1.3% Cu. This lower grade than that estimatd for the project is due primarily to three factors: (1) part of the pillars and bridges of high-grade ore c"n only be exploited toward the end of the life of the mine; (ii) between 1975 Para.8 and 1982 production was continued at a rate of 2,600 tons/day, with an average grade of 2.2% Cu; (iii) the dilution inherent in the production method presently used at Cobriza. As already mentioned, it should be noted that during the period the project was in suspension extensive exploration work was done which Para.5 effectively ruled out the existence of sizable proven ore reserves at Text Pumagayoc, thus requiring modifications to the process and to the mining appended. system in the final basic engineering. Increase in Production Capacity The alternative mentioned of expanding production by 20% would require considerable expansions in the preparation and development of the mine Para.10 and the mining equipment, an increase of the ore transport system, expansion Footnote of the concentrate thickener, installation of additional flotation cells and 3/. pumps, expansion of the primary crusher discharge system, modifications to the conveyor system and dust collection systems and water supply, while the shortening of the useful life of the mine to only 8.5 years in accordance with the known present reserves would also have to be taken into account. All of this makes it very difficult to consider expansion of production at this time, especially in a situation as at present when copper prices are completely depressed and there is no likelihood of any change in this situation in the short or even medium term. The only area at Cobriza that was studied during the locating of the Para.11 concentrator was the one known as "Plantanal," which is situated at the foot Text of the Miraflores area. The latter has a rather low safety factor, since it amended. could be subject to slides in exceptionally heavy rains, so this alternative was dropped. The Pampa de Coris is formed of similar materials in its talus, but its slopes are much less steep and its base is broader in particular, so that even if a slide were to occur any damage it might cause to the installations would not be irreparable. Consultants for Cobriza In addition to what is stated in II, it should be noted that the Para.13 Project Managers, in recognition of design errors and deficient supervision Footnote for certain works, such as the tailings thickener, agreed to pay the full 4/. compensation established pursuant to the contract, amounting to a sum of the order of US$363,375 which represented 28.5% of the agreed fixed fee, following negotiations of a most gentlemanly nature during which there was never at any time any friction or interpersonal conflict. -105 Cost Adjustment of Cobriza Project Regarding the adjustments of the capital cost of the Cobriza Para.14 Project, we feel that the points discussed display a certain degree of Text subjectivity and wish to affirm that the figures given by CENTROMIN are the appended best estimate it can make and one which has not to date drawn any comments and from the external auditors who examine and report on our financial statements amended. from year to year. Regarding the working capital assigned to the project, the Bank Staff's report takes rais to be the sum equivalent to the additional operating cost of the project for a period of two or three months. This would apply in the case of a project that represented the Para.15 entire operations of an enterprise, but loses validity when the sales of the and expanded plant only reprsent 10% of the enterprise's total sales, where some Footnote additional administrative rationalization measures could significantly reduce 5/. the working capital requirements. Moreover, it is known that all of Cobriza's new concentrates production is intended to take the place of the bought-in concentrates that have been used in our La Oroya Smelter, so the fact that these concentrates no longer have to be purchased outside has reduced our working capital requirements, rendering the incremental working capital needs for Cobriza insignificant. With regard to interest during construction, and coinciding with the Bank's viewpoint, our final internal report on the completion of the Cobriza Para.15 Project includes the finance charges up to December 1983 as interest during and construction. As of the date of that report, December 1984, the total project Table I. cost can be summarized as: Indirect costs 38,049.4 Direct costs 150,596.6 Working capital 1,638.4 Finance charges 42,700.0 US$232,988.3 million We would point out that we are putting the final cost of the Para.36. Cobriza Project at US$7 million less than the figure reported a year earlier Footnote in the Bank PCR and US$44 million less than the estimate made by the Project 10/. Manager in 1979. - 106- Mine Water Treatment Plant The mine water treatment plant was intended basically to meet CENTROMIN's obligation to stop polluting the Mantaro river, and this primary objective has been accomplished. Para.16 Text In cost terms, we used to only produce a copper "cement" with amended. 60-70% Cu that was sent to La Oroya for final processing, whereas the present plant produces refined copper of 99.9% Cu the cost of which is, of course, Para.18 higher than for cementation; moreover, in view of the scale of the copper Text production the acidulated mine waters have to be viewed as a byproduct of the appended. mining operation and the copper content of this water will depend on the content in the materials mined, especially from the open-cut workings. The main equipment, such as the transformers and rectifiers and Para.18. pumps, had problems from the start of operation, which considerably delayed start-up. The purchase of equipment is the outcome of the international competitive bidding required by the loan agreement which, to a certain Para.18 degree, tends to hinder procurement of the most appropriate equipment since Footnote it is the bidder who meets the technical specifications and offers the lowest 7/. price who gets selected, as a result of which when start-up time comes the equipment procured may not always prove to be the best suited. Para.18 It must be emphasized that the project as originally designed Footnote envisaged a progressive manual reduction of 2% in production owing to a lower 6/. copper content in the mine water. CONCLUSIONS AND LESSONS TO BE LEARNED In general terms we are in agreement with the conclusions and lessons as set forth in the Bank report. However, as we have noted in the course of our comments, we do not consider it fair to bring in the following points which, as we have demonstrated, are without validity: (i) Nonaccomplishment of the technical objectives of the Cobriza Project Para.36 The Cobriza Project has met all its technical objectives, reaching Text partially design capacity in the fourth quarter of 1983. Production is amended. currently 300,000 tons/month of an average grade of 1.33% Cu. (ii) Execution cost overrun Para.36 It is important to bear in mind that the final cost of the project Footnote cannot be compared with the amount shown in the contract documents, 10/. which is only of the order of US$160.9 million, since that figure was arrived at without any feasibility study. The final cost of the project was US$232.9 million which, if compared with the final estimate of US$277 million based on better knowledge of the mineralized deposit by the Project Manager in 1979, represents a saving of approximately 20%. - 107- (iii) Inadequacy of reserves Para.9 As regards reserves, after having operated for more than three Footnote years as a project there are sufficient proven/probable reserves 2/. for ten years as a minimum, while there is also a significant potential that would make it possible to continue operating for a further five years. We would also like to add the following suggestions for consideration in future projects: (i) Regarding the bidding and contract award process for critical main equipment, we feel that greater weight should be assigned to the quality of this equipment than to its cost. (ii) To give greater certainty to the capital cost of a project, and its return, the loans granted by the Bank, based on the feasibility study, should be oriented toward development of the basic engineering with some type of commitment that will guarantee for the borrower Bank participation in the subsequent execution of the project if the economic and financial results of the basic engineering so warrant. KEY PROJECT DATA There is a sizable interval between the completion date of the project and start-up of operations and the first year of operation. This led to considerable variations in the total project cost and the overrun on fixed assets, with the result that the rate of return on the project was different from that expected. Financial Covenants - Ratios Regarding the financial covenants, our position is shown in a bad Para.33 light in the projections in soles presented by the World bank, because the Text exchange rate used is not the real one but the end one, since our income is appended in dollars. The distortion between the financial ratios in current soles and and in US dollars is due to the valuation of inventories in time of inflation Footnote (the selling price uses the average cost system) that is partially corrected 9/. by the conversion into US$. -108 - These projections are as follows: Projections in Soles 1985-89 1985 1986 1987 1988 1989 - Current Ratio (1.5) 0.78 0.85 0.89 0.90 0.91 - Debt/Equity Ratio (50.50) 62/38 69/31 68/32 73/27 77/23 Projections in Dollars 1985-89 1985 1986 1987 1988 1989 - Current Ratio (1.5) 1.07 1.10 1.08 1.06 1.07 - Debt/Equity Ratio (50.50) 40/60 45/55 47/53 50/50 55/45 In our opinion, the negative result observed in the Cobriza Project is due to two decisive elements: 1. The significant reduction in Cobriza's metal content and Para. 38. reserves. These two factors, regarding which there is always a degree of uncertainty at the time a decision is taken, turned out to be unfavorable. 2. The need for careful updating at the time the project was Para. 39. reactivated; this aspect was not apparently accorded the importance it should have received, which is is something that should be borne in mind by both CENTROMIN and the banks that financed the project.