China Development Bank has offered a $15-billion loan to the Bolivian government to develop one half of El Mutun iron-ore deposit concession.

The move comes just weeks after Jindal Steel & Power' (JSPL) entire $18-million bank guarantee was encashed by the Bolivian government last month for failing to honour its pledge to invest $2.1 billion in the other half of EL Mutun iron ore joint venture project under the time stipulated in the contract signed in 2007. (See: Bolivia encashes JSPL's $18-million bond on El Mutun delays)

The EL Mutun iron ore deposit is one of the world's largest iron-ore deposits located in the remote German Busch province in the Santa Cruz Department in Bolivia covering an area of 75 sq km, and 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 half or 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), while the other half that is yet to be developed, is owned by the Bolivian government. 

Late last month, sensing the problems and the opportunity at El Mutun, China moved in with a loan offer of $15 billion for developing the remaining half of the deposit, including building the necessary infrastructures like construction of a railroad, development of the port at Puerto Busch to export the iron ore, La Paz newspaper La Razon reported.

The offer was made to Empresa Siderurgica Del Mutun (ESM), a government of Bolivia entity that was set up to develop the EL Mutun iron ore deposit.

Under the proposed offer, China Development Bank will loan $15 billion to Bolivia to develop the 50 per cent of the El Mutun deposit and Bolivia will repay 40 per cent of the loan with cash, while the rest is to be paid with steel that will be produced at El Mutun.

A joint venture company will be set up between Chung Hsing Mining and ESM, similar to the one  that JSPL had set up, and Bolivia will produce a minimum of 100 million tonnes of iron ore for exports to China.

But for the deal to go through, the Chinese want to conduct due diligence and exploratory work to determine the quality of the iron ore - an issue that JSPL had raised since it discovered only after signing the joint venture that the iron ore was of 42 Fe grade (low quality) and would require added investment to refine. Since JSPL had only bid at the eleventh hour, it had been unable to conduct due diligence prior to making the bid.

Although the terms of the offer are not clear, it is said that South Korea's Hyundai is also interested in the project.

The Bolivian media had reported last month that there could be third-party interests behind the decisions for the tough stance taken by the Bolivian government towards JSPL.

The Bolivian government was reported to be in talks with three other companies interested in developing El Mutun, including Chinese firms (See: JSPL could lose EL Mutun iron ore development rights in Bolivia)

Meanwhile, the Bolivian government has said that although it has encashed JSPL's 18-million bank guarantee for delays in making the stipulated investments within the committed time, the joint venture agreement would still continue to be in force.

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

JSB was also required to build a 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 had allowed it to export up to 10 million tons and the project was supposed to have begun operations last year with the first consignment of 4-5 million tonnes to be shipped out.

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.