Bolivia - The mining and metallurgical sector

~~~~~~~~~- f DOCUMENT OF INTERNATIONAL BAN POR CEeONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. PI-14a THE MINING AND METALLURGICAL SECTOR BOLIVIA VOLUME I THE MAIN REPORT DIAGNOSIS AND RECOMMENDED DEVELOPMENT PROGRAM December 7, 1972 Industrial Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Equivalents 1 Bolivian peso = os$s.o84 US$1 = 11.88 Bolivian pesos 1 million Bolivian pesos = US$84,175.00 Weights and Measures Unless otherwise specified all weights and measures are in the metric system 1 Metric Ton = 1.102 Short Tons 1 Metric Ton = 2204 Pounds 1 Metric Ton = 1.000 Kilograms Abbreviations COMIBOL = Corporacion Minera de Bolivia (Bolivian Nining Corporation) ENAF = Empresa Nacional de Fundiciones (National Smelting Company) GEOBOL = Servicio Geologico de Bolivia (Bolivian Geological Service) IIMM = Instituto de Investigaciones Minero-Metalurgicas (Institute for Mining and Metallurgical Research) BAMIN = Banco Minero (Mining Bank) CBF = Corporacion Boliviana de Fomento (Bolivian Development Corporation) BISA Banco Industrial, S. A. (Industrial Bank) CORDECO = Corporacion de Desarrollo de Cochabamtba (Development Corporation of Cochabamba) tpy = tons per year IMPC = International Metal Processing Corporation Note: Under the Government's "Stabilization and Development Plan" the Bolivian Peso was devalued to $b 20.0 per US$ on October 27, 1972. The effect of the devaluation has not been reflected in the figures quoted in this report.  BOLIVIA THE MINING AND METALLURGICAL SECTOR VOLUME I: MAIN REPORT DIAGNOSIS AND RECOMMENDED DEVELOPMENT PROGRAM TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .......................... i-iii I. INTRODUCTION ......... ............................ 1 II. SECTORAL ANALYSIS ............................... . 1 A. General ............................... 1 B. Sectoral Structure and Performance .......... 2 1. Large Mining Sector: COMIBOL ........... 3 2. Medium Mining Sector .. .................. 4 3. Small Mining Sector ..... ............... 5 4. Regional Concentrators ..... ............ 7 C. Government Policy ...... ............. 7 1. Recent History: Increased Public Ownership ............................ 7 2. Government Mineral Sector Development Plan ........ ......................... 8 3. Project Appraisal ..... ................. 9 4. Public and Private Sector Development .. 10 D. Institutional Deficiencies ................ .. 11 1. Public Sector .......................... 11 2. Private Sector ......................... 11 3. BAMIN ........ .......................... 12 4. IIMM and GEOBOL ........................ 13 5. COMIBOL and ENAF ....................... 13 6. Ministry of Mining and Metallurgy ...... 13 7. Credit Channels ........................ 14 E. The Exploration Problem .......... .. ......... 15 1. The Status of Exploration .... .......... 15 2. Source of Exploration Capital ........... 16 3. An Exploration Fund ..... ............... 16 4. The NASA Program ....................... 17  Table of Contents (Cont'd) III. THE RECOMMENDED PROGRAM ., ......................... 17 A. Institutional Reorganization ................ 17 1. Objective ............................... 17 2. Program ................................. 18 B. Credit For Medium ancl Small Mines 18 C. Exploration ............... 19 D. Pre-Investment Studiets . . 21 1. Mutun Iron Ore .21 2. Regional Concentrators .21 3. Integrated Tungsten Industry 21 E. Projects for early consideration . .22 1. Tin Recovery from Tailings .22 2. Mutun Iron Ore .23 3. Regional Concentrators ..... ............ 23 4. Vinto Tin Smelter Expansion .23 5. Tin Volatilization Plants .24 6. Integrated Tungsten Industry 24 F. Projects for later consideration . .24 G. Summary Recommendatios . .26 MAP APPENDIX I - MINERAL EXPORT TONNAGES AND VALUES 1959-70 APPENDIX II - M4INERAL SECTOR INVESTMENT PROGRAM VOLUME II - ANNEX 1: EXPLORATION AND MINING SURVEY VOLUME III - ANNEX 2: METALLURGICAL SMELTING AND REFINING SURVE'Y VOLUME IV - ANNEX 3: CREDIT INSTITUTIONS SURVEY Note: The three supportings volumes have not been prepared for distribution but can be made available on request.  SUMMARY AND CONCLUSIONS i. Mining has exerted and will continue to exert a dominant influence in the economic and political life of Bolivia. In the 1965-69 period it contributed 8-10% of the GNP and provided over 80% of export earnings. Miners, although only 3% of the labor force, are well organized and represent a power- ful political factor. ii. Three mining sectors can be identified: the large mining sector, the medium mining sector and the small mining sector. The large mining sec- tor, accounting for 50% of total mineral output, consists entirely of the Corporacion Minera de Bolivia (COMIBOL), a government owned enterprise. COMIBOL's performance in the management and development of mines has not been satisfactory. The medium mining sector, accounting for 25-30% of total mineral output and comprising some twenty-two private companies, including the seven foreign-owned mining firms that operate in Bolivia, has in recent years been the most dynamic. The small mining sector, with 20-25% of total mineral output, comprises 2000-2900 private operations ranging from one-man mines to medium size enterprizes and cooperatives generally operating on a very primitive basis with low productivity and marginal returns. Over 100,000 Bolivians are supported by small mining and there is no practical alternative activity for most of them at this time. iii. After the death of President Barrientos (April 1969), there was evident a very significant shift in Government policy towards public sector ownership and exploitation of all natural resources. This shift in policy was reflected in changes in the legal codes relating to the mining sector, reliance on public sector agencies for constructing and managing the tin, antimony and bismuth smelting projects and in the nationalization of several foreign controlled ventures. The Bolivian public sector was in no position to raise the investment capital and muster the technical and managerial capacity required to develop adequately a fully nationalized mining and metallurgy sector. There was therefore a need to formulate a more balanced strategy permitting optimum use of the joint resources of the public and rivate sectors, both domestic and foreign, - particularly in view of the widespread ownership of individual mines and the dynamism of the private owners. The Government of President Banzer, which came to power in 1971, is cognizant of this need and slowed the trend to public sector ownership, making conditions more conducive to private investment. iv. Concomitant with a greater reliance on the private sector is the need to adopt measures to improve the performance of the state corporations primarily responsible for mining and processing. Bolivia has numerous specialized institutions and agencies serving the mining and metallurgical sectors. however, their roles and areas of responsibility are often ill- defined, with multiple functions and overlapping responsibilities. This, together with the problems of insufficient funds, political interference, unstable policy, high management turnover and scarcity of qualified staff, have prevented effective long-range planning and a rational coordination of  - ii - efforts. It is recommended that the responsibilities of each agency be clearly defined and their activities coordinated to bring about greater effectiveness. In addition, technical assistance and staff training programs should be imple- mented in order to achieve more efficient administration and improved services. v. Provision of adequate credit for the development of the medium and small mines needs special attention. The mission estimates that as the climate for investment improves there will be a demand for about $20 million of credit. It is, however, necessary to investigate further the existing credit institutions to determine their roles in providing and channelling the required credit prior to recommending any specific reforms and assistance. A related approach to bank credit would be the formulation of an equipment leasing company to serve both the small and medium mining sectors. vi. One of the major problems of the mineral sector has been the failure to follow a well defined and sustained exploration program. Only about 25% of the country has been geologically mapped and less than 5% explored systematically. Exploration for reserves in the existing mines has lagged creating a situation where many mines are operating with a critically low level of reserves. This situation is partly the result of allocating scarce public funds to current needs and partly government policy which has effectively excluded the traditional sources of exploration capital - the international mining firms. It is recommended that an Explora- tion Fund be established, with government support. Carefully screened ex- ploration projects would then be financed jointly by the Fund and private and/or public entities. The fund would be replenished from revenues of those projects that successfully prove-up commercial deposits. vii. In the past, economic and financial project evaluation has been desultory with the result that several projects of doubtful viability but of great political appeal have been undertaken at the expense of alternatives which appear to be financially and economically more attractive. There is emerging, however, an increasing awareness of the need to carefully evaluate projects, as evidenced by the following ongoing or recently completed feasi- bility studies: (a) a feasibility study covering the Mutun and Cochabamba Iron Ore deposits has been conducted by Arthur D. Little (ADL). COMIBOL is now studying the project in further detail; (b) ADL has also prepared a feasibility study for a proposed tungsten plant to produce tungsten powder; (c) feasibility studies for the establishment of two regional concentrators are being prepared by Instituto de Investigaciones Minero-Metalurgicas (IIMI), a Bolivian public research institute. Despite this reorientation a more fornalized approach to project identifica- tion, preparation and implementation of investment projects is needed along with improved administration to facilitate accelerated mining development.  - iii - viii. Based upon an analysis of the current situation and a review of the available data, the Bank has formulated a tentative program for development of the mineral sector in Bolivia, for the period 1972-76. High priority projects expected to be suitable for consideration by financing agencies in 1972-73 were identified within three areas of activities. These tentative projects representing an investment in the order of US$98 million are briefly summarized below: Total Investment (US$ millions) Technical Assistance Institutional Reorganization 0.2 Pre-Investment Studies 0.1 Mining Credit Expansion Development Finance 20.0 Exploration Fund 14.5 Projects Tin Tailings Recovery 9.0 Mutun Iron Ore 34.0 Tungsten 6.0 Regional Concentrators 1.5 Tin Benefication and Smelting 12.0 Total 97.5 In addition to this program it is expected that towards the end of the 1972-76 period other projects will be developed requiring an investment anywhere in the range of US$50-100 million. The breakdown into local currency and foreign exchange requirements of the total program will only emerge after the completion of the requisite feasibility studies. While it is not possible to indicate at present as to what proportion of this program could be financed by Bolivian public and private resources it is eivident that external sources will need to provide the preponderance of the resources required. ix. It is expected that this program, if carried out will lead to average annual growth in mineral sector output in excess of 6% by 1975-76, and make a significant contribution to Bolivia's export earnings.   I. INTRODUCTION 1.01 The Bolivian mining sector has been analyzed in the Bank sectoral study of September 1970 "Current Economic Position and Prospects of Bolivia - The Mining Sector". 1.02 The prime objectives of the mining and metallurgical mission to Bolivia of February 14 to March 13, 1971 were to (1) up-date the findings of the 1970 study, and (2) identify and evaluate specific programs and projects wherein external financial assistance might be feasible. This report presents a general analysis of sectoral problems leading to program and project recommendations. Detailed treatment of the three areas of concern - mining, metallurgy and credit - is available on special request as Annexes: Annex 1 - Exploration and Mining Survey Annex 2 - Metallurgical (Smelting and Refining) Survey Annex 3 - Credit Institutions Survey 1.03 This report was prepared by the mission consisting of C. Goderez (Chief), A. Freyman (mining consultant), L. G. Bonar (metallurgical con- sultant) and R. Helling (development finance consultant). It also embraces the findings and proposals for credit channels of subsequent missions con- sisting of Messrs. G. Renger and J. Mirski. No attempt has been made to update the statistics presented in the report. The assistance of staff members of the Ministry of Planning, Ministry of Mines and Metallurgy, COMIBOL, ENAF, IIMM, GEOBOL, Banco Central, BAMIN, CBF and CORDECO is grate- fully acknowledged. II. SECTORAL ANALYSIS A. General 2.01 In Bolivia, with a population of 5 million of which about 40% or 2 million are of working age, mining provides jobs for some 40,000 full- time and 15,000-20,000 part-time workers, equivalent to 3% of the working population. Its contribution to GNP has declined from about 15% in 1950-55 to 8-10% in the 1965-69 period. Despite this declining trend, the mining sector exerts a dominant influence on the economic and political life of the nation. It is the major foreign exchange earner, traditionally provid- ing over 80% of export income. Mineral export tonnages and values for the period 1959-70 are presented in Appendix I. Minerals earned US$167 million of total 1969 exports of US$201 million; tin alone accounted for US$102 million. (See Annex 1, pages 1 to 6 for more detail). 2.02 Miners are well organized in powerful labor unions and cooperatives and are a predominant political force in the nation. The unions have succe- eded in attaining very high wages by Bolivian standards and relatively generous social benefits. Despite improvements, general conditions affect- ing the miners well-being are, however, still deficient when compared to  the standards of more advanced nations. Herein lies the fundamental challenge - how to respond to the legitimate aspirations of the miners while simultaneously improving the growth prospects of the sector. 2.03 Bolivia's geography has been a serious handicap to development, in a large measure negating the potential benefits of its rich mineral en- dowment. Land-locked and isolated from major markets by long distances and some of the most difficult terrain in the world, Bolivia faces freight costs far above normal. The resultant squeeze between high cost of imported capital goods and low net receipts otn exports places limitations on what natural resources Bolivia can economically exploit. To the extent that an upgrading strategy can be implemented with financially sound projects, mineral concentration, smelting and refining and forward linked industries producing finished products should be an integral part of Bolivia's develop- ment strategy. B. Sectoral Structure and Performance 2.04 Ownership and operation of the mines is classified in three categories: (1) Large Mining Sector - consisting entirely of the Corporacion Minera de Bolivia (COMIBOL), a government corporation which operates 14 major mines and leases others to cooperatives and mining firms. Approximately 50% of total mineral production is generated by COMIBOL and cooperative operated mines. The total labor force including cooperatives is about 22,000; (2) Medium Mining Sector - cons:Lsting of some 22 private companies, (including 7 foreign companles), producing 25%-30% of the national mineral output with 7,000 employees. Generally, these operations are technically and financially viable; in recent years this sector has been the most dynamic in Bolivia; (3) Small Mining Sector - consisting of between 2,000 and 2,900 private operating units ranging from 1 man or 1 family "mines" to companies which compare in size and output to the smaller mediumt sector companies. Estimated working force of this sector is between 20,000 and 30,000 full and part-time, producing between 15 and 20% of the national mineral output. Although operations are generally marginal, over 100,000 persons are dependent on small mines for their livelihood and there is no practical alternative activity for most of them at this time.  -3- 1. Large Mining Sector: COMIBOL 2.05 In 1952, the three major private mining companies were nationalized and incorporated into one state corporation, COMIBOL. Operational results in recent years are tabulated below: Table 1: COMIBOL INCOME SUMMARY - 1967-1970 (In millions of U.S. dollars) 1967 1968 1969 1970 (est.) Net Sales 60.9 62.0 73.9 79.2 Mine Operating Cost 51.5 51.8 54.2 61.2 Royalties 1/ 5.5 4.7 7.7 8.8 Operating Income 3.9 5.5 12.0 9.1 Other Income 2/ 1.1 0.7 1.2 n.a. Gross Income 5.0 6.2 13.2 n.a. Extraordinary Deductions 3/ 3.9 4.6 8.8 n.a. Net Income before taxes and legal workers' bonus 1.1 1.6 4.4 n.a. Tax - - 0.7 n.a. Legal Bonus - 0.4 1.1 n.a. Net Income 1.1 1.2 2.6 n.a. 1/ Royalties paid to Government on minerals exports. 2/ Lease income; exchange gains; profits on sale of surplus materials and equipment, etc. 3/ Losses on non-mine operations; indemnization of discharged workers; maintenance services to small mines; exchange losses; special bonuses; adjustments for pilferage, etc. 2.06 Between 1964 and 1970, the Triangular Plan (a joint program of USAID, IDB and German banks) provided credits of US$37.6 million to COMIBOL. Additional credits totalling US$24 million were obtained over the same period from USAID, the Central Bank, and other sources. Of the total US$61.5 mil- lion, US$57.9 million had been drawn down and US$29.2 million of principal and US$11 million interest repaid by December 31, 1970. Expansion and moder- nization expenditures, accompanied by programs aimed at improving labor utilization and strengthening management and administration by 1965 had converted COMIBOL from an enterprise losing US$1 million a month in 1963 to a profitable operation.  - 4 - 2.07 The encouraging trend through 1969 was reversed in 1970 when mine operating costs including royalties rose 13% while revenue increased only 7%. Lower world market prices were a contributing factor but the sharp increase in operating costs of 13% compared to the average increase in 1967- 1969 of 3.6%, and loss of management: authority were the primary causes. In 1970, workers who had been discharged under the Triangular Plan, were rehired adding approximately US$2 million to annual operating cost. On January 1, 1971, by government decree wage rates were raised to the levels of the pre-1965 period. According t:o COMIBOL's estimate, the forced in- crease represented a US$6 million annual increment in the cost of labor. Furthermore, under a law designed to recapitalize the Banco Minero (BAMIN), COMIBOL is required to pay BAMIN about US$1 million annually in mineral marketing commissions whether or not COMIBOL uses the service. Between increased operating costs and generally depressed world market prices, it is likely that COMIBOL will be operating on a marginal basis for some years to come. 2.08 Regardless of any swing in policy which may take place to restore balance between the public and private sectors, COMIBOL is the predominant factor and likely to remain so. It is necessary, therefore, to consider measures to reestablish the favorable trend of 1965 to 1969. Repetition of the mass layoffs and wage cuts of 1965 is probably not feasible and almost. certainly counter-productive in the long term. Such drastic measures appear to create more problems than they solve. Even assuming the existence of alternative job opportunities in other geographic areas or industries, traditional social and institutional forces must be considered. On the other hand, unnecessarily inflated production costs and reduced profitability would have a serious effect on COMIBOL's cash flow, credit-worthiness and general ability to maintain a suitable rate of growth. One approach to the problem would be to "freeze" the labor force and rates of compensation while seeking to expand COMIBOL' s operations as rapidly as possible through in- tensified exploration and economical:Ly sound projects. Surplus labor would eventually be absorbed. This would require a period of stability and uninterrupted production through union cooperation and acceptance of proper norms of labor discipline and reestablished management authority. COMIBOL should be able to overcome eventually the current inflated operating cost. The recent devaluation of the Bolivian currency should help to put COMIBOL on an improved financial footing, provided wage rates are stabilized. 2. Medium Mining Sector 2.09 In the 1960-1970 decade, the private mining sector grew at an average rate of 7.1% at constant prices. With respect to the most important mineral, tin, comparative growth in the three sectors between 1965 and 1969 is shown below:  - 5 - Table 2: TIN PRODUCTION 1965-1969 (US$ millions - current prices) Year COMIBOL Index Medium Index Small Index Average Tin Mining Mining Export Price 1965 53.2 100 15.0 100 11.4 100 1.754/lb 1966 62.2 117 16.4 101 10.7 94 1.62i/lb 1967 58.5 110 17.9 112 10.9 95 1.514/lb 1968 59.2 111 20.7 137 12.5 110 1.434/lb 1969 64.6 121 23.0 153 14.7 130 1.56i/lb For the period 1952-1969, the graphs on the following page compare the sectoral growth rates for tin, lead, antimony, zinc, tungsten and copper. Clearly, the private sector, and particularly the medium mining component of this sector, has been more dynamic since the early 1960's. Statistics for 1970 and 1971 are not available in detail, but there is no doubt that new private development had practically ceased. Any growth in production during this period would be the result of investment during the previous four or five years. If the investment hiatus of 1970-1971 were to continue, production growth would drop and eventually become negative as old mines were exhausted. 2.10 Given stable political conditions and appropriate policy and investment climate, there is no reason to doubt that the medium mining sector will recover its impetus. Recovery of the investors confidence is already evident; several entities are seeking finance for projects, while others are preparing new projects. Increased credit availability for ex- ploration and mine development would stimulate the process. 3. Small Mining Sector 2.11 Small mines are generally operated on a very primitive basis characterized by poor health and safety standards, almost no exploration, little or no working capital and low productivity. Most of the miners in this sector exist on the barest subsistence level. The problem of overcoming the classic deficiencies of small business generally - lack of advanced technology, management and credit - is compounded by the physical dispersion of hundreds of operations over the difficult terrain of Bolivia's altiplano. Past efforts to inject capital and technical assistance have achieved little more than to emphasize the stubborn nature of the difficulties. Specifically, the small mining sector requires sustained assistance in: (a) Exploration and Mine Development Planning - proving ore reserves and planning exploitation (b) Credit - for small but efficient units of mining and milling equipment to increase productivity (c) Beneficiation Facilities - providing efficient beneficiation facilities to reduce costs and minimize loss of mineral values (para 2.12).  LA 0 LA 0 LA ~~CDa, 0 o A 0 A 0 L c, 195 2 1952 -1952 195 3 1953 1953 ' r ~ 1954 C1954 ' ~ (1954 1955 1955 '..1955 1956 t1956 1956 1957 -1957 - 1957 1958 1958 1958 O 1959 0 1959 - Z 1959 rrn 1960 r' 1960 - 96 I -~~~n / I 1961 m 1961 -1960 . r 1962 >* 1962 NZ 1962 Zb 1963 -11963 1963 ry1 1964 / 1964 1964 - 1965 \ C) 1965 ,.1965 1966 01966 *1966 Z 1967 1967 196 'm Inca ~ ~ ~ ~ ~ ~ ~ nr198n 1968- 0~~~~~~~~ * m~ 1952 1952 - -1952 0 1953 1953 1953 - 1954' 1954 1954- 1955 1955 -41955- 1956 \. 1956 1956 0 1957 - 1957 195 S7-r 1958 r-1958 1958 r 1959 0 1959 01959S 1960 0 1960 N 1960 I 1961 -2 V 1961 1961 - m o rr 1962 - 1962 1962 -, 1963 - 1963 19630 1964 - 1964 1964 1965 - - 1965 )1965 1966 -1966 *1966 1967 ~ ~ ~ 97 ~1967 1968 1'96')8' J 968 - 1969 1969 I ~~~~~~~~~~~~L 969 M 96 02 "f c - - . 0V  - 7 - The average small mining operation has neither the capital nor the technical competence to explore, properly map and exploit its ore reserve. The exist- ing credit institution serving the small miners, Banco Minero (BAMIN), is in bad financial shape and in no position to provide effective technical assistance. The lack of exploration and credit in this sector is but one facet of the total problem in Bolivia; this sector also needs a substantial amount of technical assistance. Both constraints will be analyzed more fully in subsequent paragraphs. 4. Regional Concentrators 2.12 A supplementary program which has received some attention in Bolivia is the "regional concentrator" concept. Today, the most primitive methods are used to upgrade run-of-mine ore by the small miners. Crushing by boulders and cobbing (hand picking) are typically the extent of "benefi- ciation". Occasionally crude and inefficient washing and gravity separation systems are constructed with any materials available. The product is transported long average distances at high cost to one of BAMIN's collection points. The net return to the miner under these conditions is minimal. Some operational improvement could be expected with increased credit avail- ability to finance simple "equipment packages" - portable air compressors, pneumatic drills, mechanized crushers, pumps, simple jigs, etc. - but the possibilities are limited because of the inherent limitations of small scale operations. Regional concentrators, as custom mills, would provide large scale efficient facilities to further upgrade ore or concentrate produced by small miners. A number of regional concentrators, located strategically throughout Bolivia's mineral band, could effect a basic im- provement in sectoral structure and performance. C. Government Policy 1. Recent History: Increased Public Ownership 2.13 The history of Bolivia's mineral development in recent years is analyzed below as a basis for consideration of desirable policy changes. ~tarting in 1969, the policies of the Barrientos regime, which had been based on attracting foreign private capital, began to swing to a reliance on government ownership and government foreign borrowing. The government of President Torres which came to power in October 1970 accelerated the trend to public sector ownership and management of the nation's mineral resources. Decree Law 09476 of November 23, 1970 modified the Mining Code and reserved to the state all new smelter and refinery development, although existing private smelters and refineries were permitted to continue opera- tions within the limits of their installed capacity. 2.14 In January 1971, the privately-owned tin concentrator of Inter- national Metal Processing Corporation (IMPC) at Catavi was taken over by COMIBOL. In March 1971, COMIBOL unilaterally cancelled a private mining concession at Tihu. The Matilde zinc-lead mine, a US$13 million joint venture  - 8 - of U.S. Steel and Englehard Minerals and Chemicals Corporation was nationalized on April 29, 1971. A contract was signed in April 1971 with Scodaexport (Czechoslovakia), to finance and buiLd a government-owned antimony smelter for ENAF. Negotiations with other European countries were undertaken to provide a zinc smelter and a small copper smelter to be owned and operated by ENAF and the Univer3ity of San Andres, respectively. The tin smelter at Vinto, which started commercial production in January 1971, and the Bismuth smelter at Telamayu under construction are government projects (ENAF and COMIBOL, respectively). 2.15 However, the Government of President Banzer which came to power in 1971, slowed this trend to public sector ownership, making the con- ditions more conducive to private investment. This has provided a basis for a more balanced approach between the public and private sectors to mineral sector development. The DIPC issue was settled with IMPC being partly in- demnified for their investment and a mixed corporation set up; owned 55% by COMIBOL and 45% by IMPC. Also a tentative agreement has been reached with U.S. Steel and Englehard over the settlement for the Mina Matilde zinc- lead mine. The Government is conscious of the need for and is making some effort to attract foreign private capital into the sector, and has responded favorably to the Bank's observations. On December 16, 1971, a new Law of Investments was decreed, providing incentives to approved new investment, public and private, domestic and foreign, in industry, mining and other sectors. A commission of experts has been appointed to review and revise the Mining Code; its recommendations are expected very soon. 2. Government Mineral Sector Development Plan 2.16 In line with its policy the current administration has formulated a Mineral Sector Development Plan, for the 1972-76 period as presented in Appendix II and summarized below: Table 3: Mineral Sector Investment Program Investments Entity 1972 1973 1974 1975 1976 Total (%) --------------------US$ million equivalent-------------------- COMIBOL 6.8 20.2 20.2 20.7 22.3 90.2 (46) ENAF 1.5 7.3 11.8 15.0 18.5 54.1 (28) GEOBOL-COBOEN IIMM 1.9 4.4 5.6 5.6 5.6 23.1 (12) Private Sector 1.6 4.6 5.5 6.5 8.0 26.2 (14) 11.8 36.5 43.1 47.8 54.4 193.6 (100)  While recognizing the need for private sector development the administra- tion places major emphasis on public sector investment in the mineral sector. The program relies heavily on investments by COMIBOL and ENAF which include: exploration, rehabiliation of existing mining and processing plants and construction of new beneficiation and smelting facilities (see Appendix II). Investment by the agencies - GEOBOL, COBOEN and IIMM is expected to increase following some reorganization, clarification of responsibilities and restruc- turing of work programs. Investment in the private sector is expected to increase as the investment climate becomes more stable, the investors gain confidence, and as project identification and preparation gains momentum after a period of stagnation. The program reserves all smelting and refining activities for the state, and envisages a significant shift to further pro- cessing of the minerals within the country. 2.17 More than 85% of the finance required for the COMIBOL program is expected to come from foreign souces, and a similar ratio is envisaged for ENAF's programs similar to the private sector. A smaller proportion of GEOBOL's, COBOEN's and IIMM's investments will come from foreign sources. More than 75% of the total investment program (US$145 million) is expected to come from foreign sources and, the remainder (US$50 million) from domestic savings - or an average of US$30 million per year from foreign sources and US$10 million per year from domestic savings. This is an extremely ambitious target, and taking into account the large amount of technical assistance re- quired not only to implement the projects but also to identify, prepare and bring the projects to a level suitable for foreign finance, the mission casts serious doubt on the realism of the program for the years immediately ahead. 3. Project Appraisal 2.18 Although the current mineral sector development plan is somewhat more realistic than the previous (Torres) plan, it still appears somewhat over-ambitious. Not only did the above strategy place a major call on future public savings, but the public savings would have been utilized to a sub- stantial degree in projects of questionable financial and economic viability, such as the Vinto Tin Smelter and the proposed Antimony and Zinc Smelters. From the detailed analyses of these projects presented in Annex 2, it appears that financial viability has played a minor role in the decision making process. 2.19 The point is that vertical integration of the mining and smelting industry does not automatically assure increased benefits. Each project must be evaluated on its merits. Scarce resources have been allocated to projects which will make no contribution to future savings or 'will actually have a negative financial effect. National economic considerations might conceivably justify an occasional project of this type but there was no evidence of careful evaluation of alternatives or anything better than cursory financial and economic analysis.  - 10 - 4. Public and Private Sector Development 2.20 The basic historical issue faced by the government is the relative roles to be assigned to the public and private sectors. Total dependence on government operating agencies appears unrealistic since no reasonable pro- jection of public savings and external loans to public agencies can provide all the capital needed. Given national sensitivities, it would be equally unrealistic to expect a full swing to total dependence on the private sec- tor. Therefore, considering all factors, the policy that holds the best promise would be a balanced approach with appropriate divisions of respon- sibility, projects and resource allocation between the private and public sectors. A major effort appears to be necessary merely to reestablish COMIBOL as a financially sound operation. While implementing COMIBOL's rehabilitation, new exploration and development projects should be opened to private participation. Various forms of collaboration other than out- right concessions are possible. Joint ventures between foreign and domestic groups, with or without government (COMIBOL) capital participation, can be structured. Management contracts with foreign firms to assure efficient operations are often advisable, but do not necessarily substitute for equity participation. 2.21 An additional approach which should be explored where feasible is long term purchase contracts with foreign buyers who would provide initial financial, technical and management assistance. Indonesia has developed ain interesting "contract of work" concept. Concessions in that country are explored and exploited "on behalf of" a state agency unaer contracts specify- ing in detail the obligations of the contracting parties and the sharing of the proceeds. In essence, the private contractor provides the capital, technology and management and the government collects fees, royalties, taxes and bonuses, the last item tied to world market price rises above a base level. Success of the program is evidenced by the fact that nine large mining consortia are financing major exploration and development programs. The key ingredient is confidence in the stability of government policy and well defined mineral legislation. 2.22 While it would be unrealistic to anticipate anything more than cautious interest on the part of international mining firms for the immediate future, immediate steps leading to an improved investment climate should, and have been taken. As mentioned in Para. 2.15 a new Law of Investments was decreed in December 1971, providi.ng incentives for new investments. The law reserves the metallurgical and steel industries to state enterprise, but also provides for private particlpation in these sectors under certain conditions when "convenient to national interests." Joint public and private capital ventures are expected to be the predominant means of accomplishing the objective of increased private participation.  - 11 -. D. Institutional Deficiencies 2.23 The specialized institutions, agencies, government corporations and private associations serving the mining and metallurgical sectors are listed below: (A detailed analysis of these institutions is presented in Annexes 1 and 3). 1. Public Sector (1) Ministry of Mines and Metallurgy - usual ministerial functions plus direct control of following government agencies: (a) COMIBOL (Corporacion Minera de Bolivia) - in charge of all government owned mines and mills, currently responsible for about 50% of total Bolivian mineral production (b) ENAF (Empresa Nacional de Fundiciones) - in charge of government owned smelters and refineries (c) GEOBOL (Servicio Geologico de Bolivia) - geological mapping, exploration and evaluation, technical service, mineralogical analysis and laboratory investigations (d) IIMM (Institute de Investigaciones Minero-Metalurgicas) - research and development and technical service in mining, mineral beneficiation, metal smelting and refining (e) BAMIN (Banco Minero) - development bank for small miners and official mineral marketing agency for all sectors (f) COBOEN (Comision Boliviana de Energia Nuclear) - in charge of all activity related to exploration and development of radio-active ore. (2) CBF (Corporacion Boliviana de Fomento) - a development institution with equity holdings in large industrial and agricultural enterprises; some experience in mining project appraisal and lending (3) Ministry of Planning - provides overall planning of mining and metallurgical sector development (as well as all other sectors)  - 12 - (4) Universities - in La Paz, Oruro and Potosi; courses offered in geology, mining and metallurgical engineering (5) INSO (Instituto Naciomal de Salud Ocupacional) - National occupational health institute 2. Private Sector (1) Asociacion Nacional de Mineros Medianos - National AssociaVl-. of 'Medium Miners (2) Camara Nacional de Mineria - (National Chamber of Mining) - association of small mine owners (3) BISA (Banco IndustriaL, S.A.) - private industrial develop- ment bank interested in expanding into mining finance (4) CORDECO (Corporacion de Desarrollo de Cochabamba) - a regional development organization actively promoting agricultural, industrial and mining development in the province of Cochabamba. (Several other provincial development organiza- tions are functioning>). 3. BAMIN 2.24 Generally, Bolivia's public institutions are handicapped by in- sufficient funds, political interference, ill-defined responsibilities, unstable policy, high management turnover and scarcity of qualified staff. In addition, some of the institutions have multiple functions which appear to contributte to reduced efficiency. For example, BAMIN (the mining bank) acting as both a development bank and the official miarketing agency with control over the purchasing and export of mineral concentrates has been exposed to political influence from both government circles and organized miners. The institut:Lon seems to have concentrated its attention on the marketing side and allowed the banking function to deteriorate. As a development bank, more than 74% of its loan portfolio was in arrears in December 31, 1971 despite high export prices and relatively good mine income in recent years. A 1966 AID loan of US$5.7 million was only partially utilized when the covering technical assist- ance contract to assure effective reorganization and use of funds was terminated by BAMIN. Unused funds amounting to US$3.4 million were returned to AID. At the end of 1971, 54% of the AID loans were overdue. BAMIN's loss carry fonrard as of the end of 1970 amounted to 60% of its capital and it has been unable to attract new resources. The Government is considering a reorganiZa- tion of BAMIN, mainly by separating its credit and marketing functions. How- ever, short of firm steps to isolate BAMIN from political pressures and to secure additional capital, the proposed reorganization could hardly produce a viable institution.  - 13 - 2.25 As a marketing organization, its operating costs are high, and the private mine operators, both medium and small, are dissatisfied with both the service charges and service. BAMIN's discouraging record has engendered an initiative in the private sector aimed at the creation of an alternative institution. This discontent is reflected in an attempt of small mining associations to establish a separate financiera to serve their own needs. It is doubtful whether the Government would grant the necessary permission, since the new institution would make BAMIN's credit function redundant. It would, however, provide BAMIN with an opportunity to concentrate its resources on reorganizing and strengthening its marketing function. 4. IIMM and GEOBOL 2.26 Another example of the "multiple function" problem is the research institute in Oruro, IIMM, organized as a process research and development center. In an effort to build up IIMM's research capabilities, UNDP and other sources have provided funds for equipment, personnel and training. However, the Institute at one stage made an effort to expand into commercial plant operations. Use of making management and technical personnel in commercial operations can only dilute further the basic research and develop- ment function which chronically is in need itself of strengthening. IIMM also acquired staff geologists and carried out exploration completely un- coordinated with the official exploration agency, GEOBOL. The latter, on the other hand, maintains assay laboratories even though IIMM is better staffed and equipped to handle that function. The rival activities of these two institutions suggested that consideration be given to merging them into one efficient agency, capable of offering the full spectrum of technical ser- vices required by the mining industry, or that the responsibilities of each be clearly delineated. The authorities have chosen the second course of action and in 1972 GEOBOL was assigned sole responsib'ility for all exploration. 5. COMIBOL and ENAF 2.27 Further overlapping of responsibility exists between COMIBOL and 'NAF. COMIBOL operates all of the government-owned mines and mills, either directly or through cooperatives which work leased properties. ENAF is in charge of developing and operating smelters and refineries. The new tin smelter at Vinto is owned and operated by ENAF but the bismuth smelter under construction at Telamayu is COMIBOL's. 6. Ministry of Mining and Metallurgy 2.28 The foregoing discussion emphasizes the need for a central authority which would define areas of responsibility, coordinate the activities of institutions and assure rational allocation of scarce resources. Logically, these functions would be centered in the Ministry of Mines and Metallurgy.  -14 - Following discussions, with the Bol:Lvian Goverrment initiated in March 972 the Ministry prepared a 3-phase plan to reorganize and strengthen its admi-- nistration. Phase III will involve construction of a new building to house the Ministry and the head offices of the decentralized agencies including ENAF, BAMIN, COBOEN, and IIMM. Centralized administration under one roof is expected to contribute to more effective control and coordination. It is also proposed to incorporate within the Ministry a "review authority' empowered to evaluate investment proposals of all the decentralized agencie,;. 2.29 It appears evident from the preceding paragraphs that a prerequ:- site to the successful development c,f the mineral sector in Bolivia is tie reorganization and strengthening of the institutions serving the sector. This will require a major technical assistance program and the infusion cf a considerable amount of funds. (Annex 1, Appendix 1). 7. Credit Channels 2.30 Two existing credit institutions - BAMIN and CBF are active in mineral development and a third, BISA, is interested in expanding into the mining field: (a) BAMIN - As discussed in paras. 2.24 and 2.25 BANTIN as a banking institution oriented to small mine development lending has a poor record and is in precarious financial straits. The reorganization plans presently considered by the Government do not touch the fundamental problem of political influence, and BAMIN's conversion into a sound and effective mtning credit institution would be extremely difficult and take considerable time. (Annex 3, Appendix 1). (b) Corporacion Boliviana de Fomento (CBF) - For the last 10 years, CBF has been a source of development credit to the medium mining sector (27 loans) in addition to its major areas of interest - industry, power, transportation and agriculture. IDB, which has provided CBF with most of its loan funds in the past (US$24.4 million), has been nego- tiating a new loan (the sixth) of about US$2 million for feasibility studies. In view of the experience it has already gained in mining, CBF appears to be one possible channel for additiona]L development credit to the medium mining sector (Annex 3, Appendix 2). (c) BISA - This private industrial development bank organized in 1963 has demonstrated effective management and operations over the years, largely in the La Paz area. BISA's equity is about US$750,000, while total assets approximate US$5 million giving it a high debt to equity ratio of 5.7:1. Possible expansion into mining would require a change in  - 15 - BISA's statute to allow mining operations, a substantial increase in paid in capital, and hiring of additional staff with mining experience. On March 15, 1971, BISA's shareholders voted an increase of authorized capital from US$1 to 1.5 million. This is a step in the right direction but still falls short of the minimum equity base required to accommodate potential demand with an acceptable debt to equity ratio. Also, BISA must acquire the expertize and develop staff to properly evaluate mining loan applications, obtain the Government's and AID's agreements to change its statute and expand its activities to other regions. Despite these constraints BISA should be consid- ered as a potential channel for development credit to inde- pendent miners. (Annex 3, Appendix 3). E. The Exploration Problem 1. The Status of Exploration 2.31 Although there are opinions to the contrary, indications are that there is a large untapped potential in minerals of all types - ferrous, non-ferrous and non-metallic. Only about 25% of the country has been mapped geologically and (according to Arthur D. Little) less than 5% explored systematically. In the last 20 years there have been no significant dis- coveries of tin ore, yet there are numerous locations in the areas of known mineralization where surface indications would justify exploration. Explor- ation for reserves in the existing mines has also lagged making it more and more difficult to justify needed investment. In failing to assign an adequate share of its cash flow to exploration, COMIBOL has been breaking one of the cardinal rules of well managed mining enterprises. The reason for this distor- tion in resource allocation is well known. The benefits of exploration are not immediately visible and are realized only over the long term. In allocating scarce funds, politically more palatable alternatives were often assigned higher priority. 2.32 In the private sector, increased uncertainty since the end of the Barrientos period has restricted exploration investment. Yet a drastic increase in exploration is absolutely essential as the first step in re- habilitating Bolivia's mining sector. The problem is becoming critical as the proven reserves in existing mines drop. Some COMIBOL mines are of marginal profitability or actually losing money as the average grade of ore con- tinues to decrease. An assessment of world production trends appears to indicate that Bolivia, already the highest cost tin producer, may continue to lose ground in the competitive world market. Intensified efforts to find and exploit more economic tin deposits to replace existing high-cost operations and to diversify into other metallic and non-metallic minerals is a pressing priority.  - 16 - 2. Sources of Exploration Capital 2.33 The traditional sources of- exploration capital and technical capability - thie international mining firms - risk very large sums routine>,. They are motivated bv the expectation of recouping the cost of their failuris and additional profits out of the small percentage of successes. To the extent criat these firms may be attracted to Bolivia in the iTmnediate years ahead, exploration will take place. But the problems of the domestic mining sector - COMIBOL, medium and small riners - require further attention. Government support and risk-sharing may be necessary to stimulate adequate exploration by national groups. 3. :n dxploration Fund 2.34 A program consisting of an Exploration Fund to be expended on a project bv project basis in conjunction with other sources of risk capital, public and private is a means whereby Government support can stimulate exploration activity in Bolivia. Exploration projects would be screened carefully and could be limited to those which show better than average promise based on earlier investigations. Mining operations established on the proven deposilts would be the source of replenishment funds. It is not inconceivable that in time the Exploration Fund might be converted into a revolving fund to maintain the uninterrupted exploration effort without which Bolivia cannot expand or even maintain its mineral production. 2.35 COMIBOL and private mining firms would draw on the Exploration Fund for approved proiects up to 50% of the overall exploration cost, or other ratios according co the parameters to be established. In cases of successful development of neow deposits, the Fund would be repaid the principal plus interest. 'Additional royalties would also be assessed on the basis of total production, Where the exploration fails to produce an economically workable mine, the loaq would be written off and its cost absorbed by the Fund. 2.36 Eve-V if the replenishment mechanism failed to offset completely the outflow, it is almost a certainty that other benefits would in the end justify the Fund program. One large new mine, which otherwise might not have been developed, could in time contribute royalties, taxes, export: earnings an,d other e-onomic and social benefits far in excess of the original program cost. Similar programs exist in other mining countries, e.g., Car-ada, .lS. and Australia. In the U.S.A., Public Law 85-701 enact- ecd in 195% provides for the Government to finance between 50% and 75% of total exploration cost in approved projects up to a maximum government con- tribution of US$250,000. If the exploration results in a workable deposit, the project owner repays the loan plus interest through an assessment of 5% of the valle of production. If the government, based on the final report, deems the explorat!ion a failure (no economically viable deposit) the obliga- tion to repay the loan is cancelled. Variations of this formula may be necessary in Bolivia, but the concept in some form should be feasible. The Government plans to approach the adm:inistrators of these other programs for technical assistance.  - 17 - 2.37 Exploration assistance to the small mining sector presents special problems. The first step should be a nationwide survey of the 2,000 or so known small mines. The resulting data should be collated with the existing geological and mining lease records. This would allow a classification of all the small mines into three categories: probably viable, possibly viable and nonviable. It is estimated that the survey would require about US$3 million expended over three years which could be financed by the proposed Exploration Fund. The small mines survey and inventory are, however, con- sidered of such high priority that it should be undertaken even in the ab- sence of the Fund. UIDP assistance could possibly be sought for initiating the survey and inventory. 2.38 The inventory would provide a basis for exploration assistance and also for providing credit to small miners (para. 3.04). The small miners whose workings are classified as probably and possibly viable could seek assistance from the proposed Exploration Fund to prove their reserves. The Exploration Fund would, however, need to subsidize the small miner by relaxing the 50/50 basis of contribution by advancing a larger proportion of the funds required; a possible formula would be 80/20 or even 90/10. 4. The NASA Program 2.39 An interesting new source of technical assistance was called to the attention of Bolivian authorities. The National Aeronautics and Space Administration (NASA) has developed advanced techniques for geological mapping through satellite-borne sensing systems. A one year program of investigations commenced in July, 1972 with the launching of a specially equipped space vehicle designated as Earth Resources Technology Satellite (ERTS). Bolivia submitted a program of geological and other natural re- source investigation which has been accepted and a team of experts from the program is located in Bolivia. Early results have indicated a fault structure, heretofore not known. The program will provide information on major geological structures as they relate to mineralization on which to base further air- borne and ground geophysical and geochemical investigation. III. RECOMMENDED PROGRAM 3.01 This section, assumes that the GOB will continue with its current mineral policy of promoting a more balanced public/private sector approach. A. Institutional Reorganization 1. Objective 3.02 Effective implementation of national mineral policy through appro- priate revision of, (a) the Mining Code and other relevant legislation and (b) budgets, administration, functions, staffing and training requirements of all government institutions. While some steps have already been taken,  - 18 - (i.e. revision of the mining code, clarification of GEOBOL and IIMM responsi- bilities, and proposals made for restructuring both the Ministry of Mining and Metallurgy and BAMIN), major efforts are still required in implementLin the proposals. COMIBOL and ENAF, as the largest operating government ent:L.cs, should be given special attention in order to define measures to improve operational efficiency and project analysis capability. (Further discuss:Lon in Annex 1, Appendix 1). 2. Program 3.03 Advisors should be attached to Ministry of Mines and Metallurgy - cluding experts in mining law, mineral economics, geological survey and m:- eral and metal marketing. A possible initial step, would be a request to UNDP/UN/UNIDO for a preparation mission to define the scope of work, types o; advisors, duration and cost of project. B. Credit for Medium and Small Miners 3.04 The credit needs of the medium and small mining sectors are likely to expand with the implementation of the measures recommended in this report, especially the promulgation of new Investment and Mining Codes. As an il- lustration the mission identified at least seven priority projects in the medium sector that could go ahead involving about $28 million capital in- vestment. The national inventory of small mines (paras 2.37 and 2.38) will provide the basic data for assessing the potential merit of a small mine loan. If further investigations such as drilling can be carried out with the assistance of the Exploration Fund to prove the reserves, the credit institutions could avoid the unfortunate experience of BAMIN, many of whose loan recipients did not, in fact, have the reserves to allow profitable operations during the loan amortization period. There appears to be a need for at least $7 million credit to provide basic mining equipment to the small mines (Annex I-3c). 3.05 Credit for Independent Miners: As discussed in Para. 2.30 there are two potentially viable channels for credit to the medium mining sector, CBF and BISA. This credit should also be available to a certain number of larger miners, who, although still classified in the small mining category, are in a position to prepare bankable projects with no technical assistance. We shall refer to both these groups as "independent" miners. 3.06 Supervised Credit for Small Miners. Financing of small miners could be effective only if it were supported by a substantial amount of technical assistance. It is therefore proposed that a Supervised Credit program for the small miners be established. These miners, who would, on the basis of a prior study, be qualified as economic, would be assisted by technical teams in the preparation of credit applications, administration of mines, and economic use of their mining reserves. These technical teams will most probably have to be provided by agencies such as GEOBOL and IIMM. Both the geological expertise of GEOBOL and the laboratory facilities of IIMM are required, supporting the recommendation to merge the two agencies.  19 - Credit applications would be countersigned by the chief advisor to indicate his approval of the technical aspects and costing of the project, leaving for credit institutions only the evaluation of the lending risks. As credit channels for this supervised program, two alternatives are envisaged. If BAMIN could be isolaced from political pressures, satisfactorily reorganized and adeutiately recapitalized, it could be used as the sole intermediary for the development credit to small miners. If, however, these sweeping changes could not be achieved, the alternative would be to use the entire network of financial institutions, including commercial banks, to the extent where they would be willing to assume financial risk for small mining loans, and possibly to participate with their own funds in earlier maturities of each project financing. 3.07 A related approach to bank credit per se is an equipment leasing company which could serve both the small and medium mining sectors. ADELA which has established such operations in other Latin American countries, may be interested in studying this approach. C. Exploration 3.08 A survey of the most pressing exploration needs, detailed in Annex 1, Appendix 6, is summarized and updated below: Table 4: HIGH PRIORITY EXPLORATION PROJECTS 1972-1976 Preliminary Cost Mineral Locations Estimates (US$ millions) Tin Placers Various 2.5 (Potosi ) Tin Dumps (Colquiri) 0.5 (Others ) Alluvial Tin and Gold North-East Bolivia 2.0 Tungsten Various 0.5 Copper South of Coroco and in Lipez 2.0 Iron Mutun and Cochabamba 2.0 Magnesite and Asbestos Cochabamba 1.0 Small Mines - National Survey All Areas 3.0 - Additional " " 1.0 TOTAL 14.5  - 20 - Based on available data, the exploration projects listed above s.aould have a better than average probability of success, that is, establish-ing exploit- able reserves of ore. (The one exception is the Small Mines survey and here the justification for finance would be the need to separate the non-1able workings from the viable in order to optimize the operations of crc.it in- stitutions). 3.09 It is proposed that an Exploration Fund be established (paras. 2.34- 2.37). The concept of this fund assumes that matching funds from COMIBOL, medium mining firms and, possibly, to some small degree, small mining firms would be available and revenue from successful explorations would offset write-offs on unsuccessful explorations. It is too early to prcject the exact ratios of Exploration Fund and matching contributions, but one possible model for the 1972-1976 period might be: Table 5: POSSIBLE EXPLORATION FINANCE - 1972-1976 (In millions of US dollars) Project Finance Contributed by Sponsor Sponsor Exploration Fund Total COMIBOL 2.5 2.5 5.0 Medium Miners 2.5 2.5 5.0 Survey 1.0 2.0 3.0 Additional 0.3 1.2 1.5 TOTAL 5.3 8.2 14.5 The urgent exploration projects listed in Table 4 would require an estimated US$8.2 million financed by the Exploration Fund. International sources should be approached to assist in organizing and financing the program. 3.10 A total of US$14.5 million expended in exploration over 1972-1976 is considered to be the minimum level needed to achieve proper growth of the national mining sector. Based on generally accepted capital/output ratios applicable to mine development, it is estimated that annual invest- ment in exploration of the order of US$0.02 per dollar of gross mineral product is required to assure an annual growth of between 6% and 8% in the mineral sector (Annex 1, Chapter III-C). At the existing levels of produc- tion, this implies a level of investment of US$3-4 million/year or US$15-20 million for the 1972-76 period. To supplement the program outlined above, international mining companies, either independently or in joint venture arrangements with Bolivian private and public entities, would be one source of technology and finance. The ERTS satellite program (para. 2.39) will produce data pointing to potentially fruitful areas for more detailed in- vestigation. Desirable concession areas emerging from the ERTS program should be contracted out to interested groups - foreign and domestic - in accordance with objective evaluation of technical and financial capabili- ties. But, if domestic private groups and COMIBOL are to participate equitably in the exploration thrust, the recommended Exploration Fund would be needed to support and expand their limited resources.  - 21 - D. Pre-Investment Studies 1. Mutun Iron Ore (Annex 1, Appendix 6-14; Annex 2, Appendix 7) 3.11 Arthur D. Little (ADL) has undertaken a feasibility study on the Mutun Iron Ore deposit financed by US$170,000 of USAID funds. A secondary objective of this study was to evaluate the Cochabamba iron deposits as an alternative or second project to produce pre-reduced iron and specialty steels on a more limited basis. Meanwhile, the UNDP has restructured its Mutun survey project (approved funding - about US$340,000) to provide close support to COMIBOL in its current program of continued exploration and mining 60,000 tons for a trial sale to SOMISA (Argentina). The ore will be bulk tested in SOMISA's mills and if acceptable, negotiations will be undertaken for a possible long term purchase contract. 3.12 COMIBOL's semi-commercial operation of the deposit and UNDP's technical support project will provide basic data on ore analysis, work- ability, reserves and costs which will reduce the margin for error in the ADL study. 2. Regional Concentrators 3.13 Feasibility studies on two small regional concentrators have been completed by IIMM. However, it appears that assistance may be required to bring the studies to a level suitable for consideration by financing agencies. Such assistance should be sought as soon as possible. The two concentrators are planned to be located in the Oruro and Potosi areas. If the studies indicate probable feasibility, immediate implementation should be under- taken. If successful as pilot projects, a long term program to establish additional concentrators in other areas could be organized. The small miners association has estimated that the overall requirement is at least 20 such concentrators. Estimated Study Cost - US$25,000 3. Integrated Tungsten Industry (Annex 1, Appendices 6-10 and 7-7; Annex 2, Appendix 8) 3.14 ADL will also produce a feasibility study using available USAID funds covering the upgrading of Tungsten concentrate to finished products, such as tungsten powder and wire. Simultaneously an effort should be made to interest a foreign partner or partners already in the business of pro- ducing such products since tungsten powder and wire are normally not articles of commerce. Firms such as General Electric and European equivalents pre- pare these products in their own plants as intermediate steps to finished products (e.g. light bulbs). Likewise tungsten carbide and tool bits are manufactured in plants from concentrate or tungstic oxide as the starting material. The technology for these processes is a closely guarded secret  - 22 - and requires a high level of sophistication to assure quality. A joint venture with a qualified firm would seem to be the preferred route. A feasibility study prepared with the cooperation of the foreign firm would be more credible since it would incorporate a reliable body of process and marketing know-how. Therefore, the earlier a foreign joint venti.re partner or partners might be identified willing to collaborate in the proj- ect, the better. 3.15 Other studies identified as leading to potentially viable in- vestments should be held in abeyance until exploration work yields indications of commercially exploitable deposits. These studies would include: (Annex 1, Appendix 6; Annex 2, Appendices 9, 10, 13 and 20). Alluvial Tin (and gold) recovery -~ Copper Smelting and Refining - Magnesite Production -- Asbestos Production - Ferroalloys (based on Cochabamba ore) Borax - Zinc Refinery The industries listed below are deemed to be low priority items since pre- liminary analysis indicates non-viability under conditions expected in the near term: (Annex 2, Appendices 11 and 12) Sulfur - Salt - Soda Ash E. Projects for early consideration 1. Tin Recovery from Tailings (Annex 1, Appendix 6-6; A.nnex 1, Appendix 6) 3.16 The outstanding project possibility identified by the mission as suitable for earl.- appraisal was the recovery of tin concentrate from tailing dumps. Estimates of tin in the large accumulated dumps adjoining the historic mines range from 300D 00 to 600,000 tons. International Metal Processing Co. (IMPC) after considerable research and development designed and con- structed a plant designed to process 1,000 tons per day of tailings from the Catavi dump. The plant became operational in late 1970 but was nation- alized in January 1971. IIMM then took over plant management under con- tract to COMIBOI, but by March 1971, the plant had closed down due to technical diffi&'ulties. Negotiations between the Banzer Government and IMPC led to an agreement in February 1972, which provided for compensation to 1MPC and a restructuring of the equity to form a joint COMIBOL/IMPC venture. Management has been conitractually delegated to IMPC, and the plant is producing again.  - 23 - 3.17 Data from 11MPC indicate that: (a) 7ne Catavi plant could be put back into operation and the capacity doubled, i.e. 2000 tons per day, with an investment of about US $4-5 million, yielding US S2-3 million/year 1/ net income after taxes and royalties. Production would be 2,500-3,000 tpy of tin contained in 20% concentrate (b) A smaller plant could be installed at Potosi for US $4-5 million and would yield US $2-3 million/year net income after taxes and royalties. The two plants together would increase Bolivia's tin production by some 4-5,000 tpy, equivalent to about an 15% increase in national tin production. The IBRD is actively considering financing the expansion of the Catavi. 2. Mutun Iron Ore (Annex 1, Appendix 6-14; Annex 2, Appendix 7) 3.18 Assuming that the ongoing study being conducted by COMIBOL, estab- lishes the potential feasibility of the Mutun project and the existence of an adequate market for the product in Argentina, concrete steps to organize international finance might be taken in 1973. The first phase of the project could be based on shipping up to 1 million tpy of washed 62-64% iron ore to the Argentine steel mill, SOMISA. The second phase would produce minimum 500,000 tpy of pre-reduced iron for both the Argentine market (400,000 tpy) and domestic use (100,000 tpy). Gross product value in 1971 prices would be in the range of $20-25 million. 2/ In addition to the technical, financial and economic aspects, careful appraisal of the most suitable corporate structure will be necessary. International credit of US$20 to 24 million may be necessary to carry through Phase I. No estimate is available as yet of Phase II which would add facilities for producting pre-reduced iron. 3. Regional Concentrators 3.19 Based on the timing and conclusions of the pre-investment studies, the Oruro and Potosi projects are expected to be ready for appraisal late in 1973. It is estimated that each concentrator will require capital invest- ment of US$500,000-600,000 in fixed assets, plus additional working capital. 4. Vinto Tin Concentrator (Annex 2, Appendix 1) 3.20 The existing Vinto Tin Smelter is at best a marginal operation, which is primarily a result of its small scale. The contractor, Klockner of Germany, has been studying a US$6 million project to increase production from 7,500 tpy to 25,000 tpy. ENAF believes that increased tin production plus the addition of an antimony smelter and possibly facilities to recover other metals (to spread the infrastructure and overheads) would convert the plant into a financially viable operation. Further study is required, and the prepared expansion has been delayed by the financial institutions pending proof of sufficient tir. reserves in Bolivia. However, it is reported that most of the issues earlier delaying the projects have now been resolved.  - 24 - 5. Tin Volatilization Plants 3.21 COMIBOL has prepared a study and obtained finance from uS%R- for a program to install 4 volatilization plants for upgrading the low , e con- centrates produced by the COMIBOL and some private mills, to prod.-- hnigh grade concentrates. 6. Integrated Tungsten Industry (Annex i, A-pendices 6-10, 7-7; Arnex 2, Appendix 8) 3.22 The ADL study is expected to be comp'eted soon. Estimz.e( invest- ment based on the limited data currentlv available would be appzc>o. ately US$6 million. F. Projects for later consideration 3.23 In addition to the projects identified above, other possu,ilities should arise subject to further exploration and feasibility work. hese are expected to include, among others: (a) Vinto Tin Concentrator - US$9 million estimated investment under consideration by IDB (ATnex 2, Appendix 1) (b) Magnesite, Asbestos and Borax - provided that explorat-on proves the existence of commercially exploitable deposics these three projects may entail investment totalling USS-$10 million (Annex 1, Appendices 6-19, 6-22; Annex 2, Appendices 9, 10, 13) (c) Copper, Tin, Zinc and Gold - major project possibilities requiring more extensive exploration lie in the copper deposits of Lipez tin and gold alluvials in various northern and northeastern areas, and in zinc deposits throughout the country. Assuming positive exploration results, appraisal of these projects could take place in 1973/74. A major deposit of copper capable of supporting a production of 30 to 40 thousand tons per year would entail an investment of US$60-70 million and yield gross product value of US$35 to 40 million. (Annex 1, Appendices 6, 7; Annex 2, Appendix 4.) 3.24 The above possible program and its estimated investment require- ments (for the 1972-75 period) are summarized in the following table:  - 25 - Table 6: POSSIBLE INVESTMENT PROGRAM Total Estimated Cost (US$ millions) A. Institutional Reorganizatior, 0.2 B. Credit Channels 20.0 C. Exploration 14.5 D. Pre-Investment Studies /1 0.1 Sub-Total 34.8 E. Potentially Viable Projects (which could be ready for consideration during the early 1970's a) Tin Tailings Recovery /2 9.0 b) Mutun Iron Ore 34.0 c) Regional Concentrators /3 1.5 d) Tungsten 6.0 e) Vinto Smelter Expansion /4 6.0 f) Tin Volatilization Plants /4 6.0 Sub-Total 62.5 Potential 1972-1976 Program Total 97.3 F. Future Project Appraisal Possibilities; dependent upon exploration results. These could be ready for appraisal in 1973/74/75 a) Mtagnesite The total investment b) Asbestos required for these c) Borax projects may vary any- d) Tin-placer where between US$50 and e) Tin and Gold - alluvial US$100 million f) Copper g) Zinc /1 In addition to A.D. Little USAID financed studies. /2 Rehabilitation and doubling capacity of Catavi mill plus plant at 2nd location. /3 At Oruro and Potosi. /4 Financing is already arranged for these two projects.  - 26 - G. Summary Recommendations 3.26 The program outlined above assumes GOB will pursue a balanced public/private sector approach to mineral development, and essentially consists of: (a) policy reform - to make the investment climate more amenable to private investment (local and foreign). This should assist in attracting much needed investment funds to supplement the application of scarce public savings in the sector; (b) institutional reform - to rationalize the operations of both public and private entities working in the sector: This would include clear delineation of agency functions, possible merging of agencies, and will require a large technica:L assistance component. (c) the provision of sufficient credit to assist the middle and small miners to improve the existing operations and to expand their activities is essential. The selection of the most appropriate channels for providing such assistance needs further study and discussion with the Government and with the potential beneficiaries. (d) a greatly accelerated exploration program; the undertaking of the nationwide survey of small mines and the establishment of an Exploration Fund are of critical importance. (e) project development - the need to formulate a list of pre- investment studies of proposed projects; to assign priorities to projects based upon level of project preparation, and pre- liminary technical, financial and economic viability judge- ments. This should minimize the implementation of marginal projects and serve as a basis for formalizing a mineral development strategy. 3.26 B Based upon general accepted capital/output ratios applicable to mine development, it is estimated that capital investment in new mining and mineral processing facilities of $0.085 per dollar of gross mineral product is required to ensure an annual growth in mineral output of 6-8%. At the existing levels of production, this implies a minimum level of investment of US$15-20 million/year, which together with the exploration requirements (para. 3.10) implies total investment needs of US$90-110 million for the 5-year period 1972-76. On this basis, implementation of the program out- lined above can be expected to lead to average annual growth in mineral sector output in excess of 6% by the mid 1970's, making a very significant contribution to Bolivia's export earnings. November 15, 1971/October 1972 Industrial Projects Department  BOLIVIA O 100 300 400 500 KILOMETERS E o 50 MA OP COM)OoL MIWIES MAJOR PR)VATE MINES OIIEIIOL M- . 02Ls0Kss1 SIt EN) ( MONA MA.r- (ZINC) 0 00 0 0 @T*t 701 () E5TOA - S3A. (1-IN, Ns) 0 O