Jindal Steel & Power (JSPL) is in danger of losing its 50 per cent interest in EL Mutun iron ore deposit in Bolivia, for not honouring its contractual obligations.

Bolivian EL Mutun Iron Ore

The Bolivian government could cancel JSPL's development rights for 20 billion tonnes of EL Mutun iron ore deposits and enforce an $18-million performance bond for having failed to make the necessary investments stipulated under the contract signed in 2007.

Bolivia's mining director Freddy Beltran had said on 31 December that if JSPL fails to honour its pledge to invest $2.1 billion in the EL Mutun iron ore joint venture project under the time stipulated in the contract, the Bolivian government would not hesitate to scrap the contract.

After the Bolivian government twice rejected JSPL's revised investment plan, it gave the Indian company an ultimatum in early February to come up with a viable investment plan by April or face the cancellation of the contract.

Top executives of JSPL arrived yesterday in the Bolivian capital La Paz, to hold talks with the Bolivian ministry of mining and metallurgy (MMM) to sort out the problems in developing the EL Mutun iron ore joint venture project as well as the Indian steel maker's commitment to build a steel plant in Bolivia's Santa Cruz Department.

A ministry official yesterday told reporters at La Paz that several issues regarding the project would be decided in this meeting, but refused to elaborate further.

EL Mutun iron ore deposit is one of the world's largest iron ore deposit located in the remote German Busch province in the Santa Cruz Department in Bolivia covering an area of 75 sq kms.

It is estimated to hold about 40 billion tonnes of iron ore of 50 per cent grading, mainly in hematite and magnetite form.

JSPL, India's third largest steel producer in tonnage terms and revenues of $15 billion in 2008, had acquired the development rights for 20 billion tonnes of EL Mutun iron Ore in 2006 through a bidding process. (See: JSPL to invest $2.1-billion to set up steel plants in Bolivia)

JSPL's Bolivia subsidiary Jindal Steel Bolivia S.A (JSB) signed a joint venture agreement in 2007 with Empresa Siderurgica Del Mutun (ESM), a government of Bolivia entity, to develop the EL Mutun iron ore for a period of 40 years.

Under the joint venture agreement, JSB was required to invest $300 million each year of the first five-year period and $200 million annually over the next three years, amounting to a total direct investment of $2.1 billion over eight years.

This is the first, and the largest, investment by any Indian company in Bolivia and also the largest foreign investment in a single project in Bolivia.

JSB was also required to build 10 MTPA pellet plant, a 6 MTPA sponge iron plant, 1.7 MTPA steel plant and a 450 MV power plant under the contract.

Of the 20 billion tonnes of iron ore development rights given to JSPL, the Bolivian government has allowed JSPL to export up to 10 million tons and the project was supposed to have begun operational last year with the first consignment of 4-5 million tonnes expected to be shipped in the first year of the operations.

JSPL was also supposed to have begun commercial production of steel this year, but neither has any iron ore been shipped so for, nor has the steel plant become operational.

In December, the board of ESM had rejected JSPL's proposal to invest less than the $1.5 billion in the first five-years to develop the EL Mutun iron ore project, build the 1.7 MTPA steel plant and the 450 MV power plant as agreed to in the contract in 2007.

JSPL had proposed to lower the investment to $812 million instead of the $1.5 billion in the first five years since the company found large amounts of phosphorus in the ore extracted so far since May, thus escalating its cost in processing and further investments needed to improve the ore quality.

Arvind Sharman, JSPL's director in Bolivia had said in August that the company had complained that Bolivia, which produces a mere 1.2 GW of power nationwide, does not produce enough electricity to launch steel production at El Mutún.

Jindal is also apprehensive of building the 450 MV power plant to power its steel plant as the power plant could cause excess energy discharge and voltage fluctuations that could be potentially dangerous to workers.

In order to avoid such problems, JSPL had proposed to procure power for the steel plant from a Bolivian electricity network, but the network is located almost 680 kms away from the plant site.

The Bolivian government also rejected JSPL's proposal to subsidise natural gas to run the steel plant.

It is rumoured that Chinese companies are in talks with the Bolivian government to secure the development rights for the other half of the 40 billion tonnes of iron ore at EL Mutún without going through a bidding process.