President of Drew Associates and Representatives for Broken Hill Proprietary in Venezuela
For World Investment News Ltd, August 21st 2000.
The government recently announced their intention to reform the mining law and revise the regulations in order to attract national and foreign investors within this sector. They are talking about 6.4 million dollars to be captured within the period 2000-2004. Could you give us your opinion on the investment climate in the Venezuelan mining sector?
The new mining law was passed in September of last year and the regulations covering this law are in the final approval process. Despite the fact that the new law is not the most modern and competitive in the region, overall, it is not a bad law.
The positive aspects of the law are the "Taquilla Unica" which is a one-stop shop and will provide a contact or sponsor within the Ministry to solve the bureaucratic problems, which have plagued the industry in the past. The negative aspects of the law relates to the discretionality and the continuing bureaucratic nature in obtaining approval and permits for exploration and exploitation.
The historical weaknesses of the mining sector also set the stage for providing the greatest sectoral investment opportunities in Venezuela today. Despite the recognized significant natural resource potential of the country, mining has generated less than one percent of GDP over the last 50 years. With the government’s stated objective of promoting the sector as a means of diversifying the economy and providing the needed jobs, numerous opportunities exist since this sector has been overlooked for the last thirty years.
BHP is the largest mining group in Australia, the second largest producer of copper in the world. For our readers, can you briefly present the activity BHP and the extent of its business in Venezuela?
The largest project which BHP has in the country is the "Orinoco Iron" project which is an investment of approximately nine hundred million US$900 to build an iron ore briquette plant which is presently in the commissioning phase. Although I am a Director of the company, for the details of the overall project I would have you speak directly to Orinoco Iron, which represents a 50/50 joint venture between BHP and its Venezuelan partner Sivensa.
In General this project not only demonstrates the confidence BHP has in the future of the country, is also helps point some of the competitive strengths, which Venezuela has developed for investors. This relates to the significantly competitive prices for basic infrastructure and services required for industrial growth, ranging from inexpensive costs for electricity, gas prices, existence and local access to well priced raw materials, access to ports for export and general an excellent infrastructure within the Guyana/Puerto Ordaz region.
On the question of other activities, BHP maintains an interest in the mining sector and has been assisting Corporación Venezolana de Guyana and Ferrominera Orinoco in their plans to build a concentrator plant for iron ore, which will assist FMO in guaranteeing a longer life and better utilization of the country’s proven reserve base.
BHP decided to form an alliance with Sivensa in order to launch the US$816 million US dollar Orinoco Iron project, which according to Sivensa should become the largest direct steel plant in the world. Can you tell us what motivated the association with Sivensa and then what is the main objective of this project?
The motivation for BHP’s association with Sivensa is based on several factors but principally it is the desire to associate with a first class local partner, which brings experience and technology to the partnership.
Regarding the second part of your question on the main objective of this project and the 816 million US$ briquette plant being built, the intent is to add value along the iron ore value chain. Basically the plant will process raw iron ore and with utilization of gas as a reducing agent, the plant will convert the ore into solid iron ore briquettes with approximately 94% iron contact. These briquettes are then exported to markets abroad both in Europe and to the United States, for making steel products.
The suppliers of raw materials are State owned companies. With the privatization process under way, are you not afraid that the privatization process will affect the prices of those low costs products?
One of Venezuela’s strongest competitive edges in the industrial sector is the relatively low cost for raw materials and basic services such as electricity, gas, fuel and water. Therefore, I do not envision any major change with the overall privatization process. It is inevitable that prices will escalate over time, however, these are all part of long term contracts and any increases will tend to be tied into consumer price indexes or some other way to ensure that industries are protected.
Has the Orinoco Iron project been an opportunity to experiment new technologies in order to produce more efficiently?
Five years ago BHP undertook a research project to determine which briquette technology would demonstrate product improvement as a way to add value to their iron ore production. Following a review of several different types of technologies for the formation of these iron ore briquettes the company settled on the FINMET technology, which belonged to Sivensa and VAI (Voest Alpine) from Austria. This Venezuelan technology best suited some of BHP’s iron ore, but again I would have you visit directly the Orinoco Iron team for more specific details.
Are logistics infrastructure of Guyana sufficient for the volumes Orinoco Iron is dealing with?
The short answer is yes. The Guyana regional development was visionary in its time. The city was built with excellent infrastructure in conjunction with the largest hydroelectric dam of its time. The Guri Hydroelectric dam was built with a capacity in excess of 10,000 mw of power (in excess of 12,500 mw with additional add-ons today on the Caroní river). This significant power base allows the region to export or transmit electricity to the whole country as well as to export electricity to Northern Brazil.
The city sits on the banks of the Orinoco River, which provides a major river "highway" connecting the area with markets around the world.
One issue of potential concern relates to the actual river channel and the fact that without continual dredging the depth of the channel decreases due to continual sediments being dumped into the river. The depth of this channel has decreased from an average maximum of approximately 39 feet to a low of 26-27 feet during the last year. This affects Venezuela’s export products from the region and may affect one of Venezuela’s competitive advantages. The government is well aware of the importance of the Orinoco and has already developed a strategy to ensure that this is corrected and improved. The initial response has been to contract a third dredge to assist with dredging with the intent of reaching a draft depth of 32 feet by year-end. This is a positive sign since it shows an immediate reaction and action plan to solve this problem, which has persisted for years.
For an investor looking at Venezuela, where would you recommend him to invest?
President Chavez’s government is still in transition and as part of their stated goal of diversifying the economy they are providing investment incentives for selected sectors of the economy such as tourism, agriculture, telecommunications, and mining. In addition to investments in these niche areas, I believe the petrochemical sector capitalizing on some of Venezuela’s distressed gas will continue to expand. Regarding the "Gas Apertura" this will be more difficult, since the basic requirement of a strong gas market is not in place. The prime opportunities in the development of gas resources will likely be isolated reserves, which can be utilized for niche regional power generation.
Mining is one of the strongest areas where President Chavez can have a major impact. The mining industry has been stagnant for the last 30 years despite the tremendous natural resource potential which exists. Igniting the mining activity will certainly go a long way towards assisting with regional economic development and providing many needed jobs. The mining industry provides 8-10 times the number of direct jobs –vs.- the petroleum sector. The only problem with looking to mining to assist economic development is that this sector needs a longer lead-time. Between the exploration stage through feasibility and exploitation we are looking a 5-8 year time span. Therefore, the sooner one can kick start this sector the better the long-term economic future of these regions will be.
Countries like Chile, Peru, Argentina, Brazil and even as far away as Australia have clearly demonstrated the significant effects that coherent mining and environmental policies can deliver to economic development. Environmentally conscious mining with a view towards sustainable development is one of the strongest weapons to diversify the economy and one, which this government understands.
As a Director and former President of the Mining Committee of VenAmcham and a Director of Camiven, how would you evaluate the relationship between the mining industry and the Government?
The relationship with the government and the mining community has always been good, however, the problems, which have faced the sector, have been related to the overall bureaucracy and permitting problems. President Chavez has addressed this by raising the profile of mining by appointing a special Vice-Minister under the Energy and Mines Ministry with the mining portfolio and with the mandate to crank up the sector. Both Minister Ali Rodríguez Araque and Vice-Minister Alvaro Silva Calderon have taken the time to visit with the mining community to review the new mining law and more recently the regulations for this law, which are in the final draft form.
I am cautiously optimistic about the future of Venezuela and more optimistic about the future of the mining industry. I think the changes, which the country is going through, should have been foreseen. The social injustice over the last thirty years combined with the overall destruction of what had been a growing middle class sets the stage for today’s reality. Not everyone likes change since in this environment it implies uncertainty, and for investors to overcome this uncertainty requires a good understanding of what the basic fundamentals and rules of the game will be. So far, with the enactment of an investment tax credit in the income tax law, coupled with other incentives such as the "economic contract stabilization decree" presently in discussion are two solid strong signals that President Chavez means business. The message to potential investors that are new to Venezuela is to quickly get beyond the never-ending rhetoric and look at what actions are taking place in a particular sector of interest.
We like to portray success stories, after all the projects that you have played part in, what would be your next challenge?
One of my ongoing challenges is to continue to work with the government in any way I can to ensure that these lobby efforts are not fruitless and do in fact attract investors. Without foreign investment any economic plan, which the government might embark upon, is doomed to failure.
With over 25 years experience in the region I have elected to stay on in Venezuela to pursue business opportunities and provide business support to those investors prepared to act after assessing the risk rewards which Venezuela has to offer. This decision demonstrates my conviction and optimism for the country. From a personal standpoint after running operations in 4 different countries (Venezuela, Bolivia, Malaysia, Peru) over the last 13 years is to carve out more free time to take advantage of all the different facets which Venezuela has to offer. The country is full of lovely, idyllic tourist spots as well as providing world-class fishing. Maintaining a presence here provides an opportunity to be constantly challenged pursuing one of my hobbies for big game fish as well as an opportunity to visit pristine areas with abundant wildlife.
NOTE: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions.
VENEZUELA
