Colombia - Cerro Matoso Nickel Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2450a-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CERRO MATOSO S.A. WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A NICKEL PROJECT September 25, 1979 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 EQUIVALENTS Average Calendar 1978 Mid-1979 Currency Unit = Peso - Col$ Col$ US$1 = Col$39.323 42.40 Col$1 = US$0.0254 0.0236 WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 1 kilometer (km)3 = 0.622 miles (mi) 3 1 cubic meter (m ) = 35.315 cubic feet (ft ) "1 = 264.2 US gallons (gal) it = 6.29 barrels (bbl) 1 metric ton (MT) = 2,206 pounds (lb) 1 metric ton (MT) = 1.1 short tons (st) 1 dry metric ton (DMT) = 1.1 dry short tons (dst) 1 wet metric ton (WMT) = 1.1 wet short tons (wst) 1 kilowat (kW) = 1,000 watts 1 Megawatt (MW) = 1,000 kilowatts 1 Megavoltampere (MVA) = 1,000 kilovoltamperes (kVa)6 1 Gigawatthour (GWh) = 1,000,000 kilowatthours (10 kWH) 1 kilovolt (kV) = 1,000 volts GLOSSARY OF ABBREVIATIONS BILLITON - Billiton Overseas Ltd. CARBOCOL - Carbones de Colombia S.A. CMSA - Cerro Matoso S.A. COLPUERTOS - Empresa de Puertos de Colombia CONICOL - Compania de Niquel Colombiano S.A. CONPES - Consejo de Politica Economica y Social CORELCA - Corporacion Electrica de la Costa Atlantica DNP - Departmento Nacional de Planeacion ECOMINAS - Empresa Colombiana de Minas ECONIQUEL - Empresa Colombiana de Niquel, Ltda. ECOPETROL - Empresa Colombiana de Petroleos ELECTRICORDOBA - Electrificadora de Cordoba HANNA - Hanna Mining Company IFI - Instituto de Fomento Industrial INCOMEX - Instituto Nacional de Comercio Exterior INSCREDIAL - Instituto de Credito Territorial INGEOMINAS - Instituto Nacional de Geologia y Minas ISA - Interconexion Electrica S.A. SENA - Servicio Nacional de Aprendizaje SHELL - The Shell Petroleum Company Ltd. FISCAL YEAR January 1 to December 31  FOR OFFICLAL USE ONLY COLOMBIA CERRC' MATOSO NICKEL PROJECT LOAN AND PROJECT SUMMARY Borrower: Cerro Matoso S.A. Guarantor: Republic of Colombia Amount: US$80.0 million equivalent Terms: Repayment in 14 years, including 4 years of grace; interest at 7.9% (Bank standard rate) per annum. Guarantee Fee: 2.1% per annum on the US$ equivalent of the disbursed amount of the loan, but not less than 1% per annum on the US$ equivalent of the several currencies outstanding, payable by the Borrower to the Guarantor. Project Description: The project would consist in the exploitation of the Cerro Matoso nickel laterite deposit, located near the town of Montelibano, in the Department of Cordoba, through the mining and beneficiation of an annual average of approximately 780,000 DMT of ore, grading about 2.7% Ni, to produce about 20,000 DMT of nickel contained in ferronickel with a grade of 37.5% for export. The project would include the construction and operation of an open pit mine, single line ore processing facilities, ancillary on-site facilities, a town-site, a river wharf, an access road, a natural gas pipeline and airstrip improvements. Estimated Cost: US$ million Equivalent Local Foreign Total Mine 9.6 14.6 24.2 Plant 34.8 51.3 86.1 Gas Pipieline 1.0 2.0 3.0 Plant Modification - 2.5 2.5 Civil Works and Installation 24.1 5.0 29.1 Engineering and Project Serviczes 16.4 28.8 45.2 Freight and Insurance 3.0 13.1 16.1 Duty and Taxes 2.4 - 2.4 Pre-operating Expenses 9.0 16.0 25.0 Total Base Cost (April 1979) 100.3 133.3 233.6 Physical Contingency 8.7 9.4 18.1 Price Escalation 11.2 13.9 25.1 Working Capital 3.6 32.2 35.8 Total Project Cost 123.8 188.8 312.6 Interest during Construction - 27.4 27.4 Total Financing Required 123.8 216.2 340.0 This document has a restricted distribution and may be used by recipients only in the performance of their ofcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Financing Plan: US$ million equivalent I. SHAREHOLDERS' EQUITY A. Basic Investment 1. ECONIQUEL (45%) a. Joint Venture Assets 10.00 b. New Equity 23.75 33.75 2. BILLITON (35%) New Equity 26.25 3. CONICOL (20%) Joint Venture Assets 15.00 75.00 B. Sponsors' and Shareholders' Additional Equity Commitment 1. ECONIQUEL (45%) 17.55 2. BILLITON (35%) 13.65 3. HANNA (20%) 7.80 39.00 114.00 II. LONG-TERM LOANS A. World Bank 80.00 B. Chase Manhattan Bank 100.90 C. U.S. Export-Import Bank (including associated private financing) 25.60 206.50 III. INTERNAL CASH GENERATION DURING 1983-84 19.50 TOTAL FINANCING REQUIRED 340.00 IV. OTHER FINANCING A. Balance of Sponsors' and Shareholders' Additional Equity Commitment 86.00 B. Balance of Chase Manhattan Loan 19.10 105.10 TOTAL FINANCING AVAILABLE 445.10  - iii - Estimated Disbursements: US$ million equivalent FY80 FY81 FY82 FY83 Annual 27.0 38.3 9.7 5.0 Cumulative 27.0 65.3 75.0 80.0 Risks: The technical risks are small because the ore body is high grade and mining and processing have been extensively studied and will be conducted with the assistance of a large and experienced mining company. While in 1982, when the project is expected to come on stream, there might still be a surplus in the nickel market, the high grade ore and comparatively low infra- structure requirements make the project very competitive. Moreover, Billiton Metals and Ores International B.V., a Dutch subsidiary of the Royal Dutch/Shell group, would undertake to buy 100% of the project's output, at market prices, under a 13-year, take-or-pay contract. While the price risk remains with the Borrower, this contract would enable it to service debt comfortably. Rate of Return: EconomLc: 19% Financial: 17% Appraisal Report: Report No. 2149b-CO, dated September 24, 1979.   INTERNATIONAIL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CERR() MATOSO S.A. WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE CERRO MATOSO NICKEL PROJECT 1. I submit the fo'Llowing report and recommendation on a proposed loan to Cerro Matoso S.A. (CMSA), with the guarantee of the Republic of Colombia, for the equivalent of US$80.0 million to help finance the Cerro Matoso nickel project. The loan would have a term of 14 years, including four years of grace, with interest at 7.9% per annum. The Government of Colombia would charge CMSA a guarantee fee of 2.1% per annum on a dollar basis. The project is to be co-financed through (a) a US$120.0 million loan from a private bank syndi- cate led by Chase Manhattan Bank of New York, which would be available as a revolving credit for 3-1/2 years and then converted into a 6-1/2 year loan, including one year of grace, at 1-1/4% over LIBOR plus management, agency and project fees; and (b) a US5$25.6 million loan from the U.S. Export-Import Bank and a group of private banks, repayable in 13 years, including three years of grace, and bearing interest at 8-5/8% per annum on the U.S. Export-Import Bank portion and at 1-1/8% over the US prime rate on the private banks' portion. PART I: THE ECONOMY 2. An economic report on Colombia (2535-CO) was distributed to the Executive Directors in June 1979. Country data sheets are provided in Annex I. Background 3. During the past two decades, Colombia has made substantial progress in the transition from a predominantly rural and agricultural economy made up of largely self-contained regions to a more integrated urban-industrial economy. The productive base of the economy has been widened appreciably, and there has been substantial diversification of production in both the agricultural and industrial sectors. These improvements have been accompanied by rapid growth of non-traditional exports and by the development of a modern sector relying to a considerable extent on imported inputs. As a result, the country has become less dependent on coffee as a source of foreign exchange earnings, and fluctuations in domestic economic conditions resulting from unpredictable shifts in world coffee prices, while still considerable, have become more manageable. Although substantial progress has been made during the past two decades, Colombia is still only partially developed with a limited modern sector superimposed on a large, traditional and economically poor base. Per capita income is low by developed world standards, and in the mid 1970s an estimated 34.0% of the urban population had incomes under the relative poverty level as defined by the Bank.  -2- 4. Colombia's population growth rate declined sharply in the past two decades; from well over 3% in the 1950s, to about 2.8% in the early 1970s and to an estimated 2.1% at present. 1/ This was in large part the result of a rapid decline in the crude birth rate; one of the most pronounced declines ever recorded in a Lati Tc.morican couiLry. Rising per capita income, rapid rural/urban migration, expanded economic opportunities for women and increased effectiveness of family planning programs are included among the factors responsible for the lower birth rate. Although rural/urban migration slowed from the early 1960s on as progress was made in eliminating the widespread violence in the countryside, approximately 66% of the current population lives in urban centers and there are now 22 cities with populations exceeding 100,000 persons. Colombia's population is not considered excessive relative to the country's resource base. Economic growth will have to average around 6%, however, especially in the directly productive and service sectors, in order to increase employment at a pace sufficient to keep up with growth of the labor force. 5. Available information--while scanty--suggests that some improvement has occurred in income distribution and welfare of the lowest income groups in Colombia since the 1950s. Moreover, absolute poverty has been reduced substantially. These gains were probably the consequence of several factors, including migration of surplus labor from rural to urban areas, rapid growth of employment in high productivity jobs in industry and the services and reduced population growth. Policy efforts, particularly since 1967, have been directed increasingly toward improving the welfare of the poorest 50% of the population. These efforts have emphasized both employment generation and greater public investment in health, education, nutrition and urban develop- ment. The Bank has actively supported these efforts. Continued emphasis on growth of the productive sectors of the economy, on industrial decentralization and on programs to encourage small-scale industry and agriculture should pro- vide increased employment opportunities and higher real wages for unskilled and semi-skilled labor in both rural and urban areas. Further improvement in the public services provided to the poor should reinforce these trends and raise the level of welfare of this segment of the population. 6. Following several years of erratic economic growth and rising unemployment, the Colombian authorities introduced in 1967 a dramatic change in development strategy shifting emphasis from the then existing protectionist policy of import substitution to measures designed to expand and diversify exports. These policies were highly successful in expanding non-coffee exports, thereby alleviating the foreign exchange constraint and making possible a substantially higher level of investment. As a consequence, real GDP rose by an average 6.5% annually between 1967-1969 and 1974, well above the historical average growth rate. Merchandise exports in current prices expanded nearly threefold during this period and, most significantly, non-traditional exports became an increasingly important source of foreign exchange earnings, in part compensating for slow growth of receipts from coffee exports. By 1974, non-coffee exports comprised 56% of total merchandise exports, up from about 30% in 1967. 1/ Estimated 1978 growth rate.  -3- 7. Despite the growth of output and the diversification of exports, the country faced some potentially serious problems at the time the administration of President Lopez Michelsen took office in 1974. Weakening balance of payments in part related to the slowdown of growth in the indus- trial countries, loss of self-sufficiency in petroleum production, deteriora- tion of the public finances, accelerating inflation, and declining investment threatened to reduce growth of output and employment. As a consequence of these developments, the Government introduced an economic stabilization pro- gram which combined basic reforms of the fiscal, monetary, and trade systems with measures aimed at accelerating long-term economic growth. 8. In an effort to strengthen the public finances, the Government undertook a comprehensive itax reform designed to improve the progressivity and elasticity of the tax system. Some of the distortions which had developed in the financial system because of forced investment requirements placed on financial institutions and differential tax treatment of financial instruments were eliminated. Interest rates were raised in an effort to increase private savings and improve resource allocation. In order to increase the efficiency of the economy through greater reliance on market forces, price controls on a number of industrial and agricultural products were removed, thereby providing greater stimulus for increasing production. Modifications in petroleum pricing policy aimed at regaining self-sufficiency in the production of crude petroleum by improving incentives for exploration and exploitation were introduced. Concurrently, the Government initiated policies designed to reduce the subsidy on local consumption of petroleum products, which eventually led to a 220% increase in gasoline prices by 1978. Tariff levels and non- tariff barriers to trade were reduced significantly in order to increase competition and the efficiency of domestic firms. While these reforms were successful in improving thLe public finances and reducing inflation in 1975, they also served to reduce economic growth and the slowdown of domestic economic activity which began in 1974 continued through most of 1975. Recent Economic Developments 9. During the past three years, the Colombian economy has been dominated by developments in the external sector. The serious frost in late 1975 affecting Brazil's major coffee producing area, triggered a fourfold increase in the world price of coffee by mid-1977. This caused Colombia's export earnings from coffee to increase to nearly US$1.8 billion in 1977 from US$764 million in 1975, and produced an unprecedented rise in incomes and demand in the country's rural areas. Lagging supply of consumer goods, particularly basic foodstuffs--the production of which was adversely affected by drought conditions in most of the country's interior--failed to keep pace with rising demand, and inflation accelerated from 24% in 1975 to 44% in the twelve months ending June 1977. Inflation in Colombia has been moderate relative to that experienced by other countries in the region, seldom exceeding an annual rate of 20%. The acceleration of inflation which took place during the period, therefore, was unprecedented in recent history, and efforts to lower the rate of inflation have dictated economic policy since that time.  - 4 - 10. The authorities responded rapidly by introducing a broad range of fiscal, monetary and trade policies designed to gain control over the explosive increase in prices. As a consequence of these measures and of a favorable second semester harvest, inflation declined sharply beginning in July 1977. By the end of the year, the annual rate of inflation had fallen to 29%. With few exceptions, the stabilization policies, together with periodic exchange rate adjustments, were continued in effect throughout 1978 and by year end inflation had subsided to an annual rate of 17.8%. 11. Because of the lack of dynamism in world markets, slow growth in agricultural production, capacity constraints in the industrial sector and modest increases in real investment, the Colombian economy expanded only moderately in 1976 and 1977. Growth of real GDP increased from 3.8% in 1975, to 4.6% and 4.8% respectively in the subsequent two years. However, because growth occurred in the relatively labor intensive sectors of the economy-- personal services, trade, transport and communications and manufacturing--the urban unemployment rate had declined to an estimated 8% by the end of 1977, from an average 12% during the early 1970s. In addition, there is evidence of labor shortages and rising real wage rates in rural areas during this period, and it appears that rural unemployment also declined. 12. Estimates for 1978 show an 8% increase in real GDP resulting pri- marily from continued stimulus to aggregate demand from high coffee receipts and from an expansion of investment. In addition, favorable weather conditions permitted a sharp recovery in agricultural output. Agricultural production is estimated to have grown by as much as 9% over the low level of 1977. While coffee prices fell considerably in 1978 from their 1977 levels, this decline was more than offset by expanding export volume as Colombia undertook a more aggressive coffee export policy. Consequently, receipts from coffee exports rose to nearly US$2.1 billion for the year. The accompanying rise in domestic demand and a modest recovery in export markets caused manufacturing and trans- port and communications to grow by 8.5% each and trade (including commerce) by 9%. Open unemployment in urban areas is estimated to have fallen further to 7.6% by June 1978. 13. Colombia's balance of payments was in surplus in 1978, continuing the trend of the previous three years. Largely as a result of the increase in coffee exports, Colombia's net official international reserves rose by US$664 million, reaching US$2,493 million by the end of the year, equivalent to about nine months imports of goods and non-factor services. This increase in reserves occurred despite a nominal 25% increase in import payments, reflecting the rise in domestic demand, a certain overvaluation of the exchange rate and liberal import policies. There were few significant modifications in trade and exchange rate policies in 1978. The slow rate of peso devaluation was continued during the first three-quarters of the year, but accelerated in the fourth quarter when the pace of reserve accumulation began to slow. In gen- eral, trade and exchange rate policies were directed towards reducing the impact of reserve accumulation on the monetary base by delaying the monetiza- tion of export receipts and advancing import payments. These measures com- plemented monetary policies which were aimed at restraining growth of the money supply.  -5- 14. Colombia's public finances generated a large surplus in 1978 thereby permitting the Government to relax somewhat the policy of fiscal restraint which formed part of its anti-inflationary program during the previous two years. Current savings of the public sector rose to an estimated 6% of GDP, compared with 5.5% of GDP in 1977, and covered about 90% of public sector investment. Both the Central Government 1/ and tiie