Cablegate: Japan's Sumitomo Acquires Stake in U.S. Mining

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FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC 0719
INFO RUEHAC/AMEMBASSY ASUNCION 6135
RUEHBO/AMEMBASSY BOGOTA 3452
RUEHBR/AMEMBASSY BRASILIA 7310
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RUEHME/AMEMBASSY MEXICO 1798
RUEHMN/AMEMBASSY MONTEVIDEO 4043
RUEHQT/AMEMBASSY QUITO 4465
RUEHSG/AMEMBASSY SANTIAGO 9039
RUEHKO/AMEMBASSY TOKYO 0251
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

UNCLAS LA PAZ 002623

SIPDIS

SENSITIVE
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STATE FOR WHA/AND LPETRONI
COMMERCE FOR JANGLIN
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: EMIN EINV ECON BL
SUBJECT: JAPAN'S SUMITOMO ACQUIRES STAKE IN U.S. MINING
COMPANY

REF: LA PAZ 2046

1. (U) Summary: Japan's Sumitomo Corporation recently
acquired a 35 percent participating interest in U.S.-based
Apex Silver's $800 million San Cristobal silver-zinc-lead
project (reftel). Apex will receive $224 million cash and
future silver and zinc payments; Sumitomo will also assume 35
percent of San Cristobal's project financing and derivative
liabilities. Company representatives told the Charge
September 27 that they expected attractive returns, despite
the risks of investing in a politically and economically
volatile country. End summary.

2. (U) Japan's Sumitomo Corporation, a significant player in
the global mining industry, recently acquired a 35 percent
participating interest in U.S.-based Apex Silver's $800
million San Cristobal open pit silver-zinc-lead project
(reftel). The September 25 agreement also gave Sumitomo a
two-year option to purchase 35 percent shares in selected
Apex Silver exploration projects in Bolivia, Peru, Mexico,
and Argentina.

3. (U) In return, Apex will receive $224 million cash;
deferred silver payments of 22.86 percent of Sumitomo's share
of San Cristobal's future payable silver production; and
deferred zinc payments of 20 percent of Sumitomo's share of
the project's future payable zinc production. Sumitomo will
also assume 35 percent of San Cristobal's $225 million
project financing and $130 million derivative liabilities.

4. (SBU) Sumitomo representatives told the Charge September
27 that they were "very excited" about the investment and its
potential returns, noting that San Cristobal's size and ore
quality made it an attractive project. They noted only two
problems: (1) the project is in a politically and
economically unstable country and (2) record-high mineral
prices will inevitably fall, perhaps before the firms extract
the bulk of the project's reserves. Company representatives
declared, however, that they could manage both risks.

5. (SBU) According to Apex Silver executives, the project is
now fully financed and on track to begin production in the
third quarter of 2007. From a technical standpoint,
construction has proceeded relatively smoothly; problems have
resulted primarily from road blockades (and related
logistical delays) and demands from local communities for
more jobs and higher pay. Apex Executive Vice President Alan
Edwards said the company attempted to meet those demands,
even hiring a local trucker's association to move
construction materials when rail transport would have been
cheaper. Unfortunately, Edwards noted, the company's efforts
occasionally backfire: the truckers went on strike their
first day, backing down only after negotiations.

6. (SBU) Comment: Both firms expect attractive returns,
despite the risks of investing in a politically and
economically volatile country. Executives take comfort in
assurances from Minister of the Presidency Juan Ramon
Quintana and other officials that the GOB will not
nationalize the mining industry, but the government's future
course is far from clear - and with record-high mineral
prices boosting companies' returns, the GOB may find it hard
to resist the temptation to tinker with existing tax and
royalty structures to raise the state's share of profits.
End comment.
URS

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