Bolivia - National Mineral Exploration Fund Project

Document of The World Bank FOR OFFICIAL USE ONLY - L COPY Report No. 2309-BO STAFF APPRAISAL REPORT BOLIVIA NATIONAL MINERAL E'XPLORATION FUND PROJECT Junie 5, 1979 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otlherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Bolivian Peso (Bol.$) EXCHANGE RATES Bol.$20.00 = US$1.00 Bol.$1,000 = US$50.00 PRINCIPAL ABBREVIATIONS AND ACRONYMS BAMIN - Banco Minero BISA - Banco Industrial Sociedad Anonima BRGM - Bureau de Recherches Geologiques et Minieres COBOEN - Comision Boliviana de Energia Nuclear COMIBOL - Corporacion Minera de Bolivia CONSULTIN - Consultoria Metalurgia y Minas Limitada CIDA - Canadian International Development Agency CPD - Consolidated Purchasing and Designing CPM - Centro Profesional Multidisciplinario DMA - Defense Minerals Administration DMEA - Defense Mineral Exploration Administration ECOSOC - Economic and Social Council of the UN ENAF - Empresa Nacional de Fundiciones FNEM, the L2 und - Fondo Nacional de Exploracion Minera I1MM - Instituto de Investigaciones Minero Metalurgicos INDEF - Instituto Nacional de Financiamiento GEOBOL - Servicio Geologico de Bolivia GTZ - Gesellschaft flier Technische Zusammenarbeit LANDSAT - Land Satellite of the nliited States National Aeronautic and Space Administration MMM - Ministerio de Minas y Metalurgia, Bolivia MMEA - Metal Mining Exploration Agency, Japan OME - Office of Mineral Exploration, US REX - Resource Exploration International SERMIN - Servicios Mineros Limitada SIDERSA - Empresa Siderurgica Boliviana Sociedad Anonima SOQUEM - Societe Quebequoise d'Exploration Miniere TPD - Metric Ton per Day TPY - Metric Ton per Year UNDP - United Natiotns Develupt-nln Programme UNRFNRE, UN Revolving Fund - United Nations Revolving Fund for Natural Resources Exploration WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 1 kilometer (km) 3 0.622 miles (mi) 1 cubic meter (m ) 35.315 cubic feet (ft3) It" 1 264.2 US gallons (gal) It "= 6.29 barrels (bbl) 1 metric ton (t) = 2,204.6 pounds (lb.) 1 metric ton (t) = 1.1 short tons (st.) BOLIVIAN FISCAL YEAR January 1 to December 31 Industrial Projects Department June 1979  FOR OFFICIAL UaE ONLY BOLIVIA NATIONAL MINERAL EXPLORATION FUND PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. INTRODUCTION ............................................... 1 II. THE MINING SECTOR .......................................... 2 A. Structure of the Bolivian Mining Sector .... ........... 2 B. Principal Sector Problems ............................. 4 1. Taxation ......................................... 4 2. High Production Costs ............................ 5 3. Lack of Exploration ............................... 5 4. Mining Finance ................................... 6 C. Exploration Programs .................................. 7 III. THE ROLE OF MINERAL EXPLORATION FUNDS .... ............. 9 A. Objectives of Mineral Exploration Funds .... ........... 9 B. Scope and Characteristics of Major Existing Exploration Funds .................................... 10 1. The United Nations Development Programme (UNDP) .. 10 2. The United Nations Revolving Fund for Natural Resources Exploration (UNRFNRE) ........ 11 3. Consejo de Recursos Minerales (CRM), Mexico ...... 12 4. Quebec Mining Exploration Company (SOQUEM), Canada .... , 12 5. Office of Mineral Exploration (OME), United States ........ .......................... 13 6. Metal Mining Exploraltion Agency (MMEA), Japan .......................................... 13 C. Summary Experience of Funds ........................... 14 IV. FNEM--THE NATIONAL MINERAL EXP-LORATION FUND OF BOLIVIA ..... 15 A. Background ............................................ 15 B. Ownership ............................................. 16 C. Objectives .................................. 16 D. Organization and Management ........................... 17 E. Past Operations, Performance and Policies .... ......... 20 F. Financial Situation ......................... 25 The report was prepared by Ms. M.O. Smith and Mr. L. Maraboli of the Industrial Projects Department. This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Cont'd) Page No. V. THE PROJECT ................................................ 27 A. Project Objectives and Scope ..... ..................... 27 B. Project Description ................................... 27 1. 1979-82 Operations Program ............... .. ...... 27 2. Operating Procedures ............. .. .............. 29 3. Financial Credit Conditions ..... ................. 32 4. Mine Development Financing ....................... 33 C. Review of Operations Program .......................... 33 D. Project Implementation .............. .. ................ 34 1. Project Execution and Management ....... .. ........ 34 2. Training and Additional Technical Assistance ..... 36 3. Equipment Requirements ............ .. ............. 36 4. Implementation Schedule ........... .. ............. 36 VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT ...... .. ....... 38 A. Capital Cost ....... .............. ..................... 38 B. Financing Plan ....... ...................... ........... 40 C. Procurement, Allocation and Disbursement of the IDA Credit ................. .. ................... 42 VII. FINANCIAL ANALYSIS ..................... .................... 43 A. Methodology Used in Financial Projections and its Limitations ................................. 43 B. Revenues--Replenishment through Royalty Payments ...... 44 C. Exploration Costs ..................................... 45 D. Other Costs ........................................... 46 E. Financial Projections ................................. 47 F. Monitoring and Evaluation of Exploration Portfolio 50 G. Auditing and Reporting Requirements ................... 51 H. Financial Rate of Return .............................. 51 I. Major Risks ........................................... 51 VIII. ECONOMIC ANALYSIS ......................................... 53 A. Economic Costs and Benefits ........................... 53 B. Economic Rate of Return ............................... 54 C. Foreign Exchange Benefits ............................. 55 D. Fiscal Benefits ....................................... 56 E. Other Benefits ........................................ 58 IX. RECOMMENDATIONS ........ .............. ...................... 59  - iii- Table of Contents (Cont'd) LIST OF ANNEXES I Glossary Lf Mining Terms 4 Potential Exploration Projects for FNEM Financing 5 FNEM--Detailed Equipment Requirements 6 FNEM--Capital Cost Breakdown 7-1 Optimistic Case--Projected Sources and Uses of FNEM Operating Budget 7-2 Pessimistic Case--Projected Sources and Uses of FNEM Operating Budget 8 Assumptions for Financial and Economic Analyses MAP IBRD No. 13840 SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE Referred to Reference Title Date and Authors under Paragraph A Bolivian Mining Code prepared by A. Gottret and L. Valle :Ln 1975 B Taxation and the Mining Sector in Bolivia prepared by Harvard Institute for International Development in 1975 2.09 C Decree of Creation of National Mineral Exploration Fund No. 14549 of April 26, 1977 4.02 D Five-Year Plan of the Mining and Metallurgical Sector, 1976-1980, prepared by the Ministry of Mines and Metallurgy in 1976 2.05 E Operation Plan for 1978, prepared by Ministry of Mines and Metallurgy in 1977 2.05 F Mining Statistics, prepared by Ministry of Mines and Metallurgy in 1977 - G Implementation Plan for National Mineral Exploration Fund, prepared by U.S. 4.01 Geological Survey in 1976 H National Mineral Exploration Fund, Diagram of the Phases of a Project, prepared by Ministry of Mines and 4.03 Metallurgy in 1977  - iv - Table of Contents (Cont'd) Referred to Reference Title Date and Authors Under Paragraph I By-Laws of the National Mineral Exploration Fund 4.05 4.11 5.17 J Organization of the Projects Department, National Mineral Exploration Fund, 4.07 prepared by FNEM in 1977 K Organization of the Investment Depart- ment, National Mineral Exploration Fund, 4.08 prepared by FNEM in 1977 L Organization and Functions Manual of National Mineral Exploration Fund, prepared by FNEM in 1977 4.16 M Project for Financing the National Mineral - Exploration Fund, prepared by FNEM in 1979  I. INTRODUCTION 1.01 The Government of Bolivia has requested an IDA credit of US$7.5 million for the National Mineral Exploration Fund (FNEM) established in April 1977 as an autonomous public dievelopment enterprise to further mineral exploration in Bolivia. In 1972, thes Bank recommended in a report on the Mining and Metallurgical Sector in Bolivia (Report No. PI-14a) that mineral exploration be encouraged, inter alia, by establishing a self-replenishing lending fund whose loans were to be contingent upon the successful commercial development of explored deposits. A feasibility study for such a fund was carried out during 1975-76 by the US Geological Survey with the cooperation of the Ministry of Mines and Metallurgy (MMM) and financed under IDA credit No. 455-BO (Report No. 276a-BO of 1974). 1.02 The FNEM has a broad mandate to undertake mineral prospection and exploration in Bolivia. Its work program for the coming years is more spe- cifically centered on exploration work leading from delineation of ore deposits to preparation of feasibility studies. Its prospection activities will be limited to preparation of promotional profiles for territories that are being opened for pre-exploration work. Prospection and other pre-explora- tion activities, comprising mainly geoscientific surveys and country-wide collections of geological data, are carried out by the Servicio Geologico de Bolivia (GEOBOL); mine development of deposits proven with FNEM/GEOBOL assis- tance will be carried out by mine operators and financed through existing commercial and specialized financial institutions. 1.03 To date FNEM has received 82 applications for mine exploration from which 14 projects have been selected for detailed exploration work. The Project scope comprises the Fund's 1979-82 Operations Program estimated to cost about US$16 million equivalent. Under this program, FNEM expects to undertake annually 30-40 preliminary surveys of potential mine sites which are expected to lead, during 1979-82, to 25 prefeasibility or feasibility studies and 5 discoveries of econom:ically exploitable mine sites. Royalties from successful discoveries, togethesr with Government funds, bilateral grants and the IDA credit are designed to provide continuous funding of FNEM operations. 1.04 The Project was preappraised by the Association in November 1977. An appraisal mission consisting of Ms. Smith and Mr. Maraboli of the Indus- trial Projects Department and Mr. Tremblay (consultant) visited Bolivia in April-May 1978. A follow-up mission in January 1979 reviewed the Fund's 1979-82 Operations Program and its operating policies and procedures. A glossary of mining terms is given in Annex 1.  II. THE MINING SECTOR A. Structure of the Bolivian Mining Sector 2.01 Mining is a substantial factor in Bolivia's economy. Between 1968 and 1977 the sector, excluding hydrocarbons, contributed on average 9% to gross domestic product (GDP), 21% to Government fiscal revenues and 68% to the country's export earnings. Sector contribution has varied to a large degree with cyclical fluctuations in international metal prices. Over the 1973-77 five-year period, mining output increased only slightly and sector contribution has declined to an average of 8% of GDP, 24% of fiscal revenues and 63% of export earnings. The decline reflects the slower economic growth in industrial countries following the 1973-74 oil price hike, depressed metal prices, depletion of ore reserves in existing mines and lack of develop- ment of new reserves. A steady decline in the contribution of petroleum to exports from 35% in 1974 to 19% in 1977 has caused the Government to place increasing importance on the mineral sector for export earnings. BOLIVIA--Mineral Sector Contribution (% of) 1970 1971 1972 1973 1974 1975 1976 1977 Gross Domestic Product 9.2 6.7 9.3 11.1 9.5 6.4 6.7 7.9 Fiscal Revenues 27.3 14.0 18.7 40.3 32.6 18.5 14.4 14.8 Foreign Exchange Earnings 89.6 80.3 72.4 67.2 59.5 59.2 60.6 69.3 Source: IBRD Report No. 2195-BO, 1978; Central Bank of Bolivia, Ministry of Finance. 2.02 The mining sector in Bolivia includes (i) Corporacion Minera de Bolivia (COMIBOL), the state-owned mining company operating 12 large- size mine complexes, 17 concentration plants and one smelter; (ii) about 30 privately-owned, medium-size mines; and (iii) about 3,000 small mines operated either privately or under cooperative arrangements. The following table summarizes the characteristics of the three groups of mine operations, and a map (IBRD No. 13840), showing the location of major mining centers, is attached to this report.  - 3 - BOLIVIA--Mineral Sub-Sector Characteristics Medium-Size Small-Scale COMIBOL Mines Mines Average sales revenues per company in 1976 (US$ million) 218.2 3.6 0.04 Share in value of mining exports (1971-76) 64% 23% 13% Share in mine sector employment (1977) 33% 10% 57% Productivity (1976--annual mine output 302 236 27 in tons per worker) Source: IBRD Report No. 1251a-BO, 1976; FNEM Feasibility Report, 1975-76; Ministry of Planning and Coordination, 1977. 2.03 Mineral output in Bolivia is dominated by tin, which, in 1977, com- prised 66% of the country's total value of mineral exports (US$488 million), with wolfram and zinc next most important at 9% each. Practically all of its tin was exported either in concentrate form (68%) or as metallic product (32%). Bolivia is the world's second largest producer of tin (13%), after Malaysia (29%), and followed by Indonesia (11%) and Thailand (9%); it is also the second largest tin exporter, accounting for 22% of world tin exports, compared to 61% for Malaysia and 18% for Indonesia. In 1976, Bolivia's tin output reached 30,315 tons. The country's heavy dependence on tin is of great concern to the Government, the more so since Bolivian mines are the world's highest cost producers of the metal. Although international tin prices have experienced about a 20% real increase in the 1970's, the profit margin of the Bolivian tin industry has fallen to below 10%. 2.04 The relatively small amount of domestic smelting and refining activities are for the most part carried out by the state-owned Empresa Nacional de Fundiciones (ENAF) and COMIBOL. In 1977, domestic processing was limited to 40% of tin output, 55% of the relatively small amount of bismuth output and 10% of antimony output. ENAF, operating the Vinto plant near Oruro, was responsible for about three quarters of domestic tin smelting with the balance processed by several small smelters. Current expansion of the plant and the construction of an adjacent low-grade smelter are expected to allow about 83% of tin concentrates produced in Bolivia to be smelted within the country by 1981. 2.05 The Government attaches high priority to development of the mining sector. Sector objectives include greater efficiencies in mining operations, improved export marketing systems, expansion of smelting and refining capa- city, increased mineral diversification and increased ore reserve development.  - 4- B. Principal Sector Problems 2.06 The Bank reviewed Bolivia's mining and metallurgical sector pros- pects and problems in 1972 (Report No. PI-14a) and again in 1976 (Report No. 1251a-BO) and recommended changes in policies with respect to taxation, financing and exploration. The main issues are summarized below. 1. Taxation 2.07 During the 1970's annual tax receipts from the mining sector con- tributed between 14% and 40% of the Government's fiscal resources. Mining companies are not subject to income taxation but rather to a regalia and export tax which together constitute 90% of tax revenues from the sector. Both taxes are levied upon the gross sales value of concentrates and result in a substantially higher tax burden for Bolivian tin mining firms than experienced by their competitors in Malaysia, Thailand and Indonesia, where taxes are at least partly based on income. High effective rates of taxation directly increase the production costs which for tin, Bolivia's major export, already exceed comparable costs in other producing countries (para. 2.10). Production is only marginally profitable, except from relatively high-grade ore deposits (1% grade of ore for tin). International Comparison of Tin Industry Taxation (% of Sales Revenues) Tin Price Quotation (US$/lb) Bolivia Malaysia Thailand Indonesia 3.08 27.4 12.9 21.8 10 4.00 31.7 12.9 22.6 10 5.00 35.0 13.3 24.1 10 Source: Taxation and the Mining Sector in Bolivia, Harvard Institute for International Development (HIID), 1975. 2.08 Bolivia's present tax system materially inhibits mineral production, investment and development, because taxation on gross sales revenue, rather than on corporate income, discourages exploitation of those deposits that are not high grade and discourages investments in new capacity. The added costs of mining and processing of low-grade ore relative to metal-in-concentrate produced and of investments, for example, in beneficiation improvements, are expenses that are not deductible before taxation and therefore not attractive undertakings to the mine owner.  2.09 In 1975, the Harvard Institute for International Development made a comprehensive study, financed by the Association (para. 2.15) on taxation and the mining sector in Bolivia. The report advised that significant reform was essential if the mining sector wEas to continue to have an important role in the economy. The Harvard report recommended introducing a corporate income tax in two steps. The first step would entail regular and systematic updat- ing of presumed costs used in calculating the present regalia in order to reflect costs more adequately. Computation of presumed income would be made on the basis of "official" prices established by the Ministerio de Minas y Metalurgia (MMM) on an explicit basis, for example, through price indexing. In addition, the first step called for the replacement of the export tax by a 2.5%-3.5% production royalty on net revenues. The second step would entail the introduction of taxes based on net income. This step, however, requires that mining firms adopt consistent and uniform accounting systems. The Harvard study determined that there Were serious inadequacies in accounting structures in most mining enterprises in Bolivia. In 1976, the Government requested design of a standard accounting system for the mining industry from the Canadian International Development Association (CIDA). CIDA completed its design in December 1977 and has been requested to assist in implementing the recommended system. 2. High Production Costs 2.10 Bolivian tin production is primarily from underground deposits in rugged, mountainous areas; mining costs exceed mining costs associated with the alluvial mines in Southeast Asia by 21%-32%. Bolivia is landlocked and has formidable transportation obstacles within the country due to the geo- graphic remoteness of its mines. Freight costs are relatively high for shipment of mineral exports as well als for imports of mining equipment and consumables. However, high mine operating costs are also caused by inadequate mine development planning, outmoded techniques of mechanized mining and lack of infrastructure, particularly railway transportation, and to a lesser extent energy supply. Sharp increases in wages and social benefits have contributed to high operating costs since 1973; for example, the average wage and benefits per worker at COMIBOL increased by 8-3% during the 1974-77 period in US$ terms. At the same time, the exchange rate has remained fixed while domestic price increases have exceeded international inflation, thus reducing profitability markedly. 3. Lack of Exploration 2.11 Mining in Bolivia has been from underground vein-type deposits that cannot be fully assessed before mining begins but require on-going exploration and proving of reserves to support production. Bolivia's ore reserves have declined seriously. COMIBOL's proven reserves of tin were but 4.5 years of production in 1967 and by 1974 had declined to 2.8 years of production. While consistent data on ore reserves are not available for medium and small mines, preliminary estimates indicate that ore reserves of medium mines are no more than 2 years of production, a dangerous and ineffi- cient, low level.  - 6 - 2.12 Little exploration has been undertaken in Bolivia since the 1930's. About 35% of national territory has been held by the Government as fiscal reserves where private exploration, until recently, was not allowed. GEOBOL estimates that less than US$10 million has been expended on exploration in the last decade, or only 0.5% of the total gross value of sales. This modest percentage compares to average expenditures of 1% of sales value by medium- size companies and up to 10% by large-size companies in Canada. COMIBOL spent US$5.1 million on exploration and prospection between 1965-74, of which nearly three-quarters was for expansion of deposits in which known reserves are already mined. GEOBOL spent US$1.8 million during the same period mainly on geological mapping and mineralogy. Medium-size mining firms in Bolivia have not usually undertaken exploration but have increased reserves by acquiring mining properties of small mines that cannot secure finance for expansion. 2.13 The lack of exploration means that ore reserves are not being iden- tified at the same rate at which they are being depleted. GDP from mining increased by less than 1% p.a. between 1973-77, while total mining output decreased by an average annual rate of 0.4% from 136,225 metric tons to 133,996 metric tons. 1/ Inadequate exploration has also exacerbated the problem of declining ore grades, a natural trend in Bolivia where mining has been practiced for nearly 400 years. The trend of declining ore grades is demonstrated by COMIBOL's recent production, summarized below. COMIBOL--Tin Production and Ore Concentrate 1971 1972 1973 1974 1975 1976 High-Grade Production Production ('000 T) 25.6 27.4 33.1 28.7 30.3 26.8 Grade of Concentrate (%) 50.9 50.2 46.5 46.0 45.7 45.7 Low-Grade Production Production ('000 T) 11.5 12.9 6.0 7.1 8.6 7.5 Grade of Concentrate (%) 26.3 24.4 18.6 19.2 19.4 18.2 4. Mining Finance 2.14 During 1965-74, only 9% of total banking system credit went to mining including mineral stocks, compared to 11% for import financing, 27% for manufacturing and over 35% for agriculture. The low level of mining finance was largely due to the scarcity of profitable and sound mine invest- ment projects. Credit to private mining is extended primarily by Banco Minero (BAMIN) and by Banco Industrial, S.A. (BISA). BAMIN was established in 1936 to provide credits, marketing and technical assistance to private operators, mainly of small mines. Between 1972 and 1975, BAMIN extended US$13.6 million primarily in short- and medium-term loans for working capital 1/ Excluding a small amount of gold production for which comparable data is not available.  - 7 - and equipment requirements. BISA was created in 1974 to finance manufactur- ing, agribusiness and mining projects. By the end of 1977 BISA had extended US$12.2 million in loans to medium-size mining enterprises for modernization and expansion of existing mines, or L9% of its loan portfolio. As BISA increases its share capital and lending operations, it is expected to increase its lending to mining projects as well. In addition, Bolivian mining enter- prises have obtained short-term credit from suppliers, foreign commercial banks and foreign metal trading companies. 2.15 Bank Group support to mineral sector development has been provided in three projects. The first, a US$,6.2 million IDA credit (Report No. 276a-BO, Credit No. 455-BO) approved in 1974 included (i) US$5 million to BISA for financing expansion and modernization of predominantly medium-size mines; (ii) US$0.85 million for a national survey of small mines to be carried out by GEOBOL; and (iii) US$0.35 million for technical assistance, including a study of the mining taxation system (para. 2.09), a feasibility study for a national mineral exploration fund which led to the Project at hand, and technical assistance to the MMM for project evaluation and planning and equipment for data collection. The second, a Bank loan of US$10 million (Report No. 1132a-BO, Loan No. 1290-BC) to the Government of Bolivia, approved in June 1976, increased BISA's capacity to finance both industrial and private mining enterprise projects. The third, a Bank loan (Report No. 1236b-BO, Loan No. 1331-BO) of US$12 million to the Government of Bolivia, approved in September 1976, included (i) US$9.0 million to develop small mining through a credit program to be managed by BAiMIN; (ii) US$1.9 million for technical assistance to GEOBOL to continue its survey of small mines and to prepare preinvestment studies of small mining projects; and (iii) US$1.1 million for assistance, to the HMM in policy planning and cadastral survey and to BAMIN in management control and project appraisal techniques. 2.16 The first two Bank Group projects, described above, have benefited the mining sector, principally the medium-size mines that have both estab- lished operations and identifiable project requirements. BISA has almost fully committed its share of the IDA credit and about 20% of Loan 1290-BO. Delay in disbursing the loan results from BISA's stringent conditions upon lending and slow development of sound mining projects. The technical and managerial competence of BISA, GEOBOL and the MMM has been enhanced by the Bank projects, which also have prepared the way for possible policy changes in mining taxation and exploration through the 1975 study of mining taxation (para. 2.09), the 1975-76 feasibility study of a mineral exploration fund (para. 1.01) and the small mines inventory survey (para. 2.15). The Bank loan for small-stale mining development has encountered delays due to slow preparation of preinvestment studies by GEOBOL, lack of cooperation between BAMIN and GEOBOL and inadequate program promotion. The Bank has recently agreed with the MMM and BAMIN on procedures for financing gradual mininl development, which should strengthen the subproject pipeline and speed up loan utilization. C. Exploration Programs 2.17 Over the last few years, the Government has been recognizing the importance of identifying new ore reserves. Government budgetary support of  - 8 - exploration and prospection activities of GEOBOL, COMIBOL and COBOEN 1/, reflects the priority attached by the Government to the identification of new and higher grade ore reserves so as to diversify and intensify produc- tion. In addition to support of these activities, the Government created in 1977 the National Mineral Exploration Fund (FNEM) to provide another financing mechanism for mineral prospecting and exploration activities. 2.18 GEOBOL has been the primary agency gathering information for pros- pecting and exploration in Bolivia. Its objectives are to: (i) contribute to the geological investigation of Bolivia and effect improvements in the knowledge, development and use of the nation's geological reserves; (ii) compile and expand the geological data base through geological mapping, geophysical and geochemical studies, satellite and aerial photography and actual physical exploration; (iii) maintain an inventory of mineral proper- ties; (iv) establish an inventory of small mines; and (v) provide technical advice to private and public mining operations. 2.19 In addition to these current functions, the Government plans for GEOBOL to sponsor over the next several years the following projects: (i) a remote sensing program currently undertaken with the LANDSAT 2/ to provide geological, geomorphological and hydrological maps of the country; (ii) a program to prospect and explore alluvial gold and tin deposits close to La Paz, begun in April 1976 with the assistance and financing of the Government of the Federal Republic of Germany; (iii) a series of projects in mineral prospection of the Cordillera region undertaken by the United Nations Develop- ment Programme (UNDP); and (iv) a program partly financed by the British Government to carry out geological prospection and exploration of the pre- cambric shield in the region of Beni and Santa-Cruz. 2.20 COMIBOL for the most part investigates known deposits for expansion within its present concession areas. Its 1976-80 program includes 29 explora- tion projects of which the most important are (i) the exploration of the Catavi tin deposits for development of an open pit mine; (ii) tunnelling in the Caracoles tin mine to determine whether it may be economical to expand existing facilities; (iii) sampling and evaluation of the Playa Verde alluvial tin deposits with assistance from the London Tin Corporation; and (iv) drill- ing of the Centenario alluvial tin deposits. 2.21 COBOEN, whose role includes the exploration, exploitation, bene- ficiation and commercialization of radioactive minerals and possibly the production of nuclear energy, will continue exploration of uranium ore in the Cotaje and Tholapalca deposits and in the Altiplano region. Exploration has been carried out jointly with bilateral Italian assistance since 1974. 1/ Commission Boliviana de Energia Nuclear. 2/ Formerly named Earth Resources Technology Satellite (ERTS) of the United States National Aeronautic and Space Administration.  - 9 - If the exploration proves successful, COBOEN and its Italian partners plan to engage in mine development and processing of the ores. III. THE ROLE OF MINERAL EXPLORATION FUNDS A. Objectives of Mineral Exploration Funds 3.01 International or national mineral exploration funds sponsored by governments represent one of several means of increasing mineral exploration activities. The establishment of mineral exploration funds emerged during the past two decades when exploration expenditures world-wide and in specific countries appeared to decline in relative terms. This trend indicated not only declining profitability in the mining industry, but also increasing costs and risks associated with exploration. Statistics on Canada, one of the world's largest mineral producing countries, indicate that return on equity in the mining industry has declined andL is relatively low: in 1975 the return on metal mining was 7.7% compared to 10.8% and 11.8% for food and beverage manufacturing, respectively, and 13% for oil and gas. At the same time, the average cost per economic mineral discovery, which in 1951 was US$3.4 million (1977 terms), had increased at least four times by 1975. Thus, given the increased cost of exploration, increased financial risk is added to the already great geological risks of exploration. 3.02 Diminishing exploration is an even more acute problem in developing countries that are dependent on the mineral sector and that have promising but undeveloped mineral potential. Although developing countries are estimated to account for between 38% and 50% of the reserves of each mineral with major productive uses worldwide, their share in recent world exploration expendi- tures has been very low. Data for the early 1970's indicate that as much as 80% of world exploration expenditures 1/ were concentrated in four developed countries: Australia, Canada, South Africa and the United States. A 1977 UN study of mining indicated probable demand for exploration finance in developing countries of US$210 million a year, based on investment require- ments for iron ore, copper, aluminum, zinc, nickel and lead; this compares to actual exploration expenditures estimated to range from US$35-60 million per year since 1975. 3.03 Traditional sources of exploration finance in developing countries have been the large-scale international mining companies or the individual explorer. With exploration costs steadily increasing, the role of the indi- vidual mineral explorer has become negligible, and only companies or Govern- ments have the resource capability to make the relatively large capital investments required for exploration. Only they have or can arrange for access to potential mineral territcries to spread the high risk that explora- tion entails if limited to a single deposit. A recent UN Centre for Natural Resources, Energy and Transport study has estimated that total expenditures to prove one large-scale mineral discovery leading to an economically justified exploitation project is likely to be in the US$5-20 million range. 1/ Excluding centrally planned economies.  - 10 - 3.04 International mining companies, however, are increasingly reluctant to undertake exploration in developing countries for reasons of perceived political risk, as well as possible inadequate financial gains. The large amount of investment required for exploration and development and the long time span entailed (between 6-12 years) before any return can be realized make companies less willing to invest in countries where they perceive either political instability or host country goals incompatible with foreign private mining interests. With depressed markets for many mineral commodities since 1974, the value of new mineral discoveries has not increased commensurately to outweigh the increased non-economic mining and exploration risks in devel- oping countries. 3.05 Developed and developing countries that are interested in mineral production have sought various financial alternatives and supplements to increase the exploration activities necessary for growth in mineral produc- tion. Lacking private exploration activities, Governments have increasingly assumed exploration risk by funding exploration ventures or establishing national mineral exploration funds to support exploration activities within national boundaries. In addition, exploration finance has been mobilized on an international basis through multilateral and bilateral assistance programs to developing countries. State mining enterprises have been the more common undertaking by such countries as Brazil, Chile, Guyana, India, Indonesia, Peru, Zaire and Zambia. With the exception of Cia. Vale do Rio Doce (CVRD) in Brazil, however, most state enterprises have not generated sufficient income to support national exploration on a wide scale. Bilateral assistance has been offered by several countries, primarily Germany, Japan, Canada and Sweden, with assistance mostly tied to procurement and purchase agreements with the donor country. Other countries, for example, the USSR and China, have provided infrastructural support to exploration and develop- ment of minerals in developing countries. International assistance through the UN has been limited due to the exploration and financing risks and the relatively large financial commitments required by mineral exploration. Characteristics and success rates of several of the major international, bilateral and national exploration funds are discussed briefly below. B. Scope and Characteristics of Major Existing Exploration Funds 1. The United Nations Development Program (UNDP) 3.06 The UNDP began operations in 1959 with a relatively small portion of its budget allocated to minerals development, predominantly in the early phases of the exploration cycle. Its objectives in mineral development are to strengthen the economies of developing countries through mineral explora- tion projects, training in geosciences and institution building. Total UNDP commitments and expenditures for mineral development (through 1976) were US$132 million, of which about US$95 million was expended for 123 explora- tion projects.  - 1 1 -- 3.07 The program has resulted in 21 discoveries, with an estimated potential mineral value of US$26 billion. Exploitation has been limited to four of these discoveries, however, because of difficulties in attracting capital for subsequent feasibility studies and mine development. However, three additional discoveries are expected to be commencing production within the next five years, implying success ratios of 1:18 in terms of promising discoveries and 1:31 in terms of actual exploitation. 2. The United Nations Revolving Fund for Natural Resources Exploration (UNRFNRE) 3.08 The UN Revolving Fund was created by the UNDP Governing Council in June 1975 in accordance with the UN Economic and Social Council's Resolution 1962 (LIV) of May 18, 1973, and General Assembly Resolution 3167 (XXVIII) of December 17, 1973, to meet the need for increased natural resources exploration in developing countries. The Fund is financed by voluntary contributions from member countries that at the end of 1978 stood at US$23 million with replenish- ment contribution from successful projects. Replenishment contributions are set at 2% of the value of annual production over no more than 15 years of active production, total replenishment contributions being limited to 15 times the original investment by the Fund. 3.09 Exploration work is defined by the UN Revolving Fund to include: (a) Preliminary Activities: appraisal of applicant- supplied data and field inspection; (b) Technical Reconnaissance: definition of objectives for detailed prospection t:hrough photogeology, geochemistry, geophysics and other techniques; and (c) Detailed Evaluation: mapping, detailed geochemical and geophysical research, trenching, sinking of shafts and bore holes, limited treatment tests and preliminary studies of infrastructure, marketing and profitability. To limit activities to actual mineral exploration, the UIN Revolving Fund does not provide financing for feasibility studies and subsequent mine devel- opment; it also does not finance oil and gas exploration. 3.10 Operations of the UN Revolving Fund have started slowly. As of August 1978, only 10 projects had been approved for exploration, and field work began on 3 projects. The initial slow start of the UN Revolving Fund is due in part to two interrelated factors: (i) a reluctance on the part of developing countries to subsidize with successful ventures--by way of replenishment contributions--exploration in other countries; and (ii) a tendency among member countries to submit relatively unpromising projects, but, for good prospects, to mobilize funds with repayment terms perceived to be less onerous. The Fund is presently reviewing its policies; commitments by late 1978 were about US$2.0 million and are expected to reach about US$10 million annually by 1985.  - 12 - 3. Consejo de Recursos Minerales (CRM), Mexico 3.11 CRM is the third in sequence of mineral resource and exploration programs dating back to the 1930's and is funded by the Mexican Government. In 1958, the Instituto de los Recursos Minerales was incorporated into the Consejo de Recursos Naturales No Renovables, and it was later renamed the Consejo de Recursos Minerales. CRM is a decentralized public agency. Its objectives are to: (i) carry out and coordinate the geological investigation of the Mexican soil; and (ii) promote and assist individuals and enterprises operating in the mining sector in the exploration and evaluation of specific mineral prospects. It thus is involved in the full range of mineral exploration activities. Under its second objective, CRM provides credits for 90% of exploration costs, repayments of which are contingent upon identification of an economically exploitable deposit. If exploration is successful, the borrower must start to repay after one year of grace the credit amount plus a 20% premium and a 12% annual interest charge on the outstanding balance. In addition, when production resulting from the exploration commences, the borrower must pay royalties of 1%-3% of the net value of production. CRM thus spreads a portion of the risk of financing among borrowers. 3.12 In 1978, CRM's assets totalled about US$15 million, and its annual operating budget reached US$13.9 million equivalent. CRM estimates that about 50% of the costs of exploration financed through its contingent credits are met through income earned from interest and royalties on successful projects; for the remainder, CRM receives annual Government subsidies. 3.13 Over the past years, CRM has investigated 398 projects and undertaken preliminary sampling and studies, detailed reserve evaluation and feasibility studies on 70 projects. Of these, 22 have resulted in proven reserves for commercial exploitation, implying a success ratio of 1:18. 4. Quebec Mining Exploration Company (SOQUEM), Canada 3.14 SOQUEM is a stock company established in 1965 and wholly owned by the provincial government of Quebec; its objectives are to participate with the private sector in mining exploration in the Province of Quebec. It is 100% equity financed and receives annual capital contributions from the provincial government. SOQUEM's policy is to acquire an equity participation in exploration or exploitation projects and to provide technical inputs in proportion to its share holdings. It is also designed to become a holding company managing mining investments and reinvesting the dividends received from these investment(s) in exploration. Dividends received are expected to allow SOQUEM to become self-sustaining. SOQUEM by design, therefore, carries not only the risk of successful exploration and subsequent production but also the mine operating risks as the latter determines profitability and dividend payments. 3.15 SOQUEM has a paid-in capital of US$37.7 million and has been aver- aging annual exploration expenditures of US$4.4 million. The number of its exploration projects is now reaching 300. It is expected that SOQUEM's exploration expenditures will stabilize at US$3.5-4.5 million per year, an  - 13 - amount which is estimated to be generated from dividends from successful projects by 1985. SOQUEM engages in all phases of the exploration cycle, from the most preliminary mapping and prospecting to and including feasi- bility studies. So far five discoveries have been brought into production; one very small deposit has been mined out. The average time between the com- mencement of exploration and production has been seven years. Disregarding this time lag, the ratio of successful to unsuccessful projects is approxi- mately 1:60 in terms of actual exploitation. 5. Office of Mineral Exploration (OME), United States 3.16 Since 1950 the US Department of the Interior has set up three successive programs of financial assistance to private industry to stimulate the exploration of mineral resources in the United States: the Defense Minerals Administration (DMA), 1950-51; the Defense Minerals Exploration Administration (DMEA), 1951-58; and the Office of Minerals Exploration (OME) which started in 1958. Each of these programs provided loans for mineral exploration projects whose repayment has been contingent upon exploration success and mine exploitation. Total Government expenditures on these pro- grams through mid-1977 amounted to US$28.2 million, not including adminis- trative and technical service charges. Repayments of the loans, interest and other charges to the Government totalled IJS$7.6 million through mid-1977. 3.17 ONE offers its exploration loans for 36 eligible minerals. Repay- ment of these loans is based on a 57 royalty on the gross proceeds from ore sales, to be paid over the life of the new ore deposit or for periods of not less than 10, and not more than 25 years, or until the Government's contribu- tion is repaid with interest, whichever occurs first. Maximum OME financing varies from 50% to 75% of exploration costs, depending on the type of mineral prospected and may not exceed US$250,000 per exploration effort. These con- ditions limit OME financing to small- to medium-size prospects or to a cata- lytic role for attracting private exploration financing. 3.18 The OME program financed 211 exploration projects from 1958 to mid-1977, of which 57 (1:4) have led to proven mineable reserves with an estimated value of US$163 million. The costs of the exploration projects totalled US$13.3 million, of which the Government's share was US$4.9 mil- lion. Of these US$4.9 million, losses written off were US$2.6 million. The earlier (1951-58) DMEA program financed 1,159 projects, of which 399 have led to proven mineable reserves (1:3) and 97 have repaid their loans in full (1:12). The ONE program has had more limited success in terms of numbers of projects in which it has participated because, as opposed to the DMEA program, large mine operators were not eligible for financing. 6. Metal Mining Exploration Agency (MMEA), Japan 3.19 Japan established MMEA in 1963, and its exploration activities are funded by grants from the Japanese Government. The agency's responsibilities have grown from financing mineral prospection and exploration of Japanese enterprises in Japan to financing exploration activities of Japanese enter- prises abroad. In 1970, MMEA began cooperative exploration in developing  - 14 - countries and since 1974 has established a data collection and information center. It also operates a vessel for geological research into undersea mineral resources. 3.20 MMEA finances base metal exploration through loans on a 6-10 year repayment basis at low interest rates or through loan guarantees. The Agency, unlike other national exploration funds, does not normally carry the explora- tion risk but relies on the creditworthiness of the sponsors for loan repay- ment independent of exploration success. Only in the case of uranium is the loan repayment contingent on successful discovery. 3.21 Of 89 reported mineral exploration programs, 17 were brought into production (1:5). MMEA expenditures for the 17 successful projects were US$50.2 million or US$2.9 million per project for all 89 undertakings. The delay between mineral discovery and start of commercial production ranged from 3-15 years and averaged 8 years. The high success rate of 1:5 and prompt development of the discoveries indicate that MMEA-financed programs concentrate on highly promising mineral exploration prospects, well advanced in their development. Such portfolio composition is to be expected since MMEA provides loan financing and the risks remain with the sponsor, who undertakes the crucial screening before loan application. C. Summary Experience of Funds 3.22 As illustrated above, the scope of work, financing conditions and success rates of the existing national and international exploration funds vary widely. Exploration stages financed range from low-cost, high-risk prospecting to relatively high-cost, low-risk feasibility work. Financing terms vary from standard loans to loans contingent upon successful oper- ation. Among the latter, repayment obligations may be as high as 15 times the original exploration cost, equal to the original amount plus interest or tied to dividends independent of the size of the original exploration expenditures or loans. The sample of operating exploration funds is too small to correlate conditions of these funds and successful operation; how- ever, the following observations can be made. 3.23 Funds that have placed the financial risk of exploration in whole or in part on the loan applicant have been most successful in terms of mine discoveries per exploration projects. This, however, has been achieved at the cost of narrowing the focus of the exploration undertaking and there- fore its stimulus for exploring a wide territory. MMEA, for example, with a success ratio of 1:5, finances companies that due to the unconditional repayment guarantee are undertaking with the MMEA funds the later, less risky, stages of exploration, once detailed reserve exploration has for the most part been completed. SOQUEM, on the other hand, carries the full burden of exploration risks, plus the risk of unsuccessful financial operation, together with private enterprises under joint venture arrangements. Such risk-sharing lessens the stringency of conditions under which exploration can take place; and while it allows more exploration projects to be under- taken, it is bound to lead to a lower ratio of successful to unsuccessful projects. This has proved to be worthwhile in identifying new mines, but  - 15 - has required (i) greater (at least initially) government subsidization (on the part of the Government of Quebec); and (ii) highly qualified staff to undertake project selection and supervision. 3.24 The inherent risk in exploration, as demonstrated by the low success rate of some exploration ventures, underlines the importance of -7ide terri- torial coverage, either through international exposure or substantial, poten- tial mineral wealth within national boundaries. All existing national mineral exploration funds are in countries with a large number of potential mineral prospects which, in the minimum and long run, makes risk diversification possible. 3.25 Highly professional management and technical skills have been major ingredients in the funds' performances. Successful performance of existing funds has been characterized by clearly defined goals and objectives with respect to exploration, as well as stringent application of prospect selection criteria. The necessity for professional independence in technical and financial decisions regarding exploration projects has been for the most part well respected. At SOQUEM, for example, measures have been employed to attract highly qualified staff, offering bonus systems for excelled per- formance and profit-sharing incentives to staff. 3.26 Finally, public support tc, each of the national funds has been of prime importance in their establishment if not ultimate continuation, depend- ing upon financial design. Governments have assessed the economic needs of their respective countries and taken decisions on the extent to which it was in the public interest to establish and subsequently subsidize these funds. Continued political and financial support has been important in the case of each fund. 3.27 The Government of Bolivia has similarly assessed the economic needs and financial requirements for a mineral exploration fund in its territory. It has accepted the importance of stimulating mineral exploration and endorsed a scheme for a national exploration fund in which initial Government subsidi- zation will generate a revolving fund which is ultimately to generate a certain continuous level of exploralion. Bolivia, comprising a geological territory with possible and probable reserves far in excess of known reserves, fulfills the pre-condition for the spreading of risks needed for an explora- tion fund. The factors affecting the Fund's operations, such as scope and quality of its work, and the degree of risk-sharing, subsidization, financial resources and institutional independence, will determine whether the Bolivian exploration fund will meet the objective of forcefully stimulating new mineral exploration and do so at lowest possible economic cost. IV. FNEM--THE NATIONAL MINERAL EXPLORATION FUND OF BOLIVIA A. Background 4.01 In 1972, as noted in para. 1.01, the Bank recommended in a report on the Bolivian mining and metallurgical sector (Report No. PI-14a) that a  - 16 - mineral exploration fund be considered by the Government to increase explo- ration and support the continued growth of the mining sector. In 1975, a feasibility study for the exploration fund was undertaken by the US Geo- logical Survey, with the cooperation of the MMM and financed under an IDA credit (No. 455-BO). The study was revised and expanded in 1976 by the MMM to include an analysis of the technical, financial and administrative design of such a fund. The revised study provided the basis for the creation of the National Mineral Exploration Fund (FNEM). B. Ownership 4.02 The FNEM was created by Decree No. 14549 on April 26, 1977. The Fund was established as a public development enterprise, with legal identity and with financial and management autonomy. The Fund is wholly state-owned and responsible to the MMM. While the Fund operates under the aegis of that Ministry, the Government reconfirmed its desire to allow the Fund to operate as an independent entity, instead of as a Government agency, by incorporating FNEM as a public development enterprise. The chosen corporate form should help to minimize political interference in Fund operations. The Government has agreed that no modification will be made in the Decree-law creating the fund without IDA's agreement. C. Objectives 4.03 Fund objectives are defined sufficiently broadly to provide a framework for general mineral prospection, specific mine exploration as well as planning assistance for nationwide exploitation of mineral resources in Bolivia. The Fund's scope of work is defined in the Decree No. 14549 and encompasses in particular: (a) Regional prospection: This includes geological mapping, regional surveying, selecting of target areas and geological, geochemical and geophysical investigation of given prospects. The Fund is to: (i) channel internal and external finance for regional prospec- tion programs carried out by specialized State agen- cies such as COBOEN or GEOBOL; (ii) finance regional prospection programs; (iii) help develop a promotional program for prospection as well as exploration activi- ties; and (iv) review all prospecting programs pro- posed by GEOBOL; (b) Exploration: This includes required detailed surveying, mapping, surface and underground drilling and lab- oratory testing to establish contents and quality of known mineral deposits, appraisal of the economic value of the mineral reserves discovered and all feasibility studies required to prepare for the exploitation of mineral reserves. To execute a min- eral exploration program FNEM has the authority to:  - 17 - (i) give credits with repaymnent contingent on suc- cessful exploration to public or private entities for mining exploration projects; (ii) supervise, control and evaluate the financial, technical and administrative status of projects financed in whole or in part by the Fund; and (iii) present and recom- mend projects with demonstrated technical, economic and financial feasibility to national and international sources of finance for exploitation of the minerals; and (c) Revolving Characteristics: FNEM is to use whatever funds it has recovered fromL investments in prospection and exploration to reinvest in additional prospection and exploration projects. As noted, repayment of loans to mining entities for exploration is contingent on the successful identification and subsequent exploitation of mineral reserves. The decree establishing the Fund does not specify how and to what: extent prospection or explora- tion expenditures must be recovered from successful mining projects. Nevertheless, Fund management hopes that royal- ties from successful mining projects will eventually suf- fice to sustain FNEM operations. D. Organization and Management 4.04 The FNEM Board of Directors has seven members. Its Chairman, the president, is the Minister of Mines and Metallurgy or his representative. The other Board members are representatives of the President of the Republic, the Ministries of Mines and Metallurgy and of Finance and Planning and repre- sentatives from BAMIN and GEOBOL. The Board meets once a month; the president and four Board members constitute a quorum. The General Manager and Legal Advisor attend the meetings but have no vote. The main functions of the Board include, in addition to the usual functions of policy formulation and finan- cial supervision: (i) the approval of all exploration, prospecting and service contracts to be undertaken by the Fund as recommended by the General Manager; (ii) the review of the decision of the General Manager to reject or postpone decisions on applications for exploration financing; and (iii) the approval of contracts for the purchase of goods or services exceeding US$30,000 equivalent. 4.05 FNEM by-laws were approved through the issuance of Decree No. 16413 dated April 30, 1979, and provide a sound basis for operation. FNEM has agreed that it will not modify its by-laws without IDA's agreement. Review of FNEM internal regulations, however, indicates certain areas of concern that could limit procurement under the proposed IDA credit. Therefore, agreement was reached with the Fund, that IDA-financed goods would be procured according to guidelines for procurement under World Bank loans and IDA credits. FNEM also agreed that its own regulations on contracting of consultants and mining services requiring mandatory joint venture arrangement would not apply to IDA-financed services.  - 18 - 4.06 The General Manager, Mr. J. Villalobos, is FNEM's top executive officer. He is a geologist by training with limited, but good experience in his field and much initiative. He was appointed to this position upon the Fund's creation. As shown in the organization chart of FNEM on the following page, he is assisted by Mr. J. Rubin, a geological engineer and Chief of the Projects Department, and Mr. L. Pereira, an economist, the Chief of the Investment Department. At present, the staff of FNEM totals 53, including 28 professionals. FNEM staffing is sufficient to handle its pro- jected Operations Program (para. 5.04). IDA has alerted FNEM to the need of limiting additional staff increases to prevent administrative costs from encroaching on its Program. 4.07 FNEM's operating units most directly involved in exploration project decisions are the Projects and Investment Departments and the Legal Counsel. The responsibilities of the Projects Department are to establish the work plan for new projects for general prospecting and exploration and to carry out a preliminary survey of exploration projects for which applications for financing have been received. The Department also has the responsibility to control, supervise and evaluate all subsequent work on prospecting/explora- tion projects. The Projects Department has three divisions, each of which is responsible for a different phase of project work. The first has respon- sibility for technical evaluation of exploration projects, the second for economic evaluation of exploration programs and the third for promotion of prospection programs. 4.08 The Investment Department is composed of 2 divisions, the Financ- ing Division, which (i) determines the financial requirements of the Fund for purposes of the annual budget and additional external support; (ii) analyzes the financial status of the mining entities that have applied to FNEM for financing; and (iii) examines the future cash flow position of these enti- ties assuming the exploration project is successful; and the Investment Control Division, which controls the use of FNEM credits and repayments in FNEM projects that have resulted in newly identified ore reserves which are being commercially exploited. 4.09 The Legal Counsel has particular importance for the Fund since major legal problems over concession rights are common for the small- and medium-size properties in Bolivia. His main function is presently the careful screening of the mining rights of applicants which will ensure that FNEM funds and staff resources are not wasted on mines for which ownership is legally doubtful.  - 19 - BOLIVIA FNEM ORGANIZATION CHART BOARD OF DIRECTORS Pnesident Minister of Mines and Metallurgy Members. One representative of each of the follow ng Institutions: Office of the President of the Republic, M niecry of Mines and Metallugy, Ministry of Finance. Min,str, of Planning. BAMIN, and GEODOL. | EN ERAL MANAGER Jamre Villalobos 3 Seo rtetrins Finnl Council |PUBLIC RELATIONS COORDINATOR LEGAL COJNSNELOR I S.rentry PROJECTS DEPARTMENT ADMINISTRATIVE DEPARTMENT INVESTMENT DEPARTMENT Jaime Rubyn Victor Jordan Lois Perelre F. P.Sec rectar.,v 1 SwretaSr TECHNICAL DIVISION ECONOMIC DIVISION PROSPECTING DIVISION I2 Aocountnts FINANCING DIVISION |INVESTMENT CONTROL DIVISION 6 E.ploration Geologists 1 2 Proieot Evaluation 2 Prospenting GeoIist. 1 C_shier 2 Ficancing Anelysts 2 In-nstmn-t Analysts 2 M,ne Engineers 1Wranfhouse 8upe,A-o I Surve.y., 2 P-rhasers 2 Field Arsistants 2 Messengers World W Buk 20109 2 Dr.ft.-e t Dri-e 2 Drill Oper.t.rs O ri-er Industrial Projects Department June 1979  - 20 - 4.10 A Financial Committee has been established at the suggestion of IDA to broaden the base for project decision-making that initially was the sole resposibility of the General Manager. The Committee is composed of the heads of the Projects and Investment Departments and the Legal Counsel. It is to meet at least once a week to review technical and financial reports on projects and make recommendations to the General Manager on project selection and financing through successive stages of exploration. The Financial Com- mittee thus broadens the basis for decision-making by the General Manager. The establishment of the Financial Committee has been agreed to by the Fund's Board of Directors, and provisions for its establishment and scope of work have been included in the FNEM by-laws. 4.11 A Technical/Administrative Committee has also been established by the Fund to review and develop operational policies. It is composed of the General Manager, the Legal Counsel and the heads of the Projects, Investment and Administrative Departments. It is to meet at least twice a month. Provisions for its establishment and work objectives have also been included in the FNEM by-laws. 4.12 The Administrative Department handles preparation of the annual budget and financial statements and all the administrative requirements of FNEM, including payments of salaries and consultant and service contracts. While the organization chart shows a public relations advisor, FNEM does not intend to fill this position until it could be foreseen that applications might decline and active FNEM promotion among mine operators is needed. 4.13 FNEM management is generally competent. The General Manager pro- vides FNEM with strong leadership, is well known and esteemed in Bolivian mining circles. The heads of the Projects and Investment Departments equally are competent and have the appropriate experience. Below this level, however, the staff, while generally qualified, is lacking in experience. E. Past Operations, Performance and Policies 4.14 FNEM has developed an Operational Manual, governing the processing of projects through the Fund, and detailing forms used by staff in processing applications and accounting for exploration costs incurred. The procedures and forms applying to exploration projects only (with none yet available for general prospecting work) represent an organizational framework but do not include guidelines for evaluation and decision-making. 4.15 FNEM's exploration projects are undertaken in four consecutive stages, thereby enabling decisions on the continuation of exploration to be made between each stage based on technical and economic evalua- tions. FNEM thereby limits its financial exposure to one stage at a time and minimizes the financial risk of undertaking the final and most costly stage. The four exploration stages are as follows: Stage A--General Survey: Preliminary on-site inspection, ore deposit sketch preparation, ore character sampling and metallurgical evalua- tion requiring a field trip of about one week, legal verification of the  - 21 - ownership of the ore deposit and brieaf evaluation of project potential. This stage is carried out by FNEM staff. It is expected to require normally about 2 weeks per project. Stage B--Preliminary Sampling and Studies: Geological mapping and topographical surveying of the surface and existing underground mine workings, systematic sampling, trenching and drifting and, if necessary, geo- physical and geochemical studies and estimation of possible reserves. This stage is carried out by consultants or contractors using equipment and labor of the property owner whenever possible. It is expected to take about 4 months per project. Stage C--Detailed Reserve Evaluation: Drilling and tunnelling, mapping and sampling of new surface and underground workings, reserve esti- mation and prefeasibility study. This stage, which has not yet been under- taken by FNEM, is to be carried out by contractors using equipment and labor from the mine owner if appropriate. Depending on the size of the prospect, it is expected to require 1-2 years. Stage D--Feasibility Study: Proving of reserves, requiring addi- tional tunnelling, surveying and mapping, and complete feasibility study including metallurgical studies, mine planning, concentration plant design, infrastructure engineering and financial, economic and market analysis. This stage, not yet undertaken by FNEM, is to be carried out by contracts, using equipment and labor of the mine owner only for tunnelling work. It is expected to require also between 1-2 years. The four stages described are for vein deposits, 1/ which are most typical in Bolivian geology and will be the type most frequently handled by FNEM. A similar breakdown in Stages A-D is being used for alluvial deposits 2/. Most Stage A investigations are undertaken by FNEM staff (paras. 4.18, 5.17), whereas during Stages B-D FNEM staff play primarily contracting, controlling and supervisory roles. 4.16 The FNEM's Organization andl Functions Manual sets out at length the content of each stage of the Fund's e!xploration activities and establishes in detail the organizational units to bEc involved in decision-making. A system- atic set of criteria to be used for project evaluation at the various explora- tion stages has been agreed upon for inclusion in the FNEM Manual (para. 5.09). 1/ Typically narrow and steeply inclined zones of mineralized rock lying within boundaries clearly separating them from non-mineralized rock. 2/ Typically surface deposits of mineralized materials, transported and deposited by flowing water.  - 22 - 4.17 The Fund's General Manager has adopted two major strategies for guiding FNEM's operations. The Fund should: (i) be self-replenishing after a yet undefined period; and (ii) initially focus exploration on mine expan- sions instead of prospecting and exploration work for new deposits and min- ing enterprises. The initial focus of the Fund on exploration for mine expansions satisfies an urgent short-term demand for exploration financing in Bolivia and enhances the Fund's probability of success. In these cases, the general nature of the deposits is known and the basic organization and infra- structure for further mine exploration exist. A number of successful projects during the first 3-5 years of operation should enable the Fund to (i) gain experience in the execution of all exploration stages; (ii) acquire a reputa- tion as a successful exploration financing agency; and (iii) achieve a notable degree of fund replenishment within a relatively short period of time. The Fund strategy is considered appropriate for initial years of operation, since it should help strengthen FNEM as an institution. To reach eventual self- replenishment, the Fund stipulates that successful projects repay not less than 2 times the Fund's cost incurred in exploration through an 8% p.a. royalty payment on the gross value of total mine production. In addition, an interest charge of 10% p.a. will be made on the outstanding balance of the actual FNEM cost incurred in exploration of the deposit. The interest charge is to become effective at the completion of a successful feasibility study but will be deferred for payment until production from the new deposit com- mences, which is assumed to be 2 years. The formula and its effect on self- replenishment are discussed in Chapter V. 4.18 In August 1977, FNEM employed the US consulting firm, Resource Exploration International (REX) in association with a local consulting firm, Consultoria Metalurgica Minera (CONSULTIN) for a period of one year to provide technical assistance in executing Stage A investigations and in supervising and evaluating Stage B. Two permanent consultants and seven temporary con- sultants from REX have given needed support to the Fund during the one-year contracting period. During the first 22 months since beginning operations in May 1977, FNEM has reviewed 82 applications and undertaken 57 Stage A projects. Forty-five of the 57 Stage A projects are vein-type deposits and the remaining 12 are alluvial-type deposits. The Fund has as yet no know-how for undertaking Stage A investigations of alluvial deposits. Field work of Stage A exploration for 6 alluvial prospects was carried out with assistance from CPD (Consolidated Purchasing and Designing of San Francisco), a US con- sulting firm. 4.19 In September 1978, 18 of the 53 projects for which Stage A investi- gations have been undertaken were classified as promising and recommended for Stage B exploration. The Fund entered into negotiations for Stage B contracts with consultants and with mining enterprises for 8 of the projects. These are: (a) Six alluvial projects including the drilling and chemical assaying to be carried out under the super- vision of CPD, Oscar Soria--a local contractor-- and David Griffiths Laboratorios from La Paz, at a total estimated cost of US$75,000;  - 23 - (b) A vein prospect for which work was carried out by the mine owner with the assistance of Robert Plenge, a Peruvian consultant, between January and October, 1978; and (c) A vei. prospect for which most of the exploration work financed by the Fund is being undertaken by the mine operator with the assistance of Fernando Blanco, a local consultant. 4.20 By May 1979, the Fund had deleted 7 of the 18 projects from its exploration program, reducing the number of potential exploration projects to 11. Deletion was made because of a combination of insufficient geological potential, low mineral prices (for antimony) and lack of owner interest. In the meantime, the Fund surveyed 3 additional vein-type deposits which are considered to be promising prospects. The characteristics of the 14 prospects considered promising in May 1979 are given in the table on the following page, and summarized in greater detail in Annex 4. Although these promising prospects include a relatively wide range of minerals, it is expected that most of the exploration financed by the Fund will be in tin, since there is more potential for tin in Bolivia. 4.21 Present operational procedures stipulate that the FNEM and the mine owner benefiting from a contingent FNEM loan enter into contractual relation- ships at 2 stages of the exploration process: (a) Prior to Stage A: A contract is signed, defining the work of Stage A and providing a ceiling of US$5,000 equivalent on the Stage A c:osts. If exploration of the mine site results in increased mineral production, the Stage A costs will be incltuded in the repayment obligation of the miner (para. 4.17); and (b) Prior to Stage B: A contract is signed defining the scope of work of Stages B, C and D, the estimated costs and the repayment obligation of the mine owner in case of successful exploration. 4.22 The first 2 credit agreements with mining enterprises signed by FNEM for Stage B projects (Totoral and Buena Esperanza) were reviewed by the IDA mission to Bolivia in January 1979. The agreements were signed prior to establishment of contractual procedures described in para. 4.21 (b) and as such cover work to be undertaken and cost estimates for Stage B only. The agreements do, however, include statements binding the mining enterprises to agree to FNEM recommendations for advancing into more intensive exploration and incurring additional exploration costs above those budgeted if considered by FNEM to be necessary. The agreements also include a penalty provision, requiring a mining enterprise which at any time opts to terminate agreement with FNEM, despite FNEM's recommendation for more intensive exploration, to repay the cost of the exploration incurred by the Fund theretofore. The 2 credit agreements differ with respesct to the specific repayment terms  BOLIVIA - NATIONAL MINERAL EXPLORATION FUND PROJECT PROSPECTS SUCCESSFULLY STUDIED THROUGH STAGE A STAGE A POTENTIAL POTENTIAL POTENTIAL EXPECTED COST PLANNED TIMETABLE /b POTENTIAL ESTABLISHMENT/ APPLICATION FIELDWORK ORE RESERVES CONCENTRAT7 PROCESS ADDITIONAL ADDITIONAL EXPANSION CONCENTRATING PROSPECT LOCATION DATE COMPLETED RESERVES GRADE PRODUCTION RECOVE/YL EXPLORATION EXPLORATION PLANT CAPACITY ('000 Tons) (M) (TNY) (7) (US$ Thousands) From To (TPD) (TPD) 200 250 A VEIN PROSPECTS Totoral Oruro 8/77 8/77 300 1.2 Sn 450 50 694 3rd Qtr '79 - Ist Qtr '81 200 250 Suona Espora-zo Cochabanba 9/77 11/77 190 1.0 Sn 60 50 109 2/79 - 11/79 20 40 Cero Grande Cochabamba 11/77 2/78 964 1.5 Sn 700 50 2,689 3rd Qtr '79 - mid-'82 300 300 Sayaeuira La Paz 10/77 3/78 1,000 1.4 Sn 420 50 900 mid-'79 - mid-'83 120 200 Fabulos. La Paz 6/77 9/77 280 0.8 Sn 210 60 855 mid-'79 - mid-'82 100 150 Kala Uye La Pa. 3/78 5/78 5,900 0.44 Sn 790 60 1,365 mid-'79 - 3rd Qtr '83 - 1,000 Vilipaliga La Pa. 1/78 4/78 11,300 Coal 100,000 60 3,511 mid-'80 1988 - Acorn Marco La Pa. 5/78 8/78 1,000 0.5 W03 - 70 271 mid-'80 - id-'81 - - Enso... La Pa. 10/78 11/78 1,000 1.0 W03 - - 580 mid-'79 - Ist Qtr '80 Ani.nas Potosi 7/77 7/78 3,000 1.1 Pb/2.2 Zn/ - 75 58 2nd Qtr '79 - end '79 0.01 Ag B ALLUVIAL PROSPECTS Recuperacion Or-r 6/77 5/78 30,000 - Sn - - 26 4/79 - 3rd Qtr '79 10,000 - 16,000 Arque Cohabamba 6/77 5/78 120,000 Sn - 450 4/79 - lat Qtr '80 - 10,000 - 16,000 S. America-Avaroa La Pa. 1/78 5/78 60,000 - Au - 9 4/79 - 3rd Qtr '79 - 10,000 - 15,000 La Sorpresa II La Pat 8/78 5/78 100,000 - A. - 14 4/79 - 3rd Qtr '79 - 10,000 - 16,000 /a Information for alluvial pruapeot panding completion of preliminary sub-surface sanpling. Lb On alluvial deposits, information available only for Stage B; additional exploration will be defined upon completion of Stage B. /S Stage B completed in October 1978. Ind',strial Projects Department June 1979  - 25 - and conditions in the event of successful exploration. One agreement stipu- lates that Stage B exploration costs would be added to costs of subsequent stages of exploration for purposes of repayment under terms to be established at the time a contract is signed for Stages C and D; the other requires repay- ment of 2.4 times the cost of exploration incurred by FNEM, discounted by 8% p.a. over the disbursement and repayment period. The latter repayment scheme has been abandoned by FNEM as providing insufficient repayment to the Fund under its established objectives (para. 5.12) and being too difficult for most mining enterprises to understand. Four additional credit agreements have since been signed under varying terms and conditions for Stage B work on one vein deposit (Animas) and 3 alluvial deposits (Recuperacion; S. America- Averoa; and Sorpresa II). 4.23 IDA has discussed with FNEM the need to establish a standard set of general conditions applicable to all exploration credits in order to facilitate FNEM's work and simplify negotiations with the mining enterprises. These general conditions would provide for: (i) a complete clescription of work to be undertaken under Stages B, C and D and estimated costs with a 25% contingency allowance, for possible changes in the scope of exploration projects (para. 5.11); (ii) conditions binding the mining eniterprise to advance into more intensive exploration (para. 4.22); (iii) repayment terms, agreed with IDA, within the project cost range allowed by thie contingency (para. 5.12); and (iv) penalty provisions (para. 4.22). IDA further considers that the penalty provision should be strengthened by requiring payment of not less than 2 times FNEM exploration expenditures to be paid immediately in order to discourage mining enterprises in anticipation of successful explora- tion from terminating agreements with FNEM to avoid repayment. Establishment of the general conditions acceptable to the Association will be a condition of effectiveness of the proposed credit to be applied to all contracts signed by FNEM thereafter. The basic concepts of the general conditions have been agreed with FNEM. 4.24 Experience with the 82 applications for exploration financing received during the past 22 months for medium-size and small-scale mining companies indicates a good demand for FNEM financing. The attractiveness of FNEM exploration credits relate to their contingent nature and tax con- cessions granted by the Government to FNEM creditors. Repayment of the exploration credit is contingent on the identification and delineation of an economic ore deposit, and payments are only due when the ore deposit is actually being mined. In addition to the major risk-bearing of the Fund, the Government granted in July 1978, to all mining companies repaying (then and in future) FNEM credits, tax exemptions allowing 60% of the royalty payments to FNEM to be deductible from the Government "regalia" (paras. 2.07, 2.08 and 5.13). Assuming an 8% p.a. royalty payment on mine output value, the royalty is then decreased by 4.8% to an effective rate of 3.2% of that value. F. Financial Situation 4.25 By the decree establishing the Fund (No. 14549), FNEM received a capital subscription from the Government of US$12 million equivalent, to be disbursed in yearly contributions beginning in 1978 of at least US$1.2 million equivalent. In addition, FNEM has received (i) a grant in 1977 of US$84,000 from the MMM, which had been earmarked for completion of the feasibility study  - 26 - of FNEM; (ii) a loan in 1977 from the Central Bank of US$1.2 million at 5% p.a. interest, a 15-year grace period and repayment over the 5 subsequent years; and (iii) a loan in 1979 from the Central Bank of US$0.25 million at 5% p.a. interest, a 6-year grace period and repayment over the 2 subsequent years. Due to severe budgetary difficulties, the Government reduced its 1978 bud- getary allocation to FNEM to US$120,000 equivalent, compared to the planned minimum allocation of US$1.2 million. This reduction has not imposed a major constraint on the Fund, however, since FNEM could make use of the undisbursed balance of its Central Bank loan, which at the beginning of 1978 was US$856,000. 4.26 Since FNEM started operations only slowly, the capitalization and loan-financing granted by the Government have provided sufficient funds for 1977 and 1978 operations as indicated by the following financing indicators: FNEM--1977-78 Financial Indicators (US$ 000) 1977 1978 (Actual) (Estimated) Exploration Expenditures /a 95 298 Other Expenditures 304 392 Paid-in Capital & Grants 84 204 Net Fixed Assets 139 127 Current Assets 43 71 Current Liabilities 55 18 /a Includes Stages A-D exploration. 4.27 However, similar severe reductions in Government funding in 1979 would constrain FNEM from undertaking its planned operations (para. 5.04) and threaten on-going operations. The US$150,000 received from the Govern- ment through May 31, 1979, is sufficient to provide for about 5 months' salary and other administrative expenses (para. 6.10). 4.28 The Fund's accounts are kept by qualified bookkeeping staff who prepare operating expenditure statements and annual operating budgets. However, the Fund has not yet set up a system for the preparation of consistent financial statements or one to monitor the expenditures and credit status for each of the financed exploration projects. Since coherent accounts and monitoring of the cost/benefits of individual projects are essential for FNEM operations, employment by FNEM of a qualified accounting firm on terms and conditions acceptable to IDA, to assist FNEM in setting up complete financial statements and a cost monitoring system has been agreed. The total cost of such assistance has been estimated at US$25,000 and is proposed to be covered by the IDA credit. Since the setting up of complete accounts should be undertaken within the next 1-2 months, about US$25,000 may have to be financed retroactively. The terms of reference and a list of auditing firms proposed by FNEM have been reviewed and approved by IDA.  - 27 - V. THE PROJECT A. Project Objectives and Scope 5.01 The basic objective of the Project is to ensure that FNEM will develop into a capable mineral exploration financing institution, which will operate autonomously under appropriate operating procedures and thus help Bolivia in reversing the trend of declining mineral reserves for exploita- tion in a potentially mineral-rich country. The Project scope includes the Fund's entire 4-year Operations Program during the 1979-82 period, estimated to cost about US$16 million equivalent. This Program is expected to include about 160 Stage A investigations (General Surveys); 25 Stage B (Preliminary Sampling and Studies); 8 Stage C (Detailed Reserve Evaluations); and 5 Stage D (Feasibility Studies) projects as described in more detail in para 4.15. To carry out these operations, FNEM will employ consultants and contractors to undertake Stages B-D projects and strengthen its own in-house expertise by implementing a training program and obtain technical assistance from qualified foreign consultants. B. Project Description 5.02 Due to the particular nature of the Project, the 4-year Operations Program and thus the Project cannot be defined precisely or described in technical detail. What is therefore described below are the policies and procedures the Fund will follow in its operations and the number and type of projects the Fund expects to undertak.e. 1. 1979-82 Operations Program 5.03 FNEM decided to focus its 1979-82 Program on exploration of known, although unproven, mineral deposits as compared to earlier-stage, regional prospection for new mineral deposits. Prospecting activities will be limited to promoting designated areas for investment and to advising in negotiation of concession agreements. 5.04 The Operations Program for exploration work of 1979-82 assumes: (a) Continuation of Stages B-D exploration work for the 14 prospects which have successfully completed Stage A in- vestigations in 1978 and remain potentially successful prospects. The projected implementation schedule of these projects is given on the following page and their character- istics were summarized on page 24, and in Annex 4; (b) Review of applications for mine financing, leading to the execution of 40 new Stage A investigations per year; and (c) Financing and supervision of a total of 25 Stage B projects, 8 Stage C projects, and 5 Stage D projects, i.e., a total of Stages B-D projects, of which 11 Stage B projects are yet unidentified.  - 28 - BOLIVIA NATIONAL MINERAL EXPLORATION FUND PROJECT IMPLEMENTATION SCHEDULE OF PROJECTS 1979 1980 1981 1982 1983 I2I3! 4 23 3 1234 1 2 3 4 1 2I3 4 pro ject Buena Esperanza B - - 4 - i Cerro Grande C _ D C Toioral ID Sayaquira D I. _::l _. - ., | ,,, __ B Fabulosa C a ID Kala Uyo =.__ ~~B . ._. __ i_ , Vilipaliga C Aninras B Acero Marca C Bt--4- - r- - - - - - B Ensueeic Arque C Recuperacon S. America B W Sotrpiresa I I B e e B Industrial Projects Department june 1979 World Bank -20097  - 29 - The Program assumes that about two thirds of future applications will relate to vein deposits and one third to alluvial deposits. Considering the distri- bution of reserves in Bolivia and the Fund's 1977-78 experience, this assump- tion is reasonable. 5.05 The Operations Program outlined above assumes a success ratio of about 1:30 which is considered reasonable for Bolivia (para. 7.02). Of the 197 projects undertaken between 1977-82, 6 deposits are estimated to be economically exploitable and start production during 1982-87. The projected initial success rate appears justified since (i) 14 of the prospects have already successfully completed Stage A, of which six deposits are considered particularly promising; and (ii) most, if not all, of the projects during the period will consist of expansions of existing mines, where the required time for testing and feasibility work can be kept to a minimum since ore character- istics and mining conditions are relatively well known. 5.06 In order to help ensure that the Fund develops an exploration portfolio using consistent operating criteria and developing adequate in-house expertise, FNEM will transmit to the Association and IDA will review and approve the work programs and credit agreements for the Stages B-D exploration projects to be financed by IDA (para. 5.04) during the 1979-82 period. To assist in speeding up this process, IDA supervision missions may have to visit Bolivia frequently during the disbursement period. 2. Operating Procedures 5.07 Project Size and Characteristics. Considering the limited amounts of available FNEM funds and limited absorptive capacity of the institution, the size of the ore deposits chosen will influence the number of exploration projects undertaken by the Fund and the associated probability of finding economically viable prospects. Consequently, the Fund has agreed to concen- trate its activities--at least during the 1979-82 period--on prospects with potential gross output equivalent to typical Bolivian tin mines in the range of 50-1,000 tons per day (TPD). Output greatly exceeding 1,000 TPD would require exploration expenditures in the US$3-10 million range, thus absorbing about 20% to 60% of the Fund's 1979-82 operating budget. As to prospects with potential gross output of less than 50 TPD, the high specific exploration expenditures may not be justified in view of the relatively small expected production level and thus would absorb FNEM funds with little prospect of prompt repayment after production start up. 5.08 COMIBOL, the wholly-owned mining company with 12 major mining centers, owns mining concession rights to a large part of the country for which mining concessions have been granted. Since COMIBOL was formed in 1952 through the nationalization of three major privately-owned mining companies, its concession areas include some of Bolivia's great unexplored mineral wealth. Bolivian authorities and the Association have discussed during the past year whether COMIBOL should benefit from FNEM credits. Theoretically,  - 30 - the company should generate sufficient funds internally to cover its own exploration expenditures. In practice, COMIBOL has shown low profitability for some time and postponed all but the most promising exploration invest- ments. However, future exclusion of COMIBOL from FNEM financing may well lead to neglect of some of Bolivia's most promising ore deposits and, thus, to the development of only second-best or higher-cost deposits in Bolivia. Consequently, FNEM has agreed to extend exploration credits to COMIBOL under the same conditions that apply to other mine owners, namely that (i) FNEM criteria for project evaluation are strictly applied also to COMIBOL explora- tion projects, and (ii) FNEM's exposure be limited to US$2.0 million for projects presented or sponsored by the same owner, which have been or will be undertaken by the Fund, during the execution of the Project; this is to avoid over-exposure financing by the Fund of several large exploration projects within a single company. 5.09 Standards and Criteria for Project Evaluation. FNEM acknowledges the importance of using a consistent set of established financial and tech- nical standards and criteria in selecting exploration projects for financing and in deciding on project advancement into more advanced stages of explora- tion. Technical and financial standards will be used as checkpoints for assessing the characteristics of properties ana applicant mining companies and facilitating comparisons of potential projects; technical and financial criteria will be used in decision-making on project selection and exploration advancement. The standards and criteria have been formulated to ensure con- sistency while avoiding bureaucratic, inflexible screening. IDA and FNEM have reached an understanding on the following standards and criteria to be included in FNEM's internal regulations (para. 4.16). (a) Financial Standards: Financial ratios will be used to (i) analyze the financial condition of mining enterprises that have applied to FNEM for financing of exploration prospects; and (ii) recommend improvements in financial conditions of enterprises whose applications are accepted for financing exploration but are not yet meeting such standards. These standards, subject to review by the accounting/auditing firm that assists FNEM in establish- ing credit and cost monitoring systems (para. 4.28) for their applicability to local mining enterprises, com- prise a current ratio of at least 1.0, and a debt ratio (long-term debt:capital) of at most 70:30; (b) Financial Criteria: The selection of exploration projects for FNEM financing will be based on (i) the project's capability to repay FNEM' s credit, based on the estimated value and life of the exploitable ore reserves (para. 5.12); and (ii) an estimated rate of return of at least 12% on a discounted basis for projects, based on expected successful exploration and exploitation; (c) Technical Standards: FNEM has agreed to the following indexes to be used in assessing the technical merit of mineral prospects during the Stage A general survey, and in guiding decisions to move ahead into more advanced Stages B, C and D of exploration.  - 31 - FNEM--Technical Standards Technical Indexes /a 1 2 3 4 Expected Ore Reserves ('000 tons) Up to 0.05 0.05-0.2 0.2-1.0 1.0 Expected Value of Ore Reserves (US$ per Gross Ton) Up to 30 30-60 60-150 150 Expected Dilution (%) Above 70 50-70 30-50 0-30 Mining Conditions Unfavorable Normal Favorable - Existing Infrastructure Unfavorable Normal Favorable - /a Each technical standard carries a numerical index of from 1 to 4 depend- ing upon the potential of the prospect, with 4 ranking highest in poten- tial. A prospect will be assessed in terms of each technical standard. The applicable numerical index of each technical standard will be added and the numerical total used to evaluate the prospect and compare it to others. Prospects for which technical indexes add to less than 8 will be considered unpromising and rejected. Prospects with indexes adding to 8-10 will be investigated further, including a review of the geological data basis, before they are con- sidered promising and worthy of further exploration. Prospects totalling 11 or more will be considered promising and will be analyzed further, both technically and economically, to determine and justify the scope of additional exploration work; and (d) Technical Criteria: FNEM has agreed on the following technical criteria for project selection and decisions on exploration stage advancement: (i) the size and geological characteristics of mineralization, with potential for gross output equivalent to typical Bolivian tin mines should be in the range of 50-1,000 TPD, as discussed in para. 5.07; (ii) ore reserves will be estab- lished by the exploration project as 70%J of possible reserves, and 307 to 6l,% of nrosnective reserves; and (iii) the nreliTninary estiriate and determination of ore reserves to be established throu_h exnloration nro4ects -Till be based on procedures agreed with BMAIN and EISA to establish sufficient positive and probablel/ reserves to support mining activities for at least 2 years. The ore reserve percentages shown above in item (ii) will be revised from tine to time, by agreement between IDA and the Fund in light of the experience gained by the Fund in carrying out the projects. 5.10 Several mine operators applying for exploration financing have asqkeO t"e "und also to assist in tihe financing of subsequent exploitation 1/ Positive reserves acceptable to BISA and BAMIN are ore reserves estab- lished from at least 3 sampling areas, such as tunnels or raises sit- uated at boundaries of the reserves, of which at least 2 areas should not be spaced beyond 50 meters in tin vein-type deposits; probable reserves are established from at least one area over a projection of 50 meters, in tin vein deposits.  - 32 - investments and the construction of pilot-testing plants and the rehabili- tation of processing plants. If FNEM were also to provide financing for mine and plant development to any significant extent, available funds for exploration work would be severely limited without increasing the basis for FNEM replenishment. Further, existing metallurgical testing facilities at the Instituto de Investigaciones de Minero Metallurgicas (IIMM) in Oruro, and qualified testing facilities abroad are well equipped and experienced to undertake pilot testing at probably less cost, and other sources of financing for pilot plants and related improvements are available in Bolivia. Consequently, FNEM has agreed not to finance mine development and to limit financing of pilot plant construction to exceptional cases that can be tech- nically and economically justified to the Association on the basis of criteria satisfactory to IDA. FNEM has also agreed to limit financing plant rehabili- tation to 15% of the total cost of the related exploration project, up to a maximum of US$100,000, and then only if no other financing is available and the rehabilitation component can be justified technically and economically to IDA. 3. Financial Credit Conditions 5.11 FNEM's exploration credits will cover: (a) The full cost of FNEM staff and equipment used to execute Stage A investigations and supervise or help carry out Stages B-D work; (b) The consultants or contractor services employed and financed by the Fund to undertake Stages A-D work; and (c) The exploration work undertaken by the mine owners in accordance with the Stages B-D work program. The total credit amount is determined at the time of the signature of the Stage B contract and is based on the budgeted work program, including in- creases of up to 25% of the originally budgeted exploration costs which could derive from future changes executed at FNEM's discretion in the nature and scope of exploration projects (para. 4.23). If during Stages B-D additional funds are needed in excess of the 25% mentioned above, an amendment to the Fund's credit agreement would be required. The FNEM intends to finance 100% of the exploration costs for small deposits (250 TPD of potential concentrate production or less) and up to 50% of the exploration costs for large deposits (250-500 TPD of potential production). The mine owners of the large deposits are expected to finance the balance. The estimated project costs and FNEM financing for the different size deposits are discussed in Chapter VII. 5.12 Repayment will be made through an 8% p.a. royalty payment on the total mine output in case the explored deposit has been developed and reaches the production stage. FNEM has agreed with IDA on a repayment formula requir- ing repayment of not less than 2 times the exploration investment made by FNEM, plus an interest charge of 10% p.a. on the outstanding balance of FNEM's exploration investment. The interest charge would become effective upon completion of a successful feasibility study, but would be deferred for payment until production from the new deposit commences. It is considered  - 33 - that the interest charge (i) provides incentive to a mining enterprise with a successful project to commence commercial production as soon as possible; and (ii) assists in maintaining repayment in real terms. Sixty percent of the repayment made through an 8% p.a. royalty payment on the total mine output would be tax deductible (para. 4.24). 5.13 It is judged that the 8% royalty payment is normally acceptable for a mining enterprise only if it can be treated as an offset against the regalia, and such offset is in fact offered by the Government with respect to repay- ments by mining enterprises to FNEM (para. 4.24). Decree No. 15720 providing FNEM borrowers with advantages in royalty payments, however, requires clarifi- cation. According to the decree, 60% of royalty payments by borrowers to FNEM can be credited against the mining regalia or tax on presumed income (paras. 2.07, 2.08). It is unclear whether the regalia offset will affect receipt by FNEM of its full repayment, or receipt by the Government of its revenues. Therefore the Government has agreed to clarify the issue by means of a joint resolution of the Ministers of Finance and of Mining and Metallurgy, providing thereby for an automatic mechanism which will ensure repayment in full to FNEM as required by its terms and conditions, offsetting 60% of that repayment against Government taxes. Clarification of the decree acceptable to IDA will be a condition of credit effectiveness. 4. Mine Development Financing, 5.14 A mineral discovery can only be considered economically successful when it results in mine production. Thus, after the feasibility studies (Stage D exploration) have been completed, and assuming they have established the exploitation of a given ore deposit as financially, economically and technically justified, financing and technical know-how must be found to implement the mine development project and start production. It is estimated that mine deposits of the size most likely to be explored by FNEM will require US$0.5-5.5 million each to bring them to production. Availability of credits for mine development in Bolivia (through BAMIN or BISA) or from foreign sources will primarily depend on the quality of the ore deposits found and the quality of the feasibility studiLes prepared under the supervision of FNEM. If the Fund can establish itself as an institution of high caliber which carefully screens projects and sponsors, financing for development of its projects will not be a problem, as BISA and BAMIN (among other credit institutions) have access to IDA and World Bank existing or possible future funds (para. 2.15) and to other sources of financing for mining activities. C. Review of Operations Program 5.15 As indicated in the previous chapters, the Fund is still in the early experimentation stage. The institutional framework, its appropriate- ness and strength have to be proven.. Thus, it cannot be excluded--and even is likely--that substantial changes will be called for in decision-making authorities, Operations Programs and operating procedures after experience has been gained with a sufficient number of Stages A-D projects.  - 34 - 5.16 As noted before, the 1979-82 Operations Program relies primarily on exploration of known deposits for mine expansion. Although this is appro- priate for the initial FNEM operating years, the availability of such deposits will decline and the composition of FNEM's portfolio is apt to change towards more "grass roots" exploration. This will not only increase the degree of risk associated with FNEM exploration, but also require reconsideration of the appropriate volume of Fund operations. Considering the uncertainties which quite naturally surround this type of Project, the Fund has agreed to furnish IDA, not later than March 15, 1982, with a report (i) reviewing the experience gained by the Fund as a consequence of the carrying out of the Project; and (ii) providing the scope, cost estimates and financial resources required for the carrying out of an Operations Program for the Fund for the years 1983-87. The Fund shall, after exchanging views with the Associa- tion on the Operations Program, start, not later than September 30, 1982, with the execution of such Program, including modifications of operating policies and procedures if necessary. D. Project Implementation 1. Project Execution and Management 5.17 The Fund plans to execute the 1979-82 Operations Program by: (a) Undertaking Stage A investigations with FNEM staff, except on alluvial deposits for which the staff has no training and which will be undertaken by FNEM with the assistance of consultants; (b) Directly hiring consultants, contractors, or the services of laboratories to undertake portions of the exploration work and feasibility studies required in Stages B-D; (c) Contracting the respective mining companies to undertake part of the exploration, in particular drilling and tunnelling; (d) Using US$4.3 million of French and German technical assistance, including equipment and geologists; and (e) Undertaking all supervision and coordination of contracts and projects with FNEM staff. FNEM aims to minimize foreign exchange expenditures and use whenever possible local consultant and contractor personnel or mine owners. It intends to strengthen its own capabilities through technical assistance to be provided by the Government of Germany during the Project period in the form of a grant (para. 6.12). Also, both the Government and FNEM feel that any further IDA- financed expatriate assistance to strengthen the Fund (as earlier envisaged by Association staff), other than the short-term services still to be provided and discussed in para. 5.22, cannot be adequately justified and, in the Fund's view, would unduly complicate--and could possibly be in conflict with--the assistance the Fund is receiving from Germany.  - 35 - 5.18 Without the technical assistance to be supplied by Germany, the proposed form of Project execution would raise major technical, costing and organizational problems. The coordination of the possible 40-100 small consultants' contracts and work undertaken by mine owners requires a strong organization and solid technical/economic/financial evaluation skills within FNEM to prepare consolidated reports for decision-making. The diffusion of the exploration work program for a specific prospect (from the first drill- ing and sampling to the feasibility study) in a multitude of small consultant contracts and work undertaken by the mine owner raises the question of re- sponsibility for the reliability of individual exploration data and overall quality of results. Only close supervision by FNEM staff experienced in all facets of exploration can ensure high caliber results. Further, exploration work undertaken by the miner (drilling, tunnelling, etc.), which the Fund also will finance, requires detailed technical supervision and costing of the work performed. As FNEM's technical staff includes a team of only 13 geologists with experience in medium-size vein deposits in Bolivia but little or no past exposure to contracting for consulting services and the organization/coordina- tion of mineral exploration/pre-investment programs, the proposed Project execution arrangement can be considered appropriate for the FNEM 1979-82 Program only if the German technical assistance is used appropriately, parti- cularly in the fields of mine project evaluation and development, mineral economics and financial analysis. 5.19 While one of the objectives of the Fund is to assist in strengthening the local mining consulting/service industry, the limited capability of local mining consulting/service firms is Ea severe handicap to FNEM at the outset. The 4 most prominent Bolivian firms have, at present, neither the experience nor the qualified personnel to execute all advanced stages of exploration for any one project. This will lead to smaller contracts for partial exploration work. To ensure that such work is undertaken so as to be fully credible for follow-on financing, FNEM has agreecl to employ consultants and experts whose qualifications, experience and terms and conditions of employment are satis- factory to the Association. In this respect, the first 10 draft consultant contracts in the Project period wil]L be sent to the Association for prior review and approval. Subsequently, draft consultant contracts exceeding US$50,000 will be sent for IDA review and approval. All service contracts exceeding US$50,000 will be furnished to IDA for review. Consultant and service contracts under US$50,000 will be sent for IDA review and approval only on an a posteriori basis. 5.20 Since the Project execution arrangement and German technical assist- ance, which are expected strongly to influence the quality of the FNEM-sponsored exploration work, will first have to prove themselves in practice, agreement has been reached with FNEM that after the earlier of a date 18 months from the effective date of the IDA credit or when the equivalent of US$3.5 million from the credit has been committed IDA will decide whether to commit and disburse the second tranche of the credit up to a total of US$7.5 million. Disbursement beyond the initial US$3.5 million will depend on IDA assessment, following an exchange of views with the Fund and the Government, of FNEM's performance in carrying out the Project and on whether the purposes of the credit can be accomplished by the Fund.  - 36 - 5.21 FNEM has prepared a training program, which consists of 4 man-weeks' teaching in Bolivia and 3 man-months of overseas training. Seminars will be organized locally on preparation and evaluation of mining projects. The overseas training component provides for 3 FNEM staff members to attend month-long seminars on mine management, mineral economics and mineral ex- ploration and metallurgy. FNEM has agreed that by January 1, 1980, it will secure training services in mineral economics and mineral project preparation and evaluacion and furnish IDA with a program, including a timetable, that is satisfactory to IDA for the remainder of the training. 5.22 To strengthen staff further and provide on-the-job training, FNEM has agreed to contract up to a total of 100 man-months in services from largely expatriate consultants and experts for specific short-term assignments which will be defined in exchange of views with IDA every 6 months. 3. Equipment Requirements 5.23 FNEM's equipment requirements consist of items needed by its staff for Stage A surveys and a certain amount of exploration consumables and equipment necessary for Stages B, C and D of exploration. Such items as vehicles, light drills and camping equipment are required for FNEM to visit and survey ore deposits and will require replacement at frequent intervals. Exploration consumables for Stages B, C and D would be purchased by FNEM and provided at cost to the projects. FNEM will purchase these consumables from established suppliers to gain flexibility in project execution by avoiding possible delays otherwise to be expected. FNEM will also purchase a limited amount of heavy-duty exploration equipment pertinent to the execution of more than one mining project and sufficient in quantity to avoid bottlenecks that could originate from lack of equipment in Bolivia. A list of the equipment estimated by FNEM to be required to carry out its 1979-82 Operations Program is given in Annex 5. 4. Implementation Schedule 5.24 A tentative Project implementation schedule is shown on the follow- ing page. Accordingly, technical assistance required for financial accounting outlined in para. 4.28 will be contracted by June 1979; technical assistance for exploration work and training of FNEM staff will be started no later than the first quarter of 1980, and possibly earlier. Contracting for main contractors/consultants for exploration work will be started during the rest of 1979. During the first two years, the schedule for exploration work is tight but should be achieved provided that the contracts with mine owners are signed expeditiously and that needed consultants and contractors are chosen and hired without delay.  - 37 - BOLIVIA - NATIONAL EXPLORATION FUND PROJECT FNEM - PROJECT IMPLEMENTATION SCHEDULE 1979 1980 1981 1982 1 121314 1 2 34 1- 2 3 4 1 21 34 TECHNICAL ASSISTANCE t - Financial 11111 1111 liii IlIlhhEhl hl *hIh IhEhwhEh 11111 lhi linfhin. - Technical logo l EEE II hm IhhhII ilh l hI igill iiii TRAINING - In Bolivia - - Abroad - _-t_ --*___t EQUIPMENT 4 j __ EXPLORATION WORK 40 stages p.a. at 2 weeks each Stage A - I + t - , , 8B--- -- 8 5B-i6-B-.- -4--688 Stage B __.-5'- -t =6 = __ 5C- _ * -3C - ' I_ Stage C - 14 t + Stage D - 0 * 1- -2 - s- - 20 ___ * Mail Bid Documents A Bid Closing V Contract Signature World Bank -20110 A Start of Work 1 Technical Assistance During Project Execution Industrial Projects Department June 1979  - 38 - VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT A. Capital Cost 6.01 As shown below, total financing required for the Project is esti- mated at US$16.5 million equivalent, of which about 30% is in foreign exchange (Annex 6): Capital Cost Estimates B$ Million US$ Million Local Foreign Total Local Foreign Total % Equipment (including freight and spares) - 24.6 24.6 - 1.23 1.23 11.1 General Survey Costs 14.0 - 14.0 0.70 - 0.70 6.3 Consulting & Service Contracts /a 112.8 28.2 141.0 5.64 1.41 7.05 63.8 Technical Assistance and Training - 15.6 15.6 - 0.78 0.78 7.1 Administrative Costs 25.8 - 25.8 1.29 - 1.29 11.7 Base Cost Estimate (BCE) 152.6 68.4 221.0 7.63 3.42 11.05 100.0 Physical Contingencies 11.2 2.8 14.0 0.56 0.14 0.70 Price Escalation 65.0 18.4 83.4 3.25 0.92 4.17 Installed Cost 228.8 89.6 318.4 11.44 4.48 15.92 Working Capital lb .. .. .. .. Interest During Disbursement 5.8 4.8 10.6 0.29 0.24 0.53 Total Financing Required 234.6 94.4 329.0 11.73 4.72 16.45 /a Includes, as 20% of total, contractor-purchased equipment for exploration. /b Minimal working capital requirements mainly for cash administrative expenditures. 6.02 Equipment costs estimates are based on expenditures for: (a) Camping equipment, 4 pick-up trucks, 2 drills required by FNEM for Stage A exploration and a minicomputer for inform- ation storage. With the exception of cost estimates for camping equipment which are based on FNEM (January-May 1978) purchases of similar equipment, cost estimates for these items are based on delivered prices quoted in September 1978;  - 39 - (b) Exploration consumables for Stages B-D exploration. Cost estimates for these consumables are based on delivered prices quoted in December 1978; and (c) Heavy-duty exploration equipment, such as heavy drills and compressors, for Stages B-D exploration. Cost estimates for this equipment are based on delivered prices quoted in December 1978. 6.03 Cost estimates for FNEM general surveys (Stage A) and for consulting and service contracts (Stages B, C and D) have been developed from estimates made in the December 1976 feasibility study. General survey estimates have been updated in 1978, based on FNEM's experience in 32 Stage A projects carried out in that year. Consulting and service contract cost estimates were revised by the IDA mission in May 1978 after review with (i) Fund management; (ii) 2 well-established Bolivian, medium-size mining enterprises, EMUSA and FABULOSA; and (iii) Resources Exploration International (REX), a US consult- ing firm that has assisted FNEM. Estimates were reviewed for compatibility with international costs for similar type work with an international mining concern. Cost estimates were further updated in January 1979 and reviewed again in May 1979 in light of implementation and project cost schedules developed by FNEM for the 14 identified, potentially successful projects in FNEM's 1979-82 Operations Program (para. 4.20). The consulting and service contract estimates cover the exploration work expected to be carried out over the next 4 years for the 14 Stage B projects already selected by the Fund and additional projects to be selected under procedures and criteria detailed in Chapter V. 6.04 Technical assistance costs include a total of 100 man-months in services from consultants for short-term assignments, based on an average rate of US$7,500 per man-month (or IJS$90,000 per year) plus annual transpor- tation costs (para. 5.22). Technical assistance to establish a financial reporting and monitoring system has been estimated at US$25,000 (para. 4.28). Training costs are estimated at US$30,400, based on: (i) 1978 costs of specialized international seminars, including per diem and travel expenses, for 3 FNEM staff members attending one-month seminars abroad; and (ii) US university estimates, including per diem and travel expenses, of 4 man-weeks' teaching in Bolivia. 6.05 Administrative costs are based on actual expenses incurred by the Fund for rent, utilities, transportation and insurance, non-project related personal salaries, materials and supplies. These costs assume no additional personnel increases in Fund administrative staff (para. 4.06), but a 2% p.a. increase in real terms. 6.06 Physical contingencies on consulting and service contracts for preliminary sampling, pre-feasibility and feasibility studies (Stages B, C and D) are estimated at 10% of the base cost of each of the stages. No other physical contingencies are included.. Price escalation for equipment, tech- nical assistance and training and the foreign components of consultant and service contracts is calculated on the basis of international price increases in US$ of 7.5% for 1979 and 7% per year thereafter. Price escalation for the  - 40 - local component of consultant and service contracts is estimated at a rate of 15% per annum. Local costs are expected to account for 80% of exploration contract costs (Stages B-D). The increase in general survey costs and administrative costs is also calculated at 15% p.a. 6.07 The working capital requirements are expected to be small and made up primarily of cash on hand, estimated at 30 days of administrative costs. Accounts payable consist of 15 days of contract costs, as well as receivables of deferred payments by FNEM staff of unexpended travel advances for Stage A activities. 6.08 Interest is calculated on the basis of (i) an IDA credit of US$7.5 million to the Government, which is to be on-lent to the Fund at 6.5% p.a. interest for 20 years, including 5 years' grace. During the grace period, interest payments will be limited to 2.5% of the outstanding balance of the subsidiary loan with the remainder (4%) being deferred and paid in equal installments as the subsidiary loan is repaid. The subsidiary loan will be denominated and repayable in US dollars with the Fund bearing the foreign exchange risk (para. 6.13); (ii) a 1977 Central Bank loan of US$1.2 million, at 5% p.a. interest, for 20 years, including 15 years' grace, which is expected to be fully disbursed by the end of 1979; and (iii) a 1979 Central Bank loan of US$0.25 million, at 5% p.a. interest for 8 years, including 6 years' grace, which is expected to be fully disbursed also by the end of 1979. B. Financing Plan 6.09 The proposed financing plan for the Project during 1979-82 is the following: Financing Plan Equity US$ Million X Government Contributions /a 4.3 26 Bilateral Grants BRGM (France) /b 0.5 3 GTZ (Germany) /c 3.8 23 Sub-Total 8.6 52 Debt Central Bank Loans 0.4 2 IDA Credit 7.5 46 Sub-Total 7.9 48 Total Financing 16.5 100 /a An additional US$0.5 million in Government contri- butions to be used for the FNEM Prospection Program during Project period. /b Bureau de Recherches Geologiques et Minieres. /c Gesellschaft fuer Technische Zusammenarbeit.  - 41 - 6.10 As noted, in 1977, the Government committed by decree at least US$1.2 million equivalent per year to FNEII over a 10-year period beginning in 1978, when the Government's allocation totalled no more than US$120,000 due to serious temporary budgetary constraints. The financing plan is structured on the basis that the Government will contribute to FNEM the full US$4.8 million committed over the 4-year period (1979-82), o0 which US$0.5 million would be used for FNEM prospection activities that are not part of the Project. Also included in the total amount of Government funds recognized in the financing plan is a small amount of undisbursed funds (US$0.4 million) from the two Central Bank loans received by FNEM in 1977 and 1979, respectively. 6.11 Due to the importance of Government funding to the immediate, on-going existence of the Fund and to the Fund's long-term operations, agree- ment has been reached that the Government will contribute FNEM's equity provided for under Decree No. 14549 in each of the fiscal years 1980-82, by allocating 50% of the contribution for exploration projects each year and depositing the allocation in equal quarterly installments in a Central Bank account established in the Fund's name. The remaining half of the annual contribution will be made available to FNEM for salaries and other admini- strative expenses at FNEM's request. At the end of each fiscal year (December 31), the Government will deposit any undisbursed funds due that year in the Fund's Central Bank account or in any other banking account of the Fund. For 1979, the Government has paid US$400,000 into the Fund's Central Bank account for exploration investment and has paid an additional US$150,000 for operating expenses. The Government has agreed to deposit into the Fund's Central Bank account by October 1, 1979, a total of US$678,000, the amount of the Fund's 1979 Government budget request for exploration projects. No withdrawals of IDA funds will be made unless IDA has received satisfactory evidence that the Government has paid into the Fund's Central Bank account all amounts required to be paid into the account, including the payment to be made in respect of the quarter of the Government's fiscal year in which the applica- tion for withdrawal has been received. The estimated disbursement schedule for the IDA credit is shown in para. 6.16, together with required Government budgetary allocations. 6.12 Bureau of Recherches Geologiques et Minieres (BRGM), a public institution of the Republic of France, has signed a protocol agreement in September 1978 providing a grant of UJS$500,000 equivalent to FNEM in 1979 for technical assistance and equipment to undertake prefeasibility work (Stage B) on at least 3 or 4 exploration projects. Two projects have been identified and work is in progress. The German Government has agreed in principle with the Government of Bolivia in December 1978 to provide US$3.8 million equivalent for project assistance to FNEM as defined by Gesellschaft fuer Technische Zusammenarbeit (GTZ), a German goverament agency for technical cooperation. The GTZ project includes technical assistance, services and equipment for at least one large deposit. One deposit (Cerro Grande) has been identified thus far for German financing. Conclusions of the German bilateral assistance agreement required to complete the financing plan will be a condition of IDA credit effectiveness.  - 42 - 6.13 The US$7.5 million IDA credit will be on standard terms and on-lent on terms described in para. 6.08. The financial obligation arising from on- lending of the IDA credit to FNEM will give incentive to the Fund to maintain financial discipline and thus broaden the experience of the staff and strengthen the Fund as an institution. Since exploration is risk-capital financing--even if the risk can be reduced by spreading it over a large, diversified portfolio of an exploration fund--and the Project and the Projection execution arrange- ment are to a degree experimental, agreement has been reached, as noted, with the Government and the Fund that the credit will be disbursed in two tranches of US$3.5 and US$4.0 million, respectively, with disbursements of the second tranche depending on certain conditions being met satisfactorily as described in para. 5.20. C. Procurement, Allocation and Disbursement of the IDA Credit 6.14 Most, if not all, of the equipment to be financed by IDA will be purchased through international shopping (with quotations from at least four suppliers from three different member countries of the Association, including Switzerland). This is due to the relatively small equipment items involved and the need for the FNEM to be able to procure these items expeditiously for on-going general survey exploration. Any equipment to be financed by IDA that may be above US$250,000 each will be procured on the basis of international competitive bidding (ICB) according to IDA guidelines. In addition, rails, air and water pipes (even if costing less that US$250,000) will be procured under ICB, since these items are widely manufactured. 6.15 The hiring of technical assistance, training and contractor/ consultant services will also follow IDA guidelines. Qualifications and contract conditions for consultants, foreign experts, contractors and train- ing assistance financed by the Association will be subject to IDA approval. As outlined in para. 5.19, all draft consultant and service contracts above US$50,000 will be furnished to IDA for approval. After IDA has approved the first 10 draft consultant contracts, IDA will review consultant contracts under US$50,000 on an a posteriori basis. All service contracts under US$50,000 will be reviewed a posteriori by IDA. 6.16 Disbursement for the proposed IDA credit of US$7.5 million would be as follows: (a) 100% of the foreign exchange cost of equipment or 100% of the ex-factory cost of goods procured locally, estimated to total US$1.4 million; (b) 100% of the foreign exchange cost of technical assistance and training estimated to total US$1.0 million; and (c) 60% of the total cost of contractors/consultants' services, excluding bilateral assistance for Stages B-D exploration, estimated to total US$8.5 million. Disbursement would be against normal documentation duly certified by FNEM. The estimated disbursement schedule for the IDA credit and the Government fund allocations are shown in the following table.  - 43 - Estimated Disbursement Schedules for IDA Credit and Government Allocations (Semi-annual Disbursements, US$ million) Calendar 1979 1980 1981 1982 Quarters I-II III-IV I-IT III-IV I-II III-IV I-II III-IV IDA Credit - 0.4 0.8 0.8 0.8 0.9 1.9 1.9 Government Allocation 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Retroactive financing is recommended for technical assistance of up to US$25,000 after March 31, 1979 (para. 4.28). 6.17 As noted in para. 6.01, the total foreign exchange cost of the Project is estimated at US$4.7 million. It is expected that about 50% of the total bilateral assistance of US$4.3 million will be tied to expenditures in foreign exchange. FNEM intends to maximize local expenditures for explora- tion contractors and services (para. 5.19), expecting that about 20% of exploration contracts for consultants and contractor services will be in foreign exchange. In this case, the maximum amount of local cost financing required by the Association would be US$5.2 million, or about 70% of the IDA credit. VII. FINANCIAL ANALYSIS A. Methodology Used in Financial Projections and Its Limitations 7.01 Since FNEM capital and loans are denominated in foreign currencies and FNEM exploration credits expressed in US$ terms, the financial projections have been expressed in US dollars. International inflation rates of 7.5% in 1979 and 7% p.a. through 1982 have been used for all foreign exchange ex- penditures, and inflation rates of 15% p.a. from 1979-82 for local expendi- tures. These rates were used to reflect the financial situation in nominal terms during the Project disbursement period, in order to obtain the most realistic picture possible of the cash requirements and liquidity position of the Fund during its early years. Thereafter, the projections are in real terms. In any case, the uncertainties of the required assumptions on exchange rates, inflation and the nature and number of successful exploration projects are likely to distort this picture. 7.02 The financial projections are based on the 1979-82 Operations Program described in para. 5.04 and assume that 40 Stage A projects, 6 Stage B projects, 2 Stage C projects and 1-2 Stage D projects are undertaken each year. This program size which was elaborated in the FNEM feasibility study reflects the assumption that 1 exploration project out of 30 projects undertaken is likely to result in incremental mine production. The success ratio of 1:30 was derived using a risk model based on the exploration experi- ence of 9 private and 4 public mining enterprises involving some 20,000 explorations. The US Defense Minerals Exploration Agency, the US Geological  - 44 - Survey and COMINCO (Canadian private company) provided the major data for analyzing the risks associated with Stages A and B exploration. COMIBOL provided data with respect to Stages C and D exploration and was the major source for the risk analysis related to these stages. The projected success ratio was reviewed by the mission, compared with that of other exploration funds and considered appropriate in light of the higlh number of promising target areas for exploration in Bolivia. 7.03 Financial projections relying on forecasts of successful exploration and mine development reflect the full scale of major risks and uncertainties associated with exploration and mine investment and thus can only be notional projections. Whereas the Fund has identified 14 potential deposits for the 1979-82 Operations Program whose prospects can be assessed in light of avail- able information, the size, characteristics, timing and success of the 300-400 deposits which the Fund is likely to investigate over the next decade are unknown. Any medium- or long-term projections of FNEM are, therefore, highly speculative and must be regarded as possible outcomes among many different alternatives. The financial and economic analyses presented in this and the following chapter provide an illustration of two possible exploration scenar- ios, an "optimistic" and a "pessimistic" case. However, it must be stressed that these scenarios do not cover a high probability range within which FNEM financial results are likely to fall, but are mere illustrations to which no meaningful probability can be attached. B. Revenues--Replenishment through Royalty Payments 7.04 The projections assume a royalty payment of 8% of the gross value of total mine production from each exploration investment which generates commercial production of ore. Repayment of 2 times the cost of explora- tion (Stages A-D) to FNEM is assumed, plus an interest charge of 10% on the outstanding balance of the FNEM cost of exploration. The interest charge is effective upon completion of the feasibility study indicating proven reserves that are commercially exploitable, but payment of the interest is deferred until production from the new deposit commences, which is assumed to be 2 years. 7.05 Since the majority of the exploration work is expected to be in tin, the projected royalty payments for probable discoveries are based on the London Metal Exchange (LME) price of standard-grade tin. After an initial projected decrease in tin prices relating to possible US stockpile releases, tin prices are expected to be relatively stable in real terms, due in part to the operation of the buffer stock system by the International Tin Council of which Bolivia is a member. Tin prices are projected in 1978 terms to be US$5.23/lb in 1980 and to increase slowly to US$5.45/lb by 1990, assuming an international inflation rate for commodities (IBRD-Commodity Price Forecasts, April 1979 Update) of 8.6% in 1979 and 6.0% thereafter. The projections assume these real changes in tin prices; they also assume inflationary changes through 1982. Royalties are not expected to begin until 1982. After 1982, the following tin prices in 1982 constant US$ have been used.  - 45 - Projected Tin Prices (US$/lb) Current 1982 Constant 1982 6.72 6.72 1983 7.12 6.72 1984 7.55 6.72 1985 8.22 6.91 1990 10.71 7.04 Source: IBRD Report No. 814/78, June 1978, updated following Annual Review, April 26, 1979. C. Exploration Costs 7.06 The costs of exploration have been estimated for the 14 identified projects which the Fund considers to be promising (para. 4.20). The cost estimates made by FNEM have been reviewed and are considered realistic in light of cost-estimate revisions made by the Association in January 1979 and again in May 1979 (para. 6.03). On the basis of these estimated costs, an average cost for exploration of four types of mines differentiated by size has been assumed and is given below. The costs are for tin mines which are expected to dominate the work of the Fund, and they are considered suffi- ciently representative of exploration costs of other types of Bolivian mineral deposits. Estimated Exploration Costs (US$ thousands--1978 terms) Gross Mine Output Stage A Stage B Stage C Stage D Total (TPD) 50-125 5 25 150 470 650 125-250 5 50 370 580 1,005 250-500 5 85 770 660 1,520 500-1,000 5 100 1,023 835 1,963 7.07 The Fund intends to finance 100% of the exploration cost of the mines with potential output in the two lower categories, and 50% of the cost of exploration of the mines in the higher categories. The expenditure schedule for exploration costs for Stages A, B, C and D projects has been based on this assumed financing. The projections assume the 1979-82 Operations Program outlined in para. 5.04, and thereafter a schedule as shown below for selected years. The progression of one successful project (1S) from Stage A to Stage D is shown in parentheses.  - 46 - Exploration Schedule for Selected Years--Optimistic Case (Number of Projects per Exploration Stage) 1983 1984 1985 1986 40A (IS) 40A 40A 40A 6B 6B (1S) 6B 6B 2C 2C 2C (IS) 2C ID 2D 2D ID (IS) 7.08 The schedule of exploration projects and related expenditures is assumed to be the same in the optimistic and pessimistic projections, but the probabilities of successful mining exploitation based on completed exploration work are assumed to be different. In the pessimistic case, the probabilities of success are assumed to be 1:60, while in the optimistic case the probability ratio is 1:30. D. Other Costs 7.09 The general expenses of the Fund include personnel services, materials and supplies and other overhead expenses that cannot be allocated to exploration activities. These expenses are assumed to be independent of the volume of exploration undertaken in any one year. It is assumed that in addition to the inflationary increases used in the projections (para. 7.01), general expenses will increase by 2% per year in real terms throughout the projection period. 7.10 The prospection promotion activities of the Fund include the salary and other costs of FNEM's Prospection Division which will prepare promotion profiles of territories available for prospection. In addition to assumed inflationary increases of 15% p.a., prospection costs are assumed to increase by 5% p.a., in real terms over the projection period. 7.11 Technical assistance and training to be financed through the pro- posed IDA credit is assumed to be used between 1980 and 1982. Thereafter it is assumed that no further technical assistance will be used. 7.12 Depreciation charges have been excluded from the exploration costs in the projections of FNEM's operating budget sources and uses, since these projections are on a cash basis and depreciation charges are non-cash expenses. Exploration investments to be repaid by mining enterprises would include depreciation, however, to reflect the use of fixed assets of the Fund for exploration activities. 7.13 Fixed asset costs include new purchases in 1979 and 1980 and re- placements at regular intervals thereafter for camping equipment, vehicles, communications equipment, drills, heavy exploration equipment and consumables.  - 47 - 7.14 Financial charges consist of interest payable on: (i) the 1977 Central Bank loan of US$1.2 million; (ii) the 1979 Central Bank loan of US$0.25 million; and (iii) the IDA credit of US$7.5 million that is on-lent by the Government to FNEM, all on terms described in paras. 6.08 and 6.13. 7.15 The projections assume no charges for taxation, since the Fund is tax-exempt. E. Financial Projections 7.16 FNEM revenues consist of royalty and interest payment receipts. Projected financial statements of the sources and uses of the Fund's operating budget over the next 20 years are given under "optimistic" and "pessimistic" scenarios in Annexes 7-1 and 7-2 and are summarized below. 7.17 The optimistic projections assume that, over a 20-year period, 20 exploration projects undertaken by FNEM will subsequently generate revenues. Royalty payments will start as early as 1982. This is based on the almost immediate production of ore expected from tunneling work on a known vein deposit and minor plant improvements being financed by FNEM under a Stage B contract at Buena Esperanza. In 1983, 3 additional projects are expected to be completed (Cerro Grande, Totoral and Fabulosa) and, having undergone 2 years of mine development assumed to be required in most cases, to be generating royalty payments. In 1984, another 3 projects are assumed to be generating royalties, of which 2 are already identified (Sayaquira and Kalo Uyo). Thereafter, new royalty payments from one project a year are assumed to start. The early build-up in royalty receipts is based on 6 of the 14 projects that have been identified by FNEM for exploration financing beyond Stage A and that remain good prospects. Since royalty payments are to be based on total mine production and all 6 projects are mine expansions, the build-up is considered reasonable under optimum conditions. .7.18 The pessimistic projections assume that only 10 FNEM projects will generate revenues over the 20-year projection period and that the first royalties to be received by FNEM will be in 1983. Three projects are assumed to start generating royalty payments in 1984, but none in 1985. Thereafter, only one new project is assumed to be generating royalty payments every other year. 7.19 Both optimistic and pessimistic projections indicate that the Fund is not likely to generate much excess cash that could be used to increase the size of its exploration program, allhough under "optimistic" assumptions the amount of cash generated could for a limited period of time be sufficient to cover the full operating costs of a continued Program of US$2.2 million per year in 1978 real terms. However, l-he chance of this occurring is dependent upon the assumed probabilities of mineral discovery.  - 48 - FNEM--Optimistic Case Summary of Projected Sources and Uses of Funds (US$ million--nominal terms until 1982, real terms thereafter) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 FNEM Revenues /a - - - - 0.04 0.86 2.06 3.02 3.47 2.98 Govt. Contribution 0.12 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 Central Bank Loans 0.69 0.42 - - - - - - - - IDA - 0.43 1.53 1.72 3.82 - - - - - Other Foreign Sources /b - 0.57 2.59 1.13 - - - - - - Total Sources 0.81 62 5.32 4.05 5..06 2.06 3.26 4.22 4.67 4.18 General Expenses 0.30 0.36 0.43 0.50 0.58 0.59 0.60 0.62 0.63 0.64 Exploration Costs /c 0.30 1.63 3.72 2.78 3.60 2.14 1.21 1.27 2.48 1.14 Other Costs /d 0.05 0.52 1.04 0.58 0.60 0.41 0.63 0.79 0.29 0.50 Debt-Service Costs 0.04 0.07 0.10 0.14 0.21 0.26 1.11 1.20 1.14 0.98 Total Uses 0.69 2.58 5.29 4.00 4.99 3.40 3.55 3.88 4.54 3.26 Annual Cash Surplus 0.12 0.04 0.03 0.05 0.07 (1.34) (0.29) 0.34 0.13 0.92 (Deficit) Cumulative Cash Surplus (Deficit) 0.12 0.16 0.19 0.24 0.31 (1.03) (1.32) (0.98) (0.85) 0.07 /a Royalty and interest payments. /b Bilateral grants from BRGM and GTZ. /c General exploration surveys and exploration contracts. /d Fixed assets, prospection promotion, technical assistance and training. 7.20 The "optimistic" projections indicate that above the external financing assumed to be forthcoming over the 1978-87 period--based on that shown in para. 6.09 for the proposed Project and Government-subscribed annual commitments through 1987 (para. 6.10)--FNEM will require additional financial support of about US$1.3 million through 1987 if the Government commitment of U$1.2 million p.a. (1983-87) is not accelerated to cover prior years' deficits. 1/ In addition, due to the assumption that FNEM will increasingly finance exploration of smaller deposits with less output potential and cash generation as the larger "known" deposits become explored, the projections 1/ No interest is assumed on these additional financing requirements.  -- 49 - as shown in detail in Annex 7-1 indicate the need for annual support of about US$1.6 million over the 15 years following the Project disbursement period in order to continue an Operations Program of US$2.2 million per year in 1978 real terms. 7.21 The "pessimistic case" gives a more conservative analysis of the cash flow position of FNEM as shown in the summary table below. FNEM--Pessimistic Case Summary of Projected Sources and Uses of Funds (US$ million--nominal terms until 1982, real terms thereafter) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 FNEM Revenues /a - - - - - 0.41 1.44 2.10 2.67 2.48 Govt. Contribution 0.12 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 Central Bank Loan 0.69 0.42 - - - - - - - - IDA - 0.43 1.53 1.72 3.82 - - - - - Other Foreign Sources /b - 0.57 2.59 1.13 - - - - - - Total Sources 0.81 2.62 5.32 4.05 5.02 1.61 2.64 3.30 3.87 3.68 General Expenses 0.30 0.36 0.43 0.50 0.57 0.59 0.60 0.62 0.63 0.64 Exploration Costs /c 0.30 1.63 3.72 2.78 3.60 2.14 1.21 1.27 2.48 1.14 Other Costs /d 0.05 0.52 1.04 0.58 0.60 0.41 0.63 0.79 0.29 0.50 Debt-Service Costs 0.04 0.07 0.10 0.14 0.21 0.26 1.11 1.20 1.14 0.98 Total Uses 0.69 2.58 5.29 4.00 4.98 3.40 3.55 3.88 4.54 3.26 -~~~~~~ _ - .= = Annual Cash Surplus (Deficit) 0.12 0.04 0.03 0.05 0.04 (1.79) (0.91) (0.58) (0.67) 0.42 Cumulative Cash Surplus (Deficit) 0.12 0.16 0.19 0.24 0.28 (1.51) (2.42) (3.00) (3.67) (3.25) /a Royalty and interest payments. /b Bilateral grants from BRGM and GTZ. /c General exploration surveys and exploration contracts. /d Fixed assets, prospection promotion, technical assistance and training. 7.22 The additional financing over and above external financing required by FNEM under the more pessimistic assumptions is about US$3.7 million 1/ through 1987. Thereafter, FNEM would not be capable of covering the costs of its Operations Program through royalties and interest payments generated from successful projects, but would require annual support equal to the cost of continuing an Operations Program of US$2.2 million per year in 1978 real terms. 1/ No interest is assumed on these additional financing requirements.  - 50 - 7.23 FNEM's capacity to service debt is dependent upon Government support until such time as FNEM receives a sufficient level of royalty payments to cover its cash requirements. In the "optimistic" scenario, FNEM begins to be capable of servicing debt through interest and royalty payments in 1983, and in the "pessimistic" case, in 1984. To the extent royalty payments might not be forthcoming, the Government would be required to provide sufficient funds for FNEM to meet its obligations (para 7.24). 7.24 The financial uncertainties with respect to cash generation based on royalties and future exploration requirements mean that the Fund should have access to continued sources of financing over a longer period of time. However, it is premature to establish actual funding requirements beyond the 4-year Operations Program covered by the Project (1979-82) before the review of FNEM future operations level scheduled for 1982 (para. 5.16). To ensure that appropriate arrangements have been made to maintain the Fund's financial solvency and allow it to execute an agreed-upon Operations Program, agreement has been reached with the Government and the Fund that: (a) the Fund will undertake an annual review of its financial position and financial requirements in consultation with IDA; (b) the Government will pay in the average annual capital subscription of US$1.2 million according to the disburse- ment procedure and schedule in paras. 6.10 and 6.16 required for the prompt implementation of the 1979-82 Operations Program; (c) the Fund will furnish to the Association not later than March 15, 1982, a report reviewing the experience gained by the Fund as a consequence of the Project, and providing the scope and appropriate funding of the 1983-87 Operations Program; but, in any case, the Government will provide suf- ficient funds to FNEM to ensure that the Fund can meet all its payment obligations during the time in which the IDA credit proceeds on-lent to FNEM are outstanding with the Fund; and (d) the Fund will agree not to contract any new debt, except as agreed with IDA, until the Closing Date, and thereafter, only if on the basis of financial projections acceptable to IDA, its projected debt-service coverage from royalties based on production from reserves that are revenue generating would be more than 1.5 and its debt:equity ratio 50:50 or less. F. Mlonitoring and Evaluation of Exploration Portfolio 7.25 The projections are constructed on assumptions which take into account the number of projects that will be undertaken, the cost effective- ness per project (the value of ore reserve found in relation to project  -- 51 - expenditures) and the probability of geological discovery. As such, they indicate key areas for monitoring. The cost monitoring system to be set up with IDA assistance (para. 4.28) will summarize the status of exploration expenditures, indicate the amount of exploration expenditures resulting in successful exploration projects and the relative effectiveness of these expenditures in terms of royalties generated. The cost monitoring system should generate the basic data needed to monitor and evaluate FNEM's explora- tion portfolio. G. Auditing and Reporting Requirements 7.26 The Fund has not yet made provisions for external auditing of its accounts. The appointment of qualified outside auditors acceptable to the Association will be a condition of credit effectiveness. It is expected that the 1977 audited results will be available in the Association not later than September 30, 1979. FNEM has agreed to have its accounts and financial statements audited annually by qualified outside auditors acceptable to IDA and furnished to the Association not later than 4 months after the end of each fiscal year. FNEM has also agreed to forward to IDA, on a quarterly basis (i) unaudited financial statements; and on a monthly basis, (ii) a progress report on operations, (iii) a status report on credit agreements; (iv) a report on the training program; and (v) a status report on consultants and service contracts and sub-contracts. The progress report on operations should include--in addition to a summary of applications received, the status of work and intermediate results on, exploration projects and a summary of the work program for the next month--a description of major problems and timetable of steps to be taken. H. Financial Rate of Return 7.27 The financial rate of return analysis has little meaning for this type of Project. It is anticipatecl that the Fund will have difficulties in becoming self-replenishing through royalty payments from successful mining operations even under assumptions made for the "optimistic" financial projec- tions (para. 7.17). I. Major Risks 7.28 A revolving fund for mineral exploration is necessarily a high-risk operation. However, FNEM has attempted to reduce the inherent exploration risk by adopting an Operations Program over the next 4 years which includes several relatively large expansions of developed mines, a lower-risk activity than pure exploration of entirely new mines. It is likely, given the lack of systematic identification of new reserves by most mines in Bolivia over the last 30 years, that mine expansions would continue to make up the bulk of Fund financing in the foreseeable future. Thereafter, plans assume that smaller deposits or grass-roots exploration will be preponderant, thus increasing the degree of risk associated with the FNEM portfolio. 7.29 The financial risk of the Fund is related to its operational risks, to the extent that it would have to rely on royalty payments to cover not only  - 52 - its operating costs and debt service but continuing investments in exploration beyond the initial 4-year Operations Program. Were financial self-sufficiency the prime objective of the Fund, it would at best be attained for several years only under the "optimistic" assumptions and probably never under the "pessimistic" assumptions. There is therefore a high likelihood that the Fund will never build up sufficient royalty payments to sustain an annual US$2.2 million Operations Program without external credits or Government subsidies. However, since the major objective of the Fund is to increase exploration in Bolivia and not the profitability of the Fund per se, the financial risk for FNEM will be covered by the Government's commitment to provide funding for continuation of an exploration program at an appropriate level (paras. 5.16 and 7.24). 7.30 The inexperience of FNEM's management and staff exposes the Fund to some risk, as funds may be committed for sub-standard projects. The Project seeks to strengthen FNEM management through the provision of short- term technical assistance and training to the Fund over the Project disburse- ment period. Technical assistance will also be provided under German bi- lateral assistance during the first 2 years of the Project period. The Project also seeks to strengthen FNEM through agreed-upon operating pro- cedures, including technical and financial criteria for project selection. 7.31 A major risk of the Project relates to the Fund's primary objective of increasing exploration and mineral production in Bolivia: that is the risk that mining enterprises would not--for various reasons--apply for FNEM finan- cial assistance at the level expected and economically desirable because they consider their possible future financial obligations to the Fund as poten- tially so burdensome that, together with their tax obligations, financial returns from incremental production from FNEM-financed exploration would be marginal. In the near-term (1979-82) Operations Program, the risk of insuf- ficient demand appears to be covered by (i) the need for these enterprises to identify an adequate volume of new reserves to maintain existing production levels, which over the past decade they have been unable to do; (ii) the existence of "known" deposits that are relatively high grade and that would be commercially profitable to explore and develop despite adverse mining tax laws; (iii) the lack of alternative sources of finance for exploration other than through internally generated funds; and (iv) the tax incentives offered by exploration and development to users of the Fund. The formula and terms of FNEM repayment have been carefully assessed to ensure that they would not adversely affect demand for FNEM financing (paras. 5.12, 5.13). However, after the present backlog of exploration needs has been satisfied, the demand for Fund involvement may decrease as the type of exploration projects, their risks and expected viability change. The Project takes into account the likely shift in the Fund's exploration portfolio as well as other risks associated with the pilot nature of the Project by providing for a review of FNEM activities before disbursement of the second tranche of the IDA credit, and again in 1982 (paras. 5.16, 5.20). If adjustments in royalties, work program, etc., are needed to achieve the Fund's objective and attract promis- ing projects, the Government, the Fund and IDA must be prepared to make needed changes in Fund lending volume, policies and procedures.  - 53 - 7.32 Another major risk of the Project relates to the uncertainties in the political environment for mining investment. Medium-size mines that expand through exploration and development do so at a certain risk of nationalization by the Government and, thus, may be deterred from ex- pansions. Further mining taxation poLicies constrain demand for exploration and development by making the financial returns from all but high-grade ore production (above 1% tin content of mined ore) marginal. Exploration and exploitation of new mining deposits wiLth grades lower than 1% of tin content can be made financially viable through taxation reform; such action would ensure increased demand for exploration and subsequent mining production. 7.33 Finally, there is the risk that mining enterprises may request FNEM assistance primarily for less-promising deposits, to prove out concessions without the intention of proceeding promptly to mine exploitation thereafter, or would plainly seek to avoid the payment of royalties. This risk can be overcome by competent Fund management that screens its projects with a view to establishing a portfolio of promising projects and offers repayment terms that are sufficiently attractive to sustain demand for Fund financing. In addition, the general conditions of FNEM credit agreements to be put into effect prior to credit effectiveness will include a severe penalty provision for mining enterprises that opt to terminate agreements with FNEM, despite FNEM's recommendation for more intensive exploration (para. 4.23). VIII. ECONOMIC ANALYSIS 8.01 The Government identified the mining sector's failure to develop a systematic exploration program for development of reserves in existing mines and for discovery of new mines as a major reason for the lagging contribution of the mining sector to the national economy. The Project provides support to FNEM, established by the Government to carry out such a program, and will have a direct impact on FNEM's capability to contribute to the economic and fiscal objectives of the Government for the sector, as well as to more general socio-economic objectives for the country. A. Economic Costs and Benefits 8.02 The economic analysis focuses on the total direct and indirect economic impact of the Fund's exploration activities, assumed in the finan- cial projections (Chapter VII) to be maintained over a 20-year period. Economic benefits, therefore, consist of the total incremental revenues generated by increased ore production that results from FNEM exploration; economic costs consist of total capital and operating costs of incremental production, i.e., FNEM costs plus the costs of developing and exploiting FNEM-discovered deposits. A detailed list of all assumptions used for the economic analysis is given in Annex 8, and major components are summarized below.  - 54 - 8.03 To enable the full costs and benefits arising from Fund-financed exploration to be analyzed, a model was developed of the costs to bring pro- mising prospects explored by the Fund into commercial production and maintain output thereafter. The costs include: (i) investment required for mine development; (ii) operating costs for mine production; and (iii) freight and smelting charges. Since medium miners can sell directly abroad, no transactional costs are included. The costs, based on tin deposits since 90% of FNEM discoveries are expected to be tin mines, were developed with the assistance of FNEM and reviewed with international mining consultants with experience in Bolivia. Mining costs have been calculated on the basis of an estimated US$30 equivalent per metric ton of concentrates and smelt- ing charges at US$600 equivalent per ton of concentrates. Estimated mine development costs for the 4 size ranges of mines are shown below: BOLIVIA--Estimated Mine Development and Production Costs /a (US$ thousands--1978 Terms) Gross Mine Output Mine Investment Mining Costs Freight Smelting 50 - 125 300 - 1,650 315 - 800 15 - 38 50 - 185 125 - 250 1,150 - 3,500 800 - 1,600 38 - 75 125 - 380 250 - 500 2,200 - 4,600 1,600 - 3,200 75 - 150 250 - 760 500 - 1,000 3,500 - 6,300 3,200 - 6,100 150 - 300 500 - 1,500 /a Minimum/maximum cost ranges. 8.04 Total economic costs of FNEM exploration activities were developed to include: (i) capital costs for exploration incurred by the Fund, including consulting and service contract costs, fixed assets, technical assistance and Fund services directly related to exploration project work, but eliminating depreciation included in exploration cost estimates; (ii) operating costs comprising the administrative costs of FNEM, but excluding interest charges; and (iii) mine development and production costs for successful FNEM projects that result in increased production of ore based on the model described above. B. Economic Rate of Return 8.05 For purposes of economic analysis, the following adjustment has been made to real-term economic cost and benefit streams: shadow pric- ing of foreign exchange costs and benefits by 25% to reflect foreign trade distortions due to export taxes and currency disequilibriums caused by differences in local and foreign rates of inflation. For this purpose, it has been assumed that 100% of revenues, 20% of exploration cost expenditures, 75% of mine investment costs and 100% of smelting and freight charges would be foreign exchange. Operating costs have been assumed to be 100% local expenditures. Taxes and transfer payments have been excluded. As noted, FNEM activities have been assumed over a 20-year period. However, since revenues from successful exploration and development during this period would be generated for an additional 7 years, the revenue and mining cost streams have been assumed over a 27-year period.  - 55 - 8.06 The economic importance of ithe Project far exceeds its direct financial benefits to the Fund as illustrated by the economic rate of return of 25% in the "optimistic" case and 113% in the "pessimistic" case. The sen- sitivity results are summarized below: FNEM--Sensitivity Tests on Economic Rate of Return Optimistic Case 25.1 Exploration cost increase of 10% 24.4 Administrative cost increase of 10% 24.9 Mine Development cost increase of 10% 22.7 Sales revenue decrease of 10% 21.4 Sales revenue decrease of 20% 17.3 Pessimistic Case 17.8 Exploration cost increase of 10% 17.2 Administrative cost increase of 10% 17.7 Mine development cost increase of 10% 16.2 Sales revenue decrease of 10% 15.1 Sales revenue decrease of 20% 12.0 8.07 The projected ranges of eccnomic rates of return of 25% under the various sensitivity assumptions far exceed the average economic rates of returns of 10%-15% experienced generally for mining projects. This under- lines the urgent need and substantial prospect for exploration and mine development in Bolivia. The financial return to the mining enterprise, nevertheless, would still be marginal for all but high-grade deposits dis- covered and exploited (para. 2.08) due to the extraordinarily burdensome mining tax. The tax relief offered to FNEM users indicates awareness by the Government of the need to make changes in the tax system to develop the full economic potential of the sector. Even if the Fund would charge no royalties, but be replenished solely by Government subsidies, its activities would be fully justified from an economic point of view. Collection of royalties and revolvability of the Fund are a mechanism to tax the successful exploration and mine development projects and minimize the use of Government subsidies. However, the Fund's main objective of stimulating exploration to increase mine output in Bolivia is independent of the repayment mechanism used by the Fund (other than if this mechanism were to discourage the explora- tion activity per se) and depends primarily on the Fund's technical expertise in selecting and exploring promising exploration prospects. C. Foreign Exchange Benefits 8.08 An analysis has been made of the foreign exchange earnings that would be generated by the export of new mining production from mining deposits explored by the Fund under the assumed implementation and repayment schedules developed for the financial projections. In the optimistic case, when revenues  - 56 - to the Fund are assumed to start in 1982, the foreign exchange benefits to be generated from the new production total US$113 million up to 1990, as is shown below; in the pessimistic case where commercial production from the first discovery will start in 1983, foreign exchange benefits for the 1985-90 period are still estimated at US$78 million despite slower build-up in successful projects (para. 7.18). This analysis is conservative since it assumes that no foreign credits are available to finance mine development and therefore repayments--which in case such credits were to be incurred--would start to be flowing out only in the later years. FNEM--Foreign Exchange Benefits - Optimistic Case (US$ Thousands - 1978 Terms) 13 a 1980 1981 1982 1983 18 1985 1986 1987 19 ~88 9 15 I. Fcreign Exchange Inflo- Foreign loans 425 1,525 1,725 3,825 - - - - - - - - Foreign Grants 575 2,600 1,175 - - - - - - _ - - Subtotal 125 2,850- - - - - - - - II. Foreign lxcha. Outflow 1. Capital Expenditures Exploration costs 264 606 410 500 279 137 147 328 128 100 140 330 Fixed Assets, Fund 421 563 132 113 214 377 496 113 266 196 397 265 Technical assistance - 274 258 247 r - - - - - - - Mine development costs - 291 4,396 8,333 5,624 2,915 t 038 3,161 4,305 4,1428 3,68 _3.'L Subtotal 685 1,734 5,196 9,193 6,117 3,429 2,i81 3,602 4,699 4,724 4,224 40 2. Debt Service Financial charges 5 30 70 140 188 494 461 406 374 341 309 276. Loai repanment/a - - - - - 546 546 546 546 546 546 546 Subtotal 5 30 70 140 188 1040 1,007 952 920 887 855 & 22 Total FE Outflow 690 1,764 5,266 9,333 6,305 4,469 4,688 4,554 5,619 5,611 5,079 j 227 III. Total Export Revenues - - 344 5,8 i12L, lQ 12 7 2i,18J. 27=~a 2_8 IV. Foreign Exc ten _ Surolus, 310 2,361 (2,416)(5,164)( 907) 7,875 14,037 17,983 17,740 18,570 20,454 21,981 (Deficit) V. Acu mlated Foreign Exchange 310 2,671 255 (4,909)(5,816) 2,059 16,096 34,079 51,819 70,389 90,843 112,824 Surplus (Deficit) /a Includes 41 annual interest deferred during grace period D. Fiscal Benefits 8.09 An analysis of the fiscal impact that can be expected, based on production from new mines explored by the Fund, indicates that the Govern- ment could expect a net fiscal benefit from the Project of US$38 million by 1990 under optimistic assumptions. Under pessimistic assumptions, the Government could expect a net fiscal benefit of US$22 million by 1990. It is to the long-term benefit of the Government to support the Fund financially  - 57 - even if such support is required over a long period of time. Fiscal revenue calculations are based on the combined burden of a tax on gross revenues from new production of ore which, in the case of tin, amounts to about 38% of presumed income from gross sales rev,enue, an export tax which amounts to 7.5% of gross sales revenue and an additional tax of 1.1% of gross sales revenue for mining research. The tax incentive allows users of the Fund to deduct 60% of royalty payments to the Fund from taxes owed to the Government. Even should the Government implement ultimately a profit-based mining tax reform (para. 2.09) reducing the total tax burden by 20%-30%, the fiscal benefits from projects benefiting from FNEM-financed exploration would still be significant. Moreover, FNEM, by generating additional mining exports, sup- ports the more than US$50 million in duties on imports paid through the foreign exchange earnings of the mining sector. It should be noted, however, that the fiscal benefits of FNEM assume that none of the incremental output would have come forward without the Fund's activity. This is more likely to be the case for the lower-grade deposits and smaller mines unable to obtain finance for expansion from commercial channels than for the larger mines with higher-grade deposits that are more financially secure. The analysis for the optimistic case is shown in the table below: Estimated Incremental Fiscal Benefits--Optimistic Case (US$ millions--1978 Terms) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1. Government Tax Receipta 1. Regalia /a 0.09 1.46 3.33 5.06 6.08 6.31 6.53 6.89 7.35 2. Export Tax lb 0.03 0.40 0.93 1.40 1.69 1.75 1.81 1.92 2.04 3. Cther Taxesa c - 0.06 0.14 0.21 0.25 0.26 0.27 0.28 0.30 Subtotal 0.12 1.92 4.30 6.67 8.02 8.32 8.61 9.09 9.69 II. Tax Incentive Id 0.01 0.26 0.60 0.90 1.08 1.12 1.16 1.23 1.31 III. Government Fiscal Benefit 0.11 1.66 3.80 5.77 6.94 7.20 7.45 7.86 8.38 IV. Acumulated Fiscal Benefit 0.11 1.77 5.57 1L1.34 18.28 25.47 32.92 40.78 49.16 V. Accum. Government Support to FXEM 4.92 6.12 7.32 8.52 9.72 10.92 10.92 10.92 10.92 VI. Net Govern.ment Fiscal Benefit (4.92) (4.35) (1.75) 2.82 8.56 14.55 22.00 29.86 38.24 /a 38% of presumed income from tin exports, based on presumed cost of US$1.80 per lb of tin priced at us$6.00 per lb. /b 7.5% of gross value of exports. /c 1.1% of gross value of exports Id 60% of FNEM royalty receipts deductible.  - 58 - 8.10 Under assumptions regarding exploration and mine development made above, the operations of the Fund would assist in creating or preserving 1,275 permanent jobs in mining production in the "optimistic" case and about 700 under the "pessimistic" assumptions. The jobs would be created in the case of new (or expansion) mine discoveries and development and preserved in the case of mines that would have closed down if new reserves had not been identified. The estimated numbers of those directly employed is based on the estimated average productivity of mine workers in Bolivia. 8.11 Additional permanent employment will be generated in the local service and consulting companies that will be expanded as a result of Fund activities. The amount of indirect employment created cannot be estimated but should be a large multiple of the direct employment, particularly in the creation of supporting services and facilities around a mine site. 8.12 Local capabilities in mining and exploration development will be increased through experience and through the involvement of foreign service and consulting companies that are likely to be used in collaboration with local firms as a result of Fund operations. Fund professionals will be exposed to technical assistance and training, gaining technical skills and experience which will be required in other Bolivian enterprises when explor- ation activities increase. E. Other Benefits 8.13 Mining production techniques, particularly in beneficiation and concentration of ore, are inefficient and high cost. The Fund's operation will help to introduce updated techno'ogies through its feasibility work and through its ability to attract qualified and experienced technical personnel and equipment suppliers. With improved methods of beneficiation, for example, recovery of concentrates from gross mine output can be increased on average for a typical, poor-grade ore from 35% to 80%. The capability of the Fund to introduce these changes, however, will depend to a large extent on mining taxation reform to stimulate new mining investment (para. 2.09). 8.14 The Fund activities should provide for increased capacity util- ization of the existing national smelters as well as of new planned capacity in tin, lead and silver. Local smelting, however, will only be beneficial to the local mining enterprise if mineral prices from ENAF are not based on foreign costs. A change in the regulation preventing ENAF from charging foreign costs for smelting would assist in stimulating output for greater value added in Bolivia and in providing the mining sector with much-needed funds for exploration. 8.15 New mine developments and job creation should result in improvements in living conditions in regions that are geographically isolated and marginal in the general economy of the country. Active mines are sub-centers of development with their own rural facilities and amenities. The Project will have a direct impact on the betterment of living conditions in properties which are developed as a result of Fund activities.  - c9 9 IX. REC_NENDATIONS 9.01 IDA has obtained the followi.ng major agreements and assurances: (a) the L_cree-law creating the Fund, or its by-laws, would not be modified without IDA's agreement (paras. 4.02, 4.05); (b) FNEM internal regulations that could limit contracting of services according to IDA guidelines will not apply to IDA-financed services, and IDA-financed goods and services will be procured according to IDA guidelines (paras. 4.05, 6.15); (c) agreed criteria will be used by FNEM for evaluating explora- tion projects financed by IDA (paras. 4.16, 5.09); (d) all contracts with mine owners will be subject to the Fund's general conditions and will include certain provisions (paras. 4.23, 5.11); (e) FNEM will hire an accounting firm on terms and conditions satisfactory to IDA for finacial and cost control purposes (para. 4.28); (f) IDA will approve the work programs and credit agreements, for the B-D Stage projects to be financed by IDA (para. 5.06); (g) FNEM's exposure will be limited to US$2.0 million for projects presented or sponsored by the same owner (para. 5.08); (h) the Fund will not finance pilot testing plants or the rehabilitation of processing plants unless certain con- ditions are met (para. 5.10); (i) the Fund will furnish IDA by March 15, 1982, a report on its operating experiences and the program for 1983-87 which it will start to put into effect, before September 30, 1982, after exchanging views with IDA (paras. 5.16, 7.24); (j) the Fund will contract consultants and contractors on terms and conditions satisfactory to IDA (paras. 5.19, 6.15) for the carrying out of projects: (k) the Fund will, by January 1, 1980, start a training program that is satisfactory to IDA (para. 5.21); (1) short-term consultant services will be agreed by IDA and the Fund every six months (para. 5.22); (m) the Government will on-lend the IDA credit to the Fund on agreed terms and conditions (para. 6.08);  - 60 - (n) the Government will contribute to the Fund according to an agreed timetable and disbursement of IDA funds will be contingent upon the Government being up to date in its contribution to the Fund (paras. 6.11, 7.24); (o) the Fund will undertake an annual review of its financial position and requirements in consultation with IDA (para. 7.24); (p) the Fund will not contract any new debt until the Closing Date of the proposed credit, unless on the basis of financial projections acceptable to IDA, its projected debt service coverage is more than 1.5 and the debt/equity ratio is 50:50 or less. The current ratio will be kept at all times at 1 or higher (para. 7.24); and (q) the Fund will provide IDA with quarterly financial reports and monthly progress reports (para. 7.26). 9.02 The following are conditions of credit effectiveness: (a) adoption by FNEM of general conditions acceptable to IDA (para. 4.23); (b) enactment of a Joint Ministerial Resolution clarifying the decree providing incentives with advantages in royalty payments (para. 5.13); (c) conclusion of the German bi-lateral assistance agreement for completion of FNEM's financing plan (para. 6.12); and (d) appointment by FNEM of qualified, independent auditors on terms and conditions acceptable to IDA (para. 7.26). 9.03 The following are conditions of credit commitments/disbursements: (a) after the earlier of a date 18 months from the effective date or when the equivalent of US$3.5 million from the credit has been committed, assessment by IDA, following an exchange of views with FNEM or the Government, on FNEM's performance in carrying out the Project and on whether the purposes of the credit can be accomplished by the Fund (para. 5.20); and (b) payment of all due quarterly installments by the Government of its contribution to FNEM (para. 6.11). 9.04 With the preceding agreements and assurances, the Project is suit- able for an IDA credit of US$7.5 million for 50 years, including 10 years' grace. Retroactive financing of up to US$25,000 is recommended. Industrial Projects Department June 1979  - 61 - ANNEX 1 Page 1 of 2 BOLIVIA: NATIONAL MINERAL EXPLORATION FUND GLOSSARY OF MINING TERMS Alluvial Deposit Earth, sand, gravel or other rock or mineral materials transported and laid down by flowing water. Alluvial deposits generally take the form of surface deposits, river deposits, or shore deposits. Drift Usually a horizontal gallery in or near an ore deposit and parallel to the long dimension of the deposit or to the course of the vein. It is usually of a relatively small cross section. Larger sections are commonly called tunnels. Concentration Separation and accumulation of economic minerals from gangue. Geophysical Survey The survey of an area in which geophysical properties and relationships unique to the area are mapped by one or more geophysical methods. Geochemical Survey A survey involving the geochemical analysis of sys- tematically collected samples of rocks, soil, plants, or water. Ore Reserve The term is usually restricted to ore of which the grade and the tonnage have been established with rea- sonable assurance by drilling and other means. Proven Reserves Ore deposits; which have been reliably established as to their volume, tonnage and quality by approved sampling, valuing and testing methods. Possible Reserves A class of cre whose existence is a reasonable possi- bility, based primarily upon the strength and con- tinuity of geologic-mineralogic relationships and upon the extent of ore deposits already developed. Because of the comparative absence of mine workings which could reveal assay values, possible ore cannot be assigned a grade with any meaningful certainty nor can the quantity be expressed as a definite, absolute amount.  - 62 - ANNEX 1 Page 2 of 2 Probable Ore A class of ore whose occurrence is for all essential purposes reasonably assured but not absolutely cer- tain. A definite grade can be assigned to the tons thus classified. Probable ore, however, is not amenable to immediate mining, although the probable ore could, through development work, become mine- able in a relatively short time. Prospecting Geological survey searching for outcrops, surface exposure, or geochemical and geophysical anomalies to discover mineral deposits. Pre-Cambric Shield Rocks older than the Cambrian age. Refining of Metals Metallurgic operations performed after the crude metals have been extracted from their ores in order to obtain them in a condition of higher purity. Sampling Cutting a small part of an ore deposit, which should truly be representative of the deposit's average value in an established zone. Smelting Metallurgical operation in which metal is separated by fusion from those impurities in minerals with which it may be chemically combined or physically mixed. Trench A narrow, shallow ditch cut across a mineral deposit to obtain samples or to establish geological trends. Vein Deposit Usually narrow and steeply inclined zones of mineral- ized rock lying within boundaries clearly separating them from mineralized rock. Industrial Projects Department June 1979  - 63 - ANNEX 4 Page 1 of 8 BOLIVIA NATIONAL MINERAL EXPLORATION FUND POTENTIAL EXPLORATION PROJECTS FOR FNEM FINANCING 1. At the time of the Appraisal in April/May 1978, 18 prospects con- sidered promising had been successfully studied through Stage A. Since then, however, 7 prospects have been deleted for reasons of insufficient geological potential, low mineral prices (antimc,ny) and lack of owner interest and 3 prospects added as a result of Stage A surveys during the last 5 months. Summarized as follows is a descriptic,n of the 14 remaining prospects which are the basis of FNEM's 1979-82 Operations Program. 2. Buena Esperanza. This small mine is located approximately 307 km SE of La Paz and extends through altitudes ranging from 2,950-3,200 meters. Discovered in 1939, it is presently c,wned by Sr. Augusto Saravia and has been mined by three different operators. In addition to housing for 33 employees, existing facilities include a concentrating plant with a rated capacity of 20 TPD, which is operated 8 hours per day at a rate only 3-4 TPD because of inadequate maintenance. Its application for FNEM financing for exploration was presented on September 27, 1977. Preliminary field investigation, under Stage A, was carried out by FNEM staff from November 8-12, 1977, confirming the existence of micro-crystalline, cassiterite mineralization in 4 nearly- vertical vein structures of about 300 meters, which extend horizontally over a total of 800 meters, with an average thickness of about 0.6 meters. 3. Based on results from Stage A, FNEM plans to finance further ex- ploration to be undertaken in February-November 1979 to confirm the existence of about 190,000 tons of ore reserves, with an average grade of 1.0% tin, which FNEM staff estimate can be processed with a recovery of 50% at a rate of 40 TPD. According to existing contracts, this additional exploration will be carried out at a cost of US$109,000 under Stage B by the mine owner, with assistance and supervision of Fernando Blanco, a local consultant. It will comprise: (i) establishment of about 1,500 meters of access road within the property at an estimated cost of US$7,500; (ii) over-hauling existing plant facilities at an estimated cost of US$7,500 to enable production at a rate of 20 TPD; kiii) rehabilitation of housing at an estimated cost of US$2,000; and (iv) approximately 400 meters of drifts and 60 meters of raises to develop ore reserves. Accordingly, FNEM and the mine owner envisage processing a mine production of 20 TP?D in tin ores from exploration develop- ment work during Stage B. If successful, this work will also include studies to justify expanding the processing plant to a capacity of 40 TPD. BAMIN has already indicated that it could finance this expansion after adequate studies are completed to its satisfaction.  - 64 - ANNEX 4 Page 2 of 8 4. Cerro Grande. This medium-size mine is located in the Department of Cochabamba, approximately 343 kilometers SE of La Paz. It comprises 3 adjacent mining centers, which extend for nearly 14 sq km, situated at elevations of about 3,800 meters. These deposits were first mined for silver during the Spanish rule and, subsequently, for tin since 1880. At present, they are owned and operated by the Cerro Grande Group which is controlled by Sres. G. Broersma, P. Espana and C. Oroza. Existing facilities include housing for 560 workers and two beneficiation plants that produce concentrates containing 25%-30% tin. One plant has capacity to process 200 TPD, with a recovery of 40%-50%. The other plant has capacity to process 100 TPD, with a recovery of only 30% because it is used to concentrate more complex tin ores which have finer granulometry and are associated with other minerals. The application for FNEM financing for exploration was presented on November 1, 1977. Preliminary field investigation, under Stage A, was carried out by FNEM staff for 3 prospects, to review ore reserve potentials from November 7-13 and November 22-26, 1977, and finally from February 14-18, 1978, to review existing difficulties when processing the more complex ores mentioned above. 5. Based on the successful results of Stage A investigations, FNEM plans to finance additional exploration--to be undertaken between October 1979 and mid-1982--at an estimated cost of US$2,689,000, in order to estab- lish additional proven reserves estimated at 964,000 tons of ore, with an average grade of 1.53% tin, and to prepare feasibility studies. For this purpose, exploration would comprise mainly geological surface mapping and approximately 4,000 meters of tunnelling to cut and follow promising vein structures already identified. As presently envisaged by FNEM and the mine owner, the additional ore reserves would be processed at a rate of 300 TPD. FNEM has shown strong interest in including a pilot plant, estimated to cost about US$0.2 million, with capacity to treat 80 TPD, as part of its financ- ing for exploration. The justification for such a plant in an exploration program remains unclear, particularly because of the (i) specialized nature of metallurgical testing; (ii) proposed size of the plant; and (iii) existence of other facilities that can be used for pilot testing on the property and in Bolivia. Since this exploration project is sufficiently large and very well defined, FNEM plans to finance and execute it through German bilateral assistance. 6. Totoral. This medium-size mine is located at approximately 60 km SE of Oruro and at 317 km SE of La Paz. It extends over an area of 5.75 sq km at elevations of 4,400 meters. Mined by foreign and local operators since 1902, it is presently owned by Compania Minera Orlandini Ltda., a family group. Existing facilities include housing for 300 workers and a processing plant for tin ores with capacity to (i) preconcentrate 200 TPD, increasing the ore grade from 0.9% to 1.8%; and (ii) concentrate 100 TPD, increasing the ore grade from 1.8% to 47% tin. The application for FNEM financing for exploration was presented in August 1977. Preliminary field investigations, under Stage A, made by FNEM staff from August 12-17, 1977, confirmed the existence of tin mineralization in the form of vein, beds and pipes, along six geological structures. Three of these structures have not yet been  - 65 - ANNEX 4 Page 3 of 8 mined and may contain 300,000 tons of ore reserves, with an average grade of 1.2% tin, which could be mined at a rate of 250 TPD. Based on the successful results from Stage A, FNEM financed additional exploration under Stage B, which was carried out successfully from January-October 1978 by FNEM staff and Sr. R. Plenge, a Peruvian consultant, using services from SERMIN for topographical mapping. This exploration successfully confirmed the findings of the previous geological investigators. 7. Based on the results from Stage B, FNEM plans to finance additional exploration, combining Stages C-D, to be carried out between August 1979 and March 1981 at a projected cost of US$i0.694 million. As planned, this work would include approximately 1,420 meters of tunnels to intercept mineralized structures, 1,360 meters of exploratory drifts along promising structures and 735 meters of vertical raises to confirm mineralization at different elevations and provide ventilation and access. As envisaged by FNEM and the mine owner, the additional exploration would be carried out using independent consultants and possibly a contractor firm, using surveyors' samplers and labor from the mine owner. Services from the mine owner will be limited to providing equipment and labor, excluding technically specialized functions such as sampling and surveying. 8. Sayaquira. This medium-size tin mine is located approximately 222 km SE of La Paz. It extends over an area of 8.58 sq km, at elevations ranging between 4,500 and 5,000 meters. Mined by three different operators since the mid-1800's, these deposits are presently owned by Empresa Minera Barrosquira, which is two-thirds controlled by the Sarmiento family, and one-third by its General Manager, Sr. F. Killmand, under a purchase option valid until January 1981. Existing facilities include housing for 211 workers and a concentrat- ing plant which can process up to 70 TPD, with a recovery of 25%-30%, to produce concentrates that contain about 26% tin. The low recovery of this plant is attributable to inadequate process design and maintenance and the lack of spare parts. Approximately 50% of concentrate production is obtained manually. The application for FNEM financing for exploration was made on October 3, 1977. Preliminary field investigations, under Stage A, were made by FNEM staff from October 18-23, 1977, to review the mine, sample promising vein structures and examine the possibility of introducing more systematic mining methods. A follow-up visit was made between February 28 and Mlarch 3, 1978, to review processing facilities and examine specific exploration alter- natives. Information developed by FNEM confirmed that existing mineralization may hold ore reserves of 1.0 million tons in sub-vertical veins of thicknesses ranging from 0.2-2.5 meters, with an average grade of 1.4% tin, which could be processed with a recovery of 50%. These results are in line with a pre- feasibility study prepared in 1976 by Sres. Plenge and De Lucio. FNEM has decided to finance additional exploration of Sayaquira, continuing directly with Stage C, in view of both the positive Stage A results and the more advanced status of geological informiation as shown in the 1976 pre-feasibility study.  - 66 - ANNEX 4 Page 4 of 8 9. As presently planned by FNEM and the mine owners, Stage C would be carried out between mid-1979 and mid-1981 at a cost of US$0.759 million. It would comprise 720 meters of tunnelling to intercept vein formations, 2,840 meters of drifts to follow promising mineralization and 520 meters of raises to confirm vertical continuity of the veins and provide ventilation and access. It will also study the possible expansion of plant facilities to process 200 TPD. The mine owners have expressed interest in also receiving FNEM financing, estimated at US$0.21 million, to rehabilitate the concentrator thereby increasing its capacity to 120 TPD during this stage of exploration. Although financing of minor plant rehabilitation could be undertaken by FNEM, the proposal received from Sayaquira is clearly a proposition which should be dealt with in an industrial loan since it involves a relatively large amount of equipment for production purposes. If successful, Stage C will be followed by Stage D exploration, which as presently planned would cost US$0.141 million and would be undertaken between the end of 1981 and mid-1983. As originally envisaged by FNEM and the mine owners, exploration was to be supervised by FNEM and an independent consultant, while a service group operated by Sr. Killman would carry out the exploration project. Mine-owner participation in this work would be limited to providing equipment and labor. 10. Fabulosa. The tin mine is located at approximately 111 km north of La Paz. It extends over an area of 25.17 sq km, at elevations of about 4,700 meters. Since 1900, this mine has had seven different owners or operators. In 1971, its mining rights were acquired by its present owner, Cooperativa Minera 16 de Octubre. Existing facilities include 101 rooms for workers, a 60 KW hydro-electric plant and a concentrating plant which is presently processing 10-15 TPD because of mechanical deterioration of crusher and concentrating equipment. The application for FNEM financing for explora- tion was made on June 25, 1977. Preliminary field studies of Stage A were carried out by FNEM staff from September 19-25, 1977. These studies confirmed the existence of six mineralized areas extending over 0.46 sq km. The most promising areas has a vein outcrop, which extends over 800 meters, with average thickness of one meter and a projected height of 100 meters. Based on its review of the property as well as availble information on production in similar areas, FNEM estimates that there may be ore reserves of 280,000 tons, with an average grade of 0.8% tin, which could be processed with a recovery of 60%. Accord