Document of The World Bank FOR OMFIAL USE ONLY Report No. 9'o2PE PROJECT COMPLETION REPORT PERU - CENTROMIN EXPANSION PROJECT (LOAN 1281-PE) October 25, 1985 Industry Department This doument has a resticte distribution ad may be used by recipients only in the performance of thdir official dutie Its cotents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OMFIAL USE ONLY
Report No. 9'o2PE
PROJECT COMPLETION REPORT
PERU - CENTROMIN EXPANSION PROJECT
(LOAN 1281-PE)
October 25, 1985
Industry Department
This doument has a resticte distribution ad may be used by recipients only in the performance ofthdir official dutie Its cotents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENT
Currency Unit = Soles
Average 1983 value US$1.00 = S/. 1,628.6Average 1984 value US$1.00 = S/. 3,466.9
GLOSSARY OF ABBREVIATIONS
Ag Price - Silver price
CENTROMIN - Empresa Minera del Centro del Peru S.A.
COFIDE - Corporacion Financiera de Desarrollo, aGovernment-owned development corporation
Cu Price - Copper price
EPD - Economic Analysis and Projections Department
IDB - Inter-American Development Bank
LME - London Metal Exchange
PCR - Project Completion Report
SAR - Bank Staff Appraisal Report
WFIGHTS AND MEASURES
Tons used in this report are short tons equal to 0.907 metric tons.
CENTROMIN FISCAL YEAR
January 1 - December 31
FOR OFFICIAL USE ONLY
PERU - CENTROMIN EXPANSION PROJECT
Project Completion Report
Table of Contents
Page No.PREFACE .... .. ........................ i
BASIC DATA SHEET . ............ ii
HIGHLIGHTS ............................ iv
I. INTRODUCTION ............... .... . I
II. PROJECT BACKGROUND ......................................... I- Project History .. I- Role of the Bank During Implementation ................... 2
III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PCR .......... 2
- Cobriza Ore Reserves .. 3- Increase in Production Capacity . . 4- Consultants for Cobriza ............. 4- Capital Costs Adjustments of Cobriza Project . . 5- Mine Water Treatment Plant .............................. 6
IV. FINANCIAL AND ECONOMIC PERFORMANCE .......................... 6
- Metal Prices ............................................. 7- Financial Rate of Return ................................. 8
- Cobriza Production Costs ................................. 9 - Cobriza - Projected Income and Cash Generation ........... 9 - CENTROMIN - Historic Financial Performance ............... 11- Financial Covenants ...................................... 11
- Economic Reevaluation .. 12
V. CONCLUSIONS AND LESSONS TO BE LEARNED ....................... 13
ANNEX I : Completion Report - Cobriza Project 15(dated August 1983)
ANNEX II : Completion Report - Mine Water Treatment Project 67(dated August 1983)
ATTACHMENT : Additional Comments From the Borrower 102
This document has a restricted distribution and may bc used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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PROJECT COMPLETION REPORT
WORLD BANK COMMENTS
PERU - CENTROMIN EXPANSION PROJECT
(LOAN 1281-PE)
PREFACE
The Bank approved a Loan of US$40 million equivalent in June 1976to EMPRESA MINERA DEL CENTRO DEL PERU (CENTROMIN) to assist in financingthe Cobriza Mine Expansion and the Cerro de Pasco Mine Water TreatmentPlant.
The Project constituted an important part of CENTROMIN's Stage IProgram to expand copper production, to reduce pollution effects on theenvironment and to provide necessary industrial and social infrastructureto support the Project. Planning for the Project began under the company'sprevious ownership, the Cerro de Pasco Corporation. Initial feasibilitystudies were completed in 1975 for Cobriza and in 1974 for the Cerro dePasco Plant. Project implementation was suspended from the end of 1977 toMay 1979 due to shortage of Government funds. After reactivation,substantial project modifications were required. Consequently, thestart-up of operations of Cobriza took place in November 1982, that ofCerro de Pasco in February 1981, i.e., about three years later thanoriginally expected during the Bank Appraisal.
IND Staff visited Peru in August 1983 to discuss the draftProject Completion Reports (PCRs) for the two subprojects prepared byCENTROMIN. The Borrower's final PCRs were received on November 14, 1983 andsubsequently translated from Spanish. IND's comments on their PCRs weresubmLtted on May 17, 1984. The project has not been audited by OED.
Further comments, dated June 10, 1985, received from theBorrower, which are included as an Attachment, have been taken into accountin the revised text.
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PROJECT COMPLETION REPORT
PERU - CENTROMIN EXPANSION PROJECT(LOAN 1281-PE)
BASIC DATA SHEET
(US$ millions)
LOAN POSITIONAs of June 30, 1985
Original Disbursed Cancelled Repaid Outstanding
Loan No. 1281-PE 40.0 39.73 0.27 14.68 25.06
CUMULATIVE LOAN/CREDIT DISBURSEMENT
FY77 FY78 FY79 FY80 FY81 FY82 FY83
(i, Planned original est. - 23.00 36.00 39.80 40.00 40.00 40.00i)a Planned revised est. - - - 19.10 36.00 40.00 40.00(ii) Actual 0.27 2.37 3.38 7.90 24.41 35.12 39.73*(iii) (ii) as Z of (i) - 10.3 9.4 19.9 61.0 87.8 99.3(iv) (ii) as X of (i)a
(revised est.) - - - 41.4 67.8 87.8 99.3
* US$0.27 million was cancelled as of March 1980, thus reducing the loan amountto US$39.73 million.
Date of Physical Completion 10/79 03/78 09/82 10/80Completion Time (in months) 34 15 63 40Time Overrun (in months) 29 25Date of Start-up of Operations 12/79 03/78 11/82 02/81
Total Project Cost (USS m) 160.9 15.3 245.0 15.3Overrun (Z) 52.3 -
Financial Rate of Return (Z) 15.2 18.1 Neg. Neg.Economic Rate of Return (Z) 16.0 20.0 Neg. Neg.
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MISSION DATA
Month/ No. of No. of Date ofYear Weeks Persons Manweeks Report
Borrower CENTROMINExecuting Agency CENTROHINFiscal Year of Borrower 1/1 - 12/31
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PROJECT COMPLETION REPORT
PERU - CENTROMIN EXPANSION PROJECT
WORLD BANK COMMENTS
HIGHLIGHTS
1. The IBRD Loan 1281-PE in the amount of US$40.0 million equivalentwas approved in June 1976 to assist EMPRESA MINERA DEL CENTRO DEL PERU(CENTROMIN) to implement two sub-projects of its Stage I ExpansionProject. The Cobriza Mine Expansion was designed to increase undergroundmine production to 10,000 tons of ore per day and to convert this ore to aconcentrate product. Plans for the Mine Water Treatment Plant at Cerro dePasco called for the construction of a solvent extraction and electro-winning plant to both replace the less efficient existing facility and tohalt the contamination of the San Juan and Mantaro rivers. The project wasalso to provide the associated industrial and social infrastructure (see para 1).
2. Due to shortage of Government funds, which accounted for 57X ofthe total project financing plan, implementation of both sub-projectsslowed down in late 1977 and was suspended from January 1978 until May1979. After reactivation of the projects, a host of serious management andoperational problems developed between CENTROMIN and its expatriate projectmanagement group. These problems are described in detail in CENTROMIN'sProject Completion Reports (see Annexes I and II).
3. While CENTROMIN has prepared in general good Project CompletionReports for the Cobriza Mine Expansion Project and for the Cerro de PascoMine Water Treatment Plant, a number of clarifications and comments arewarranted on the part of the Bank. These include the critical area of theCobriza ore reserves which during project implementation requiredsubstantial modifications to the original mine and concentrator plans (paras.7-9).
4. Due to the loss of virtually two years during project suspension,substantial engineering modifications required on the basis of unexpectedexploration results and the problems the company experienced with itsproject management group, original project cost estimates were exceededconsiderably. Total project costs are estimated at about US$260.3 million,i.e., a cost overrun of about 48X over the appraisal estimate.Consequently, both the financial and the economic rates of return of theproject based on the range of World Bank copper price projections arenegative. Nevertheless, analysis indicates that keeping Cobrizaoperational is justified on financial and economic grounds (see paras.22-29).
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PERU
CENTROMIN EXPANSION PROJECT
PROJECT COMPLETION REPORT
I. INTRODUCTION
1. The IBRD Loan 1281-PE provided financing for two projectcomponents, i.e., the Cobriza Mine Expansion and the construction of theCerro de Pasco Mine Water Treatment Plant of Empresa Minera del Centro delPeru (CENTROMIN). Both projects constituted an important part ofCENTROMIN's Stage I Program to expand production and processing and toreduce environmental pollution. Specifically, the Cobriza project wasdesigned to (i) increase underground mine production from 2,600 tons to10,000 tons of ore per day and (ii) to treat this ore in a new concentratorwith an annual output of 223,000 tons containing 252 copper and 5.5 oz. ofsilver per ton. In addition, industrial and social infrastructure was tobe built to support the project. The main objective of the Mine WaterTreatment Plant at Cerro de Pasco was to replace the existing cementationplant with a more efficient solvent extraction and electrowinning plant ofthe same capacity, which would produce refined copper in place of cementcopper and halt the contamination of the San Juan and Mantaro rivers.
2. At full capacity both project components will represent about 64%of the company's total contained copper output compared to only 34% beforethe expansion, and therefore comprise an important share of the company'sproduction and revenues. With total project costs estimated at aboutUS$260.3 million, of which US$39.7 came from the Bank and US$66.4 millionfrom the IDB, and revenues estimated to reach about 10% of CENTROMIN'sgross sales, b,th projects also play an important role in the company'sfuture.
II. PROJECT BACKGROUND
Project History
3. Plans for the modernization and expansion of CENTROMIN'soperations were originally formulated by the Cerro de Pasco Corporation,owner of the company before nationalization on January 1, 1974. With theformation of its own planning department in May 1974, CENTROMIN began tomodify and finalize a program to increase production of all major products(copper, silver, zinc, lead, gold and bismuth), improve productivity and toreduce environmental contamination. The company identified six projects asStage I of a long-term expansion program: Expansion of the Cobriza andCasapalca mines, the modernization and expansion of the coppersmelter/refinery, construction of a zinc refinery and a lead sinter plantat La Oroya, and the replacement of the copper cementation plant at Cerrode Pasco with a solvent extraction and electrovinning plant. Feasibilitystudies were prepared for all six projects.
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4. CENTROMIN requested the Bank to review the program and to assistin it 4inancing. Because of their high priority to the country, theiradvanced state of preparation and their self-contained nature, the Bankselected the Cobriza Mine Expansion and the Cerro de Pasco Mine WaterTreatment Plant for financingl/. For the Cobriza project a feasibilitystudy had been prepared in 1975 by the U.S. consultant firm Ralph Parsons.In 1974 a feasibility study for the Cerro de Pasco project was carried outby the U.S. engineering firm Holmes and Narver, Inc. The Bank appraisedthe projects in April/May 1975 and August 1975. The Bank loan (1281-PE)for US$40 million equivalent was signed on December 6, 1976 and becameeffective May 24, 1977. Basic engineering studies for Cobriza began onMarch 11, 1977, those of the Cerro de Pasco project on May 26, 1977.
Role of the Bank during Implementation
5. The Bank worked closely with CENTROMIN on the formulation of bothprojects. As a result of this work the scope of the Cobriza expansionproject was increased from 7,000 tons of ore per day to 10,000 tons per dayto realize optimal economy of scale and new investment capital costestimates were prepared. Due to shortage of Government funds which weresupposed to provide 57% of total project financing, implementation of theprojects slowed down in late 1977 and was suspended from January 1978 untilMay 1979. Overall, virtually two years were lost. However, explorationwork continued during this period showing that there were no economicallyviable reserves in the Pumagayoc area, from which ore was supposed to bemined for Cobriza's expansion. Thus, the basic engineering for the miningaspects of the project performed up to this point was no longer valid.After the reactivat ion of the engineering contracts a host of seriousmanagement and operational problems developed between CENTROMIN's internalproject administration and the expatriate project management group. TheBank attempted during its supervision missions and in special meetings toidentify solutions to those problems aimed at reducing further delays andcost overruns. Nevertheless, some of the problems remained and could notbe reso'ved. The most significant of these problems concerned the lack ofcoordination between CENTROMIN's project administration and the projectmanagei'ent group and detrimentally affected mine desigr., the constructionof the mine shaft and project scheduling. How CENTROMIN saw these problemsis described in their Project Completion Reports (see Annexes I and II).
III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PROJECT COMPLETIONREPORTS
6. In general, CENTROMIN has prepared good Project CompletionReports for the Cobriza Mine Expansion Project and for the Cerro de PascoMine Water Treatment Plant covering almost all aspects required under theBank's guidelines. However, a number of clarifications and comments arewarranted on the part of the Bank concerning (i) the ore reserve questionof Cobriza; (ii) the possibility of increasing Cobriza's mine output; (iii)the relationship between CENTROMIN and its project management consultants;(iv) CENTROMIN's capital cost estimates; and (v) technical, financial andenvironmental issues relating to the Mine Water Treatment Plant as follows.
1/ The other projects in the stage I program have also been completed withthe major exception of the copper circuit for the La Oroya refinery.
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Cobriza Ore Reserves
7. At the time of the Bank appraisal, ore reserves which were minedfor the old Cobriza plant in the Coris area were estimated to total about50 million tons with an average grade of 1.82 Cu and 5 oz. silver per tonof ore. At the proposed mining rate this ore deposit would have beensufficient for 14 years of operation. In addition, the ore deposit wasbelieved to extend across to the Pumagayoc area where scout drilling andgeological interpretation indicated another 60 million tons of possible oreof similar grade. Therefore, overall reserves were considered reasonablyassured for the proposed expansion with over 20 years of mill-feed oreavailable.
8. Additional geological exploration, however, has not only beenunable to confirm the earlier estimates but also found the mineralizationat Pumagayoc to be economically unattractive owing to its very small size,lower grade and costly development requirements. In addition, the oregrade in the Coris area had to be revised downward to an average grade ofabout 1.3Z Cu or about 72% of the grade estimated during the Bankappraisal. The higher ore grades and larger reserves originally estimatedresulted from the erroneous assumption that the deposits were of stratiformnature, i.e., extending consistently to the West, increasing in depth, andreaching across the Pumagayoc ridge. This misjudgment was made by allparties involved in project preparation on the basis of insufficientphysical evidence through adequate drilling necessary to at least interceptthe assumed mineralized extensions. Drilling exploration to this effectshould have been completed prior to the actual project implementation or bythe latest at the time work on Cobriza was reactivated in late 1979.However, both CENTROMIN and Project Management personnel remainedoptimistic and little concerned about detailed reserve identification sinceproject implementation itself required their fullest attention. As we nowknow, this proved to be an essential error. The lower ore grade hasrequired considerable modifications of the processing circuits andincreased reagent consumption, and thereby critically affects the financialviability of Cobriza due to the fact that processing facilities were sized,designed and constructed for ores with significantly higher copper content.
9. CENTROMIN has recently accelerated its efforts to discover otherhigher grade ore deposits in the area, but it appears doubtful whether thiswill improve the project's finances in the short to medium term because ofboth the usual risks associated with such exploration and the additionalinvestment and time required to study, develop, and start mining a newlarge mineral deposit. Nevertheless, existing general geological trendsindicate that over the longer term it appears likely that additionalreserves similiar to the ore presently mined could be delineated throughCENTROMIN's ongoing exploration efforts. These efforts are given highestpriority by the com3any since they are needed to ensure the long-termfuture of Cobriza. _/
2/ As of June 1985, CENTROMIN estimated that sufficient proven andprobable ore reserves remain for a minimum of ten year production withsignificant potential of an additional five years.
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Increase in Production Capacity
10. A more immediate solution to improving the economics of theCobriza project may be found in raising the utilization of installedfacilities at a higher than the planned rate. The existence of someover-capacity of several major processing components due to over-design,such as two extra mills, suggests that a production increase of about 20Xto 12,000 tons of ore per day could be achieved with relatively minorinvestment needed to remove some bottlenecks, such as expansion of thecrusher discharge system, and addition of pumps and flotation cells.CENTROMIN is presently studying this solution for possible implementationas soon as project start-up difficulties have been fully resolved. 3 /
II. At the time of the appraisal, CENTROMIN decided to expand itsconcentrating capacity at Cobriza by erecting a new plant and dismantlingthe existing concentrator which had been inaugurated only nine yearsbefore. The old plant was located on the side of the mountain and exposedto potential hazards from unstable slopes and local talus slides. For thisreason it was decided to shut down the old plant. Unfortunately, the newmuch costlier plant was established also on the side of a mountain whichmay be subject to the risk of similar slides although the slopes aresomewhat less steep and its base broader. In retrospect, it appears thatmore consideration should have been given to the tectonic conditions of thenew plant location. This knowledge together with the uncertainty of thereserves may have resulted in a more modest expansion based on theirexisting plant facilities and infrastructure.
Consultants for Cobriza
12. Although CENTROMIN had voiced concern during the Bank appraisalas to the Bank's requirement of retaining an expatriate project managementfirm to assist CENTROMIN in the implementation of the project, the companyagreed to it before Board presentation. Nevertheless, the actual selectionand participation of the expatriate project manager for the overallexecution of the Cobriza project became a highly controversial subject.CENTROMIN felt that it could better implement the project by itself, andwas not keen on contracting management services for this purpose. However,the Bank held that CENTROMIN's staff did not have sufficient projectexperience. The relationship between CENTROMIN's project administrationand the Project Manager became increasingly difficult and deteriorated tothe point where the parties did not talk to each other anymore.
13. There is little doubt that the project did suffer from thissituation. And in fact some main project components clearly show majordesign and operational difficulties resulting from inadequate engineeringand poor construction. 4/ Designwise, this situation is typicallyreflected by the apparently larger than needed milling section of the
3/ After further investigations, the borrower informed the Bank (seeBorrower's Comments in the Attachment) that this alternative ispresently difficult to implement because depressed copper prices andlimited ore reserves could hardly justify the required expansionexpenditures.
4/ Further details are provided in the Borrower's Comments (see Attachment).
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concentrator. Operationally, the tailings thickener, for example, had tobe abandoned due to leakage from major cracks resulting from settlementattributed to poor compaction. In addition, the mining component of theproject had to be executed by CENTROMIN itself, since according to thecompany several activities under the responsibility of the Project Manager,such as mine plans, technical input and support for shaft sinking, were notsatisfactory. CENTROMIN completed this work on its own although about 15months after project inauguration in May 1982. This delay reduced theaverage mine capacity by about 40% during this period. In light of theseproblems, the question can be raised as to whether the Bank should havemore positively considered CENTROMIN's request in April 1977 to retain awatch-dog- firm to monitor the performance of the Project Manager.
Capital Cost Adjustments of Cobriza Project
14. When the projects were reactivated in May 1979, the ProjectManagers substantially modified the earlier basic engineering, especiallywith respect to mine development, mine equipment, an additional mine shaft,hydraulic fill, a transmission line and a new ore transportation system,estimating capital costs in the order of US$260 million for Cobriza andUS$15.0 million for Cerro de Pasco. CENTROMIN decided, however, to keeptotal actual capital costs for the Cobriza Mine Expansion Project belowUS$240 million. This was achieved primarily by allocating only a minorportion of the required working capital to the project.
15. Since working capital was not directly assigned to the project,no exact information is available but on the basis of increases inconcentrate and supplies inventories and in accounts receivable,incremental working capital neads for Cobriza have been estimated at abo"tUS$14 million. 5/ Peruvian accounting procedures require that interestduring construction be capitalized up to the time when the project hasoperated for three full months at a minimum of 80% of rated plantcapacity. CENTROMIN anticipated that Cobriza would have met this test bythe end of 1983. Thus an additional US$7.7 million would be chargeable tothe project. These adjustments are shown in the following table:
Table IPERU - CENTROMIN EXPANSION PROJECT
Capital Costs(in USS millions)
Cobriza CENTROMIN AdjustedAppraisal Final FinalEstimate Estimate Estimate
Total Fixed Assets 121.9 188.6 188.6Working Capital 12.2 1.6 13.7Interest during Construction 26.8 42.7 42.7Total Project Financing i60.9 232.9 245.0
5/ Although Cobriza concentrates will replace to a certain extentpurchased concentrates to be used in the La Oroya smelter, the networking capital requirement of Cobriza is believed to be considerablyhigher due to longer throughput and higher mining and processing costs.
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Mine Water Treatment Plant
16. At the time of the appraisal, the main objectives of the projectwere to replace the existing cementation process with a solvent extractionand electrowinning plant that would neutralize discharges and effectivelyeliminate impurities. With the same production capacity but at lower coststhe plant was supposed to recover copper in refined form with a high gradeof 99.9% Cu instead of the -cement product containing only 60-70% Cu. Thenew operation would eliminate the flow of polluting discharges into the SanJuan and Mantaro rivers. These discharges, which took place over manyyears have been characterized as acidic, turbid and containing iron andother impurities. In addition, the old cementation process required scrapiron which was expected to become increasingly scarce in Peru. Thisassumption did, however, not materialize.
17. In terms of the project's pollution control objective, afterdetailed study the neutralization component of this project was eliminatedwith Bank approval in order to avoid cost overruns and was replaced bydischarging the effluents to a tailings pond instead of the San Juan andMantaro rivers. The full environmental impact of this short-term solutionchiefly depends on the balance of discharges to the pond and actualevaporation rates. This is presently under study. To this end, CENTRONINhas requested that the Bank send an envirormental specialist for a detailedreview of possible options for the long-term disposal of both all effluentsfrom the Cerro de Pasco mine waters and the proposed tailings disposal fromthe Cobriza concentrator. A Bank mission will be scheduled shortly.
18. The mine water treatment plant without the neutralizationcomponent was constructed within the original budget estimate of US$15.3million. Data is not available as to the savings CENTROMIN realized onaccount of the scope change. Full production has not yet been reached.Output during 1983 is estimated at about 5,200 tons of contained copperrepresenting about 86% of installed capacity. Full capacity output isexpected to be reached some time in 1984. 6/ The relatively long start-upperiod, since June 1981, resulted primaril7y from major electricaldifficulties with transformers and rectifiers which halted plant operationsover a period of five months while they were replaced. 7/ Contrary to theSAR assumption, the new plant did not succeed in lowering operating costs,but is expected to require approximately US$1.0 million more per year inreal terms in production costs compared to the old plant owing to higherelectricity costs and larger use of costlier reagents. However, thepresent plant produces refined copper which does not require furtherprocessing.
IV. FINANCIAL AND ECONOMIC PERFORMANCE
19. Since the financial section of CENTROMIN's PCR is limited toassumptions as to copper and silver prices and five-year projections of
61 As copper content in the mine waters decrease over the coming years, a2% reduction of copper production per year is expected.
7/ See Borrower's Comments in the Attachment.
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sales revenues and operating costs of each project, this section expands onessential financial and economic aspects relating to the Cobriza and Cerrode Pasco projects.
Metal Prices
20. Copper aad silver prices as forecast in the SAR are compared inthe following table (Table II) to the actual average prices for the period1977 to 1982 and to the current price projections for the period 1983 to±988.
Table IIPERU - CENTROMIN EXPANSION PROJECT
Copper ard Silver PricesAppraisal vs. Actual and Projected
a/ April 1984 EPD projections.b/ SAR Zambia Export Rehabilitation and Diversification Project.
21. The table shows that the actual price development of copperremained consistently well below the forecasts used in the SAR. For thesix year period, 1977-1982, the copper price in current terms averaged 76cents/lb. while the SAR had assumed an average of US$1.15/lb., i.e., a 50%higher price level. CENTROMIN's price projections for the next five yearsexceed those by the Bank by an average of 31%. In contrast, CENTROMIN'ssilver price projections appear reasonable over the longer term. Asproceeds from silver will amount to only about 6% of Cobriza's gross salesvalue, minor price variations of that metal are not very critical to theoverall picture.
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Financial Rate of Return
22. The SAR estimated the incremental before-tax returns in realterms for the Cobriza project at 15.2% and for the Cerro de Pasco MineWater Treatment Plant at 18.1%. On the basis of the project capital costsestimated as of September 1983 and estimates for (i) future operating costsas predicted by CENTROMIN and (ii) net revenues based on the range of WorldBank copper price projections, new cost and benefit streams have beenprepared for both projects.
23. On the basis of the range of the Bank's price projections therecalculation of the Cobriza project yields an incremental rate of returnbefore income taxes of between -10.5% and -8.5%, i.e., the anticipatedbenefits over the life of the mine and the plant are insufficient torecapture the initial capital costs, future asset replacement plus actualand future operating costs of the project. This very significant reductionin the financial outlook of the project stems primarily from thesubstantial capital cost overrun (about 62% over SAR estimate) and theconsiderably lower than expected copper price combined with markedly lowerthan expected copper grade (1.3% versus 1.8% assumed in the SAR resultingin only 170,000 tons of concentrate rather than the originally expected223,000 tons).
24. In order to offset the actual, lower ore grade and improve thefinancial performance of the Cobrixa project, CENTROMIN contemplates thepossibility of increasing ore produ,Lion by 20% to 12,000 tons per day (seeparas. 11 and 12). Assuming that the exploration program, which iscurrently underway, will prove sufficient reserves within a long-term timeframe, the increased production would generate about US$5.5 million inadditional net revenues per year and improve the incremental financial rateof return to +1.2%.
25. In view of these rate of returns, the question becomes relevantas to whether CENTROMIN would not be better off financially to close downCOBRIZA. To assess this option, the net cash flow after debt servicing ofkeeping COBRIZA operational have to be compared with the option ofabandoning the operation. All historic capital costs are considered sunkfor this purpose but interest and principal repayments of all relevantloans would be maintained as scheduled. The estimated effects on the restof CENTROMIN's operation is considered to be negligible since it is assumedthat it can expand its contract smelt'ng business to the extent ofCOBRIZA's production. It is very difficult to estimate the cost ofshutting the plant and to determine the exact write-off benefits.Nevertheless, our analysis indicates that keeping the operation going wouldover the period 1983-92 result in a rate of return of about 16%.
26. A similar conclusion can be reached using a differentmethodological approach as follows. Despite closing down Cobriza, loanservicing would have to be continued. On a per pound of produced copperbasis this amounts to 39t in 1983 terms. Since total cash costs for onepound of copper amounts to 115t (para. 28), a copper price of 76e/lb. in
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1983 terms would equal the options of abandoning versus continuedoperation. This price is very close to the Bank's price projections.
27. While scope changes of the Cerro de Pasco Mine Water TreatmentPlant allowed it to be completed at the original cost estimate (para. 18),the copper output of the plant is expected to be roughly the same as couldhave been expected if the old cement plant would have been retained.Deviating from CENTROHIN's PCR, for our analysis it was assumed that onlysufficient copper bearing solution for the annual production of 5,200 tonsof copper would be available compared to CENTROMIN's estimate of 6,000tpa. Contrary to the SAR assumption, the new plant did not succeed inlowering operating costs but is expected to require in 1983 termsapproximately US$1.0 million more per year primarily resulting from higherelectricity and reagent demand. Consequently, in addition to the totalcapital costs of US$15.3 million, higher operating costs and equalrevenues, the new plant cannot be expected to generate a positiveincremental cash flow in any of the 22 years of construction (7) andoperation (15).
Cobriza Production Costs
28. On a per pound basis direct operating costs for mining andconcentration8/ at full production (10,000 tpd) are estimated in 1983terms to amount to 46t/lb. Depreciation expenses add about 194/lb. andfinancial charges an average of about 21¢/lb. Assuming headquarteroverhead expenses applicable to Cobriza at about lOt/lb., the totalproduction cost of one pound contained copper ex La Oroya amount toapproximately US$0.96/lb. Taking account of sales commission,transportation, insurance, freight, smelting charges, export taxes, etc.,and of a by-product credit of 8¢/lb. a LME price of about US$1.16/lb. isnecessary to break-even. On a cash basis (including principal repayment),the break-even price amounts to approximately US$1.15/lb.
29. Despite this dismal picture, the new, large-scale Cobriza projecthas been successful in reducing direct operating costs by 40% compared tothe old installation. Thus, per short ton of ore mined, direct operatingcosts of the new facilities presently amount to US$9.64 (US$6.35 for miningand US$3.29 for concentration) in contrast to the US$16.30 (US$10.27 formining and US$6.03 for concentration) of the old installation. On thebasis of direct operating costs only, Cobriza ranks as the least costproducer of CENTROMIN's six mining centers.
Cobriza - Projected Income and Cash Generation
30. Cobriza is projected on the basis of the Bank's copper priceassumptions to incur an accumulated loss for tne period 1983-88 of aboutUS$20.4 million in current terms. During the same period Cobriza will havea cash deficit of USS40.1 million. Details are given in Table III. It
8/ Include direct mining costs and direct concentration costs but excluderefining costs, other charges (e.g., transportation, insurance,marketing, handling) and overhead expenses.
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should be noted that these projections do not include the cost foradditional financing required to cover the cash shortfalls. In addition,CENTROMIN does not include headquarter overhead expenses attributable toCobriza in the operating expenses. Consequently, only direct mining andconcentrating costs are covered.
31. The projections indicate that over the next few years Cobrizawill unfortunately not be in a position to alleviate CENTROMIN's alreadystrained financial position but rather will further burden the company'ssituation. Only from 1989 on, will Cobriza produce overall positive netincome and net cash surpluses. By then, copper prices are predicted togenerate net revenues in excess of operating and capital expenses. The newCerro de Pasco operation is too small to have any significant influence onCENTROMIN's total financial picture.
a/ Includes mining and concentration operating costs but excludesheadquarter overhead expense allocation.
b/ Bank projections: SAR Zambia Export Rehabilitation and DiversificationProject.
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CENTROMIN - Historical Financial Performance
32. Summary financial statements and their financial ratios for theperiod 1979-82 are presented in Table IV. The accounts reflect thecompany's deterioration of its financial position in 1981 and 1982, whichwas mainly due to the depressed international metal markets, a sharpincrease in borrowings to finance the company's heavy investment programand cash deficits and large foreign exchange losses resulting from soldevaluations.
PERU - CENTROMIN EXPANSION PROJECTSummary of Financial Position(Billion soles, current terms)
Current Ratio 1.64 1.27 1.16 0.90 0.37Long Term Debt/Equity Ratio 22:78 28:72 38:62 64:36 63:37
Financial Covenants
33. As a consequence of the worsening of CENTROMIN's financialposition from 1980 on, the company was unable to meet the financialcovenants relating to the financial ratios stipulated in the Loan Agreement(Sections 5.4, 5.5 and 5.6 of Loan 1281-PE). On December 1, 1982,CENTROMIN requested a waiver of these clauses for 1981 and 1982. However,in its latest long-term projections covering the period 1984-1987,CENTROMIN shows that it cannot meet the current ratio covenant (1.5 to 1)before the year 1986 and the debt/equity ratio (50:50) during any of theprojected years. If the accounts are expressed in US dollars, in whichCENTROMIN's products are primarily traded, the financial ratios wouldimprove markably. 9/ A summary of CENTROMIN's financial projections isgiven in Table V.
9/ See also Borrower's Comments in the Attachment.
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Table VPERU - CENTROMIN EXPANSION PROJECT
Summary of Financial Projections for Centromin(including Cobriza and Mine Water Treatment Plant)
(April 1983)(Billion soles, 1983 terms)
1984 1985 1986 1987
Net Revenues 1,187.9 2,175.6 2,844.0 3,700.3Operating Expenses 720.5 1,153.5 1.610.S 2,090.1Net Income (Loss) 72.8 280.8 329.0 450.9
Gross Margin, x b/ 39.4 47.0 43.4 43.5Operating Margin, Z 28.5 37.2 31.6 30.8Net Income/Revenues, Z 6.2 13.2 11.6 12.2
Current Ratio 1.12 1.49 1.86 2.46Long Term Debt/Equity Ratio 58:42 58:42 57:43 56:44
of After revaluation of assets.D/ Gross margin, % - (Net Revenues less Operating Expenses)
Net Revenues * 100
It must be emphasized that an even dimmer picture would emerge if thelatest World Bank copper price projections are applied (see Table II).
Economic Reevaluation
34. On the basis of the Bank's metal price projections the netforeign exchange surplus generated by Cobriza and Cerro de Pasco isestimated to gradually build .p to about US$45 million in 1982 real terms.No income tax and no dividends for the projects would accrue to thePeruvian Government before 1990. Fiscal revenues will result neverthelessfrom increased export and sales taxes, import duties and indirect benefits.
35. The necessary adjustments to the financial benefits are notsufficient to make the incremental economic rate of return for the projectspositive. The employment benefits from the projects are described indetail in CENTROMIN's PCR.
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V. CONCLUSIONS AND LESSONS TO BE LEARNED
36. After an over three year delay caused primarily by the economiccrisis in Peru beginning in 1977, both projects, the Cobriza Mine Expansionand the Agua de Mina plant in Cerro de Pasco, are now physically completeand in operation. Primarily due to the unresolved ore reserve question inCobriza and the less than expected volume of copper bearing mine water tobe treated in Cerro de Pasco, it is still very doubtful whether theprojects will achieve their full technical objectives over the originallyexpected project period. Because of the very high cost overruns of theCobriza mine expansion10 / together with the lower than antiripated oregrade, the project's economic objectives cannot be achieved unlessproduction is increased substantially, a much more attractive mineralizedarea is found in the near future, and/or the Bank assumptions as to futuremetal price development turn out to be too conservative, i.e. copper and/orsilver prices show a drastic upward swing.
37. The degree of uncertainty affecting the future of the projects isfurther heightened by the fact that Cobriza is located within an area ofpolitical instability. So far only limited terrorist activity occurredwith an outlying communication station having been destroyed.
38. Timely and proper project implementation and avoidance ofsignificant cost overruns can normally be controlled by the projectimplementing agency and its overseeing bodies. With respect to Cobriza,the country's economic crisis in the late Seventies played a dominantfactor in the almost two year project suspension. Furthermore, the successof all mining projects is greatly dependent on the exogeneous factor ofworld market prices for their products. Thus, the accurate estimation offuture metal prices for a mining project can reduce or altogether eliminatethe financial and economic success of a project as to the same or evenhigher extent as capital cost overruns or delays in project completion.When applying the original SAR copper price projections (see Table II) tothe actual capital expenditures and the latest projected sales andoperating cost estimates over the life of the Cobriza project, theincremental rate of return increases from negative 8.5-10.5 (see para. 23)to positive 5.4%. Thus, the price forecasting error between the appraisaland the current assumptions amounts to about 15 percentage points in thefinancial rate of return of the project.
39. At the time work resumed on the projects in May 1979, the Bankreviewed CENTROMIN's revised implementation schedule and capital costestimates. Although no formal reappraisal of the projects took place atthat time, tbe economic rate of return was reestimated for Cobriza at closeto 20% using the then latest Bank projections for copper prices. Moreover,CENTROMIN advised the Bank on February 26, 1979 that although its
10/ The borrower points out (see Borrower's Comments in the Attachment)that the final costs of the project should not be compared with theappraisal estimate but rather with the estimate arrived at as result ofthe revised basic engineering. On this basis, Cobriza was completedconsiderably under budget.
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exploration work in the Pumagayoc area could not prove out the expectedreserves, the size of the proven and potential ore reserves in th'- Corisarea would guarantee ample ore supply for the project. CENTROMIN's ProjectManagement endorsed the company's contention and also concluded that thechange in the area of the ore reserve did not justify a change in projectscope nor an increase in 'he overall project costs. The average ,radeestimate at that time was given at 1.77% copper and 0.5 ozs. silver per tonof ore, almost exactly what the SAR had indicated. The downward revisionof the copper grade took place much later. Consequently, on the basis ofthe then available information it was not warranted that the project bestopped and the incurred expenditures of US$13.8 million be written off.
40. Similarly, it could now be argued that it would be morebeneficial to shut down Cobriza rather than continuing its operation whileincurring large financial losses. CENTROMIN's management points out,however, that Cobriza is its lowest direct cost mining center and that itwould have to serve its debts in any case. With 81.3% of total projectcosts borrowed from external sources, continued operation enables thecompany to generate at least the foreign exchange portion of the projectedUS$124 million debt service over the next five years. If Cobriza were toclose today, its technical impact on the remaining CENTROMIN operationcould be reduced by increasing its custom smelting operation. As in thepast, the La Oroya smelter would then be available for an increased shareof custom concentrates produced by Peru's large number of small and medium-sized mines. These concentrates are presently shipped primarily to Japan.Consequently, in addition to its financial implications for the company theclosing of Cobriza would primarily eliminate most of the 650 direct jobs atthe mine and impact adversely on the transport and general services sectorsof the region.
41. CENTROMIN discusses in its PCR's the shortfalls of the projectsand provides suggestions as to improvements in several areas. They neednot be repeated here. There are a number of conclusions, however, whichcan be drawn by the Bank for consideration in future projects in the miningsector. In fact, most of these conclusions have been incorporated to avarious degree in the selection/appraisal and supervision process of theMiuing Division.
42. The main lesson to be learned affecting project identificationand appraisal is that feasibility studies have to be reviewed and assessedin depth with a more critical eye as to whether the goals of the projecthave been set realistically on the basis of the underlying assumptions.Specifically, in mining projects this would require a high level ofscrutiny of (i) the presented ore reserve data and its respectivegeological interpretation; (ii) the sizing of the proposed projects inlight of given ore reserves and technical, financial or other constraints;and (iii) the actual detail design proposals in order to avoid unwantedover-design or under-design of the various project components.
M12
- 15 -
Annex 1
PROJECT COMPLETION REPORT
LOAN 1281/PE
COBRIZA PROJECT
(PREPARED BY THE BORROWER)
AUGUST 1983
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1. MDENTIFICATION OF TIE PRtJECr, FEASIBILTTY AND PREFEASIBILIIY STUDIESLtteuS ra)j *.--TcT-an:7W -)
At the end of 1974, the Cobriza mine produced 1833 tons of grade 2.2%copper ore, and plans were laid at that time to expand the output to 7,&0k tonsof grade 1.6% copper on the assumption that reducing the grade of the ore to beextracted would make the mining operation more efficient and less selective thanat present.
The ore produced would be treated in the existing concentrator plant (2,0a0TPD) and in a new plant with an initial capacity of 5,000 TPD to be built in theCoris valley some 3 kmu from the present plant. The new concentrator would beconstructed in modules of 2,50O TPD each so that it could easily be expanded to7,500 or 10,000 TPD. The possibility of eventually closing the existing plantand centralizing concentration operations in Coris was considered. However,there was no discussion at that time about working the Cerro Pumagayoc or Level10 of the Cerro de Coris (Cobriza Mine), alternatives that have been discussedonly since 1975 and 1978, respectively, after the findings from studies on thoseoperations '4ere in.
The expansion project included a tailings dump in the Coris valley (toserve both plants) and the construction of the housing and services required.The electric power needed would be obtained from the Mantaro Hydroelectric PowerPlant.
The investment required was estimated at that time to be aboutUS$42 million, to be disbursed between 1975 and 1978, when the expansion wouldbe placed in operation.
The feasibility study made by consultants at the beginning of 1975 defined
the following parameters:
- Operation at an average of 7,000 TPD.
- Construction of the new 7,000 TPD concentrator in la Pampa de Corts,using sone of the equiptent and materials from the existingconcentrator.
- Construction of an access tunnel to the Pampa de Coris, crossing theCerro Pumagayoc, which would help to evaluate the potential reservesin the area.
- Alluvial material taken from the slopes of the adjacent area wouldcontinue to be used for mine fill, leaving for later the analysis ofthe a'lternative of using part of the tailings as hydraulic filL
- Irstallation of a tailings thickener to recover industrial water inthe annual periods of fresh water shortage.
- The tailinqs would be dumped directly in Mantaro, with plans for latertimiting that activity by setting up a tailings dump in tile area ofBanos de Coris.
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The auxiliary services, management, housing and welfare facilities
would remain at their present location, and would be expanded asneeded.
- The project would begin in mid-1975 and would end in mid-1978. The
amount of investment required would be USS67.6 million, and theinternal rate of return on the investment, considering the costs andincome differentials over the existing operation, would be about 5.6%,including tax deductions.
Later, negotiations began with the World Bank and the Inter-American Bankto finance the project, and in order to improve its profitability, it wasexpanded to lk,woo TPD, based on the potential reserves of the deposit locatedboth in cerro Coris and in Cerro Pumagayoc. With the aid of World Bankspecialists, a new investment estimate was prepared, which increased it toUS$160.9 million, including preoperation financing charges and a substantialescalation and contingencies reserve.
The Bank's aid made it possible for the loan contract to be signed on
December 6, 1976, that is, the negotiations lasted only a little over a year,and the basic engineering studies began imzuediately since the managementcontract for the project was signed on March 11, 1 7.
II. PROJECT IMPLEMENTATION AND MANaGEMENT
a). Scop of the Project
(1) Based on the need for selective mining if the 2,600 TPD ratewas continued, the proven-probable reserves, the greatpotential of the mine, and the economic feasibility of theexpansion, Centromin decided to expand the mine, concentratorand auxiliary facilities in order to operate it at the optimallevel of production, which at the time of the evaluations wasfound to be 10,000 TPD. That expansion would make it possibleboth to make better use of the Cobriza mining resources withoutlowering costs and to produce concentrates at a rate consistentwith the mine's reserves and potenti.z10
To that end, a consulting firm was hired to conductthe feasibility study for the project. The studyfindings led to the adoption of the most appropriate
alternative for implementing the project, which primarilyconsisted of:
Mine Development and Preparation: Improve the mine system byconstructing galleries, cross cuts, sublevels, chimneys, andramps at the various levels of opreration to expedite oreextraction and hauling.
To that end, the project called for the purchase of largecapacity LHD mining equipment such as Scooptrams, hydraulicdrllls, low profile trucks, raise borers, etc.
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The proposed mining system is a modification of the currentsystem, with the major change being the almost vertical boringsystem, which will take it possible to have the entire lengthof the stope bored, imaprove the cycles within the stope andeliminate lost tirte owing to transfer of equipment. The oreextracted fro. the mine will be hauled to the concentratorplant by electric locomotives or waine cars.
Ore will be transported from the levels below level 28 throughlevel 10 and from there will be hoisted to the nain extractionlevel (level 10) by a 220 m shaft.
Concentrator Plant: The ore processing plant consists of: aprimary stone crushing plant, a 5,X00 tons storage area forcoarse stone, a fine crushed stone plant and closed circuitclassification, and a 5,g00 tons capacity storage area forfines; The grinding plant, consisting of two grinding circuits(primary and secondary), the flotation plant withconventional rougher scavenger and cleaning circuits. A twoline giratory circuit, with thickener and filtering sections,Is included.
The concentrator plant will have a capacity of 10,000 tons/pd.
Urban Area: The project has built an urban complex of 450multifanmily buildings. The complex includes such communityfacilities as a civic center, schools, medical posts, shoppingcenter and recreational areas. It occupies about 11 ha locatedadjacent to the concentrator plant in the esplanade of Pawupa deCoris.
- Mantaro-Cobriza Transmission Line: The present thermal energyplant in Cobriza has been replaced by the Mantaro HydroelectricPlant of Electro Peru. The power will be transmitted by a 69K' high-voltage line approxirately 55 km long.
- Auxiliary Services: The project has installed auxiliaryservices like: water supply, warehouses, repair andmaintenance shops, internal comlaunications system, electricalsubstations and the transmission line from Pampa de Coris tothe mine. It has also built a concentrate transfer station inthe town of Huayucachi 10 km from Huancayo.
(ii) After the project was suspended in January 1978, it wasreactivated in May 1979, at which time the location of the oreextraction was changed. The project originally called forextracting ore from Pumagayoc and Cobriza. The change meantthat ore would be extracted only from Cobriza, which at thattime was in production, although on a reduced scale. Thischange resultea from the discovery of additional ore reservesin the Cobriza area, while studies of the Punmagayoc area hadfound lower grade ore. Reactivating the mine was mutuallyagreed upon by the top level management of Centrorin Peru andthe project managers.
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b) Project anagement
(i) To manage the project, Centromin Peru hired a foreign Soumpanvassociated with a national consulting firm. Under thiscontract, the managers were responsible for implementing theproject plan, organize, direct, coordinate and control allact vities involved in the mine expansion and in theconstruction process, and install and operate auxiliaryfacilities and the concentrator plant until reaching standardoperations.
For all project business, Centromin Peru is represented by theproject administration, working in coordination with themanagers and supervising all aspects of compliance with theproject management contract. In addition to representing theowner, the administration was in charge of planning,development and construction of the following areas: the urbanhousing complex, the Mantaro-Cobriza high-voltage transmissionline, and the hydraulic fill plant, as well as mine planning.
(ii) During the project, the project administration worked closelywith the managers and third parties. Under the direction o3fdhe managers, Centromin Peru hired specialized companies toperform the detailed engineering, arranged for purchase ofequipa.ent and material through international calls for bids,,and contracted for earth movement, and civil, electromechanicaland mine development works, all supervised by the managers. Itwas also necessary to hire specialized firms to solve problemsthat occurred during the project. Aid was also obtained fromtechnical representatives of the equipment suppliers. Ingeneral, they all provided aid as required.
(iii) Management services were not satisfactory throughout theproject, because a number of problems occurred in variousstages of implementation. This was particularly true of basicengineering and as a result detailed engineering, becauseneither an adequate mine development plan nor a suitableproject control system were prepared. Consequently, thetechnology employed was inappropriate for the characteristicsof the project, and this situation was made worse bycontinually having to replace key personnel assigned to theproject.
Because of the terms of the contract with the managers, the CMP-had to rely aluost entirely on their managerial ability andtheir responsibility for the work perfor.iied, which preventedthe ChP fronm taking over sufficiently in advance the managers'corntractual functions, which the financing agencies wereinformed about in the coordination and evaluation meetings heldwith IDa and ISWD officials. The pragmatic solution to theseproblems would have been to rescind the contract, and hire anoutside consultant.
1/ CMP: CentromIn Peru
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(Iv) In its original conception, the project was reported to theWorld Bank through a prefeasibility study drawn up bya consulting firm, in cooperation with the CMP.
Based on the prefeasibility study and the contract with theproject managers, the US$40 million IBRD loan was extended forprojects to expand thse Cobriza mine and concentrator and themine water treatment plant. That amount was maintained duringimplementation of both projects.
After reactivating the Cobriza project, the World Bank requiredfrom the managers and the CmP periodic information on thestatus of the project. This was provided in a monthly progressreport by the managers and a quarterly report by the CMPProjects Execution Division, which reported to the l1RD and tothe IDB on the most important agreements, progress,modifications or variations in the original plan and in thefinancing structure, among others.
The CtP maintained close relationship with the managers,consultants, technicians and contractors that took part in theproject, in order to achieve satisfactory solutions to theproblems of conceptual changes in the design, technicalspecifications, programming system and progress control, thecontrol system for costs and commitments, the disbursementschedule, and changes in the financial structure, which werereported to the financial institutions at the proper time.
In light of the difficulties that occurred because of themanagers' unsatisfactory performance, which resulted in delaysand consequently higher implementation costs for the project,in addition to nonperformance of the contract for thedevelopment program anc preparation of the mine, which had tobe taken over by the CMP, it is of crucial importance for theCMP to be informed, in order to evaluate the project, of theresults of the IBRD and IDB evaluation of the services providedby the project managers.
C) Performance of the Consulting Foreign Firms
(i) Through the managers, Centromin Peru hired several consultingfirms. The detailed design engineering for the productionshaft was performed by engineering consultants, whose workwas regarded as satisfactory by Cantromin Peru.
The detailed engineering throughout the project was performedby local engineering consultants, under the directsupervision of the managers. It was necessary to hire soilspecialists to prevent cave-in of the thickener wastes. Ingeneral, the consultants. satisfactorily met Centromin Peru'srequirements.
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In the construction stage, technical aid for Installation
and/or assembly of the main equipment was provided at planttestiny and start-up by consulting firm experts, who gaveinstruction and training to the operating staff
d) Perforr-ance of the Suppliers
{i) In general, the quality of service of most suppliers was abovethe acceptable average. While some of them did not meetdelivery schedules, these delays were mainly due toconsultations by the managers. In other cases, delays werecaused by transportation strikes and tie-ups, and in a fewinstances, they were the fault of the manufacturers, in whichcase the penalties stipulated in the purchase orders were
The project administration assistants visited the suppliers andfound that manufacture and quality of the equipment purchasedwas satisfactory. In addition, it was determined that mostfirms maintain an adequate stock of repair parts.
In summary, the suppliers, with some exceptions, met ourrequirements. Delays in equipment delivery did not in generalresult in significant delays in the project execution program.
;ii) Problems or limitations in the suppliers' meeting our orderswere mostly due to administrative and organization problems, asin the case of one supplier, where changes in the personnelinitially assigned to fill our purchase order caused technicaldelays affected delivery times.
Another reason was that some suppliers offered a project forworking c,nditions different from our requirements. Thissituation could have been avoided by more effective andintensive follow-up by the managers.
(ii3) Examples are the following: Some suppliers did not provideantislipping controls and turbo-charger on the engines;other suppliers provided wrong shaft tubing; locomotivesreceived were unsuitable for the installed unloading system;spare parts were not provided by some firms and there weredefects in the pulley desigas of others.
(iv) Perfornance of the Contractors
In evaluating the contractors' proposals, it was noted that,despite doubts about the capabilities and/or performance of thelow bid company, quantifying the comipany's perforr.mance comparedto other proposals was difficult and subjective. So somecompanies that won the bid did not satisfactorily carry outtheir contracts, and this delayed the implementation ot theproject.
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e) Loqistics
(1) Purchases had to comply with the lending institutions! biddingrules on the purchase order amounts.
The managers handled purchases abroad, while purchases in Limawere handled by Centromin Peru. The managers' responsibilityfor local purchiases endea with delivery of the approvedrequisition. The following logistics management stages werehandled by the CMP, except for the receipt of materials in thefield, and later disti-ibtion to the contractors, which washandled efficiently at the warehouse.
Similarly, materials and equipment purchased abroad werecleared through customs and hauled to the field under CMPsupervision. Here the uanagers merely coordinated the follow-UP.S
(ii) The Bank's regulations only caused difficulties wben suppliersthat won the bid were from countries not eligible under thelending institution's rules. In addition, the rigidity andstrictness of general purchase terms and conditions caused somesuppliers to refrain from making bids. moreover, the 15%preference margin for local suppliers did not enable localfirms to win the bid, so most bids were won by foreign firms.
In general, the regulations followed made it possible forpurchases to be entirely flexible.
(iii) There were really no reasons for blaming suppliers for delaysduring the project.
(iv) Although the company has undoubtedly standardized certainequipment, international bids made it possible to expand ourlist of suppliers and obtain the specified equipment andmaterials of the proper quality, on time and at the lowestprice.
f) Implementation of the Program
(i) Before and during construction of the works, Centromin Peruimposed strict controls over the work programs in each area tominiaize possible defects in implementation. (Table 1).
In the construction projects, bonuses and penalties werestilulated to encourage better performance and progress of theworks.
(ii) Table A summarizes the project of the Cobriza Expansion Projectin May 1983.
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(ili-jY)
The main reasons for progress and/or delay are as follows:
Progress:
Civil works and electromechanical assembly (EC-8 and EC-13):
The- mechanical works of the concentrator plant were completedone and a half months early because of implementing the
accelerated construction program submitted in 198L
Delays:
Extraction shaft (EC-23): The delay in starting this work was
due to management negligence, and underestimating the period ofexecution, in addition to excavation problems caused by water
and terrain difficulties. Problems with the contractorowing to both his internal problems and work difficulties,have caused the mechanical completion of the shaft to berescheduled for August 1983. Because of this, severalagreements were concluded to solve the field problemsexisting at the start of the work.
Mine services (EC-37): This contract Was terminated andis being liquidated. Because of the late start,technical-financial deficiencies, and the inexperiencedemonstrated by the contractor, this contract was cancelled andthe work was taken over directly by Centromin Peru.
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STRETC OUT OF CO8RIZA PRCJIECr ACTrVITIES FROM THE ORIGINAL IBRD SCHEDULE
- The actual date of signature of the contract with the project managersis May 26, 1977, which is two years after the date originally programmed bythe Bank.
- The se-vices of the project managers were suspended from February 10, 1978, toMay. 22, 1979, because of lack of sources of ftinancIng.
- For the above reasons, detailed engineering services began on November 1,1979, and were completed on December 30, 1981L
- Because of the above delays, the plant's mechanical work was notcoapleted until May 29, 1982, despite the CmP's development andimplemention of a crash program.
- Procurement and civil works began in 1980 and were completed in May 1982.
- 1Mine development and services began in 1980. Work has continued to dateand is expectea to be completed by late-Septer-aber 1983. The delay inthe mine preparation and development activities scheduled by the managersis due to the inefficiency of the project managers, and its failure to meetits work schedule, particularly the minr development works (this work wastaken over directly by CENTROMIN.
- The Mantaro-Cobriza electric power line was completed in May 1981, with aslight delay because of slippage in the supply of substation equipment.
- Mine development continues under way, and design capacity is expected to bereached when the production shaft is completedL
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TABLE A
SUtM1Y PROGRESS CHART
MAY 1983
THIS REPORT
TARGET
Project Procure- Construc- Mine Urban 69 RV MCEng.&Adm. ment tion Devel Center Trans.Line Total
70 -
107
Percent.of TotalProject 16 32 24 17 6 5 100
Project Engineering and Administration continues to be under the CMPAdministration.
Procurement: Some purchase orders, mainly for mine equipment, are perIng.
Construction: Awaiting only the tailings thickener.
Mine Development: Will be completed in October 1983, according to the CMPP-Cobriza operations time schedule.
Nine Planning: Because of deficiencies and delays in the mine planningsublmitted by the amanagers, the cortapany had to intervene in preparing Itwhen this activity was already in a critical phase. This caused delaysin start-up of the development work and preparation of the mine, so thatthese works had to be taken over by Centromin Peru. In aodition, thecontractor, did not meet contract deadlines.
Tailings thickener: The design and supervision of the thickener workswere entirely the responsibility of the managers. Because of groundfaults, bad compacting and design errors, the structure collapsed twice.For that reason, the CMP decided on another system for water supply, andabandoned the thickener system. The new system involves pumping waterfrom the mantaro river and is fully under way. Legal action has beentaken against the firuas responsible for the problems.
Table B lists the contractors and shows the contractual and actualcompletion date, comments on progress, delays, penalties and incentives.
TABLE BCOBRIZA EXPANSION PROJECT
STATUS OF MAIN CONTRACTSAs of Hay 31, 1983
Actual Contract Extension ActjalCONTRACT start-up completion of delivery cnmpletion AMOUNTNo. Date DESCRIPTION date date deadllne date Bonus Penalt) COMMENTSEC-1 12/19/79 Fxcavations and 01/09/80 05/28/80 07/27/80 10/14/80 No penalty forexplorations
transactionarrangement
EC-2 03/26/80 Mine Development 04/15/80 01/31/82 02/28/82 Under vay, to becompleted in Juce1983
EC-3 06/26/80 Production of aggregate 07/18/80 12/31/81 --- 11/30/81 Completedand cement blocks
EC-5 01/02/80 Development of detailed 02/04/80 08/04/82 07/31/82engineering
EC-7 09/26/80 69 KV Mantaro-Cobriza Lines 11/03/82 09/03/81 01/03/82 02/04/82 4,412,870 32-day delayEC-8 07122/80 CIvil construction 08/01/80 05/10/82 --- 11/30/81 123,704,098 130 days early01/15/82 --- 12/02/81 15 days early05/07/82 --- 12/31/81 127 days early05/30/82 --- 12/31/81 50 days earlyEC-1O 04/18/80 Construction of 8 type 04/18/80 09/15/80 10/30/80 12/22/80 --- 1,466,438 52 days delay,2/3 buildings, uncompleted 01/17/80 --- 2,932,877 receipt 3 bldga.
78 days delay,receipt 4 bldgs.
EC-IOA 09/15/80 Completion of one type 2/3 09116/80 11/15/80 - - 01/31/81 509,295 76 days delayC-23 building
2,413,680 Penalties ImposedEC-46 04/30/81 Urban equipment 05/01/81 01/25/82 03/02/82 U3/ot/82 2,858,960 for not meeting
assigned quota.EC-50 12/07/81 Construction housing and 12/07/81 08/04/82 Taken over by the
annexes CMiP, will be
delivered InJune 1983.
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g) Cost of Capital, Financing and Disbursement
(i) Table 2 shows, by investment category, the original, actual andforecast cost, in both local and foreign currency.
(ii) The cost of the projects, partially finance by the World Bankin 1976, was US$176.2 million, of which US$160.9 million wentto the Cobriza Project and US$15.3 million went to the mineWater Project.
After a suspension of about 16 months because of financiproblems in the project for expanding the Cobriza mine aconcentrator, the Peruvian government, the internationalfinancing agencies and the company itself took a number ofactions and decisions to enable the project to be resumed.
In fact, after exhaustive studies to determine the amount ofinvestment, taking into consideration among other factors
1) cost increases because of the time elapsed,2) addition of required project items that had been omitted
in the original study,3) and complete maintenance of the concentrator plant in Pampa
de Coris,
in April 1979, the investment was adjusted, since the projectwas to resume by July 1, 1979. The project estimate at thattime was US$181.3 million, a figure used for the economicanalyses. The breakdown for this amount is shown in a table.
In December 1979, the managers prepared and submitted toCentromin a new investment budget of USS240,661,000. This newestimate was substantially increased over the one drawn up inApril 1979, mainly because of:
-- Revision of the mining plan.-- Escalation during the months the project was suspended, which
was reflected in a considerable increase in the equipment,materials and spare parts to be purchased abroad.
- Variation in the exchange rate of national currency againstforeign currency, because of the high local inflationforecasted for the project execution period.
AS is usual in investAment projects of this size, the kanagersreadjusted the estimate monthly according to the direct costtren2s, but without substantial variations, except for theestimate submlitted in November 1980 to the CMP, which wasexhaustively reviewed by the GEP and cut from US$277,U53,00W toUS$261,242,000 in March 1981. Later, at the suggestion of theC-EP, closer participation in u-pdating the estimated-costs forproject completion was established, which made it possible tocut the budget submitted by tne managers to US$240 million.This forecast was estimated based on the CMP commitments as ofmay 31, 1983, which amounted to US$222.98 million.
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TABLA No. 2
COBRIZA MINE EXPANSION PROJECT
PROJECT COMPLETION REPORT
EXPENDITURES & COMMITMENT
OUM$ Milrlons)
Appraial Estimate Actual *LOC211 Foreign Total Local. Foreign TToal Local |rig Tatal
(iiL) To cut the cost increases resulting from the programmingprepared by the managers, which scheduled the mechanicalcompletion of the plant in Novenmber 1982, the CentrominDepartment of Project Execution prepared and implemented acrash program and offered financial incentives to thecontractors to advance the completion dates of civilconstruction and electrozaechanical assembly. This made itpossible to complete those works before the date set in thecrash prograu (June 1983).
The congruence of these factors and the establishment of properbudget control by the GEP, through analysis, review and directparticipation in the periodic updating of tbe forecast finalcost for completion of the project, made it possible to cutproject costs substantially. As mentioned in the aboveparagraph, this reduced the budget submitted by the managers inNovember 1980 from US$277 million to US$259 million in thefirst revision, a figure that was succe,sively adjusted throughthe cost control procedures pre-established by the GEP.
In addition, Centronin Peru used its own resources to designand execute the hydraulic fill system, redesigned the miningplan, and constructed the railways throughout the mine. Inaddition, it hired local engineering services for the detaileddesign of several industrial buildings, such as surface andunderground workshops, locomotive workshops, painting and tiresshop, and so on, which made it possible to begin constructionof them before the scheduled time.
moreover, when it was found that the project management was notentirely satisfactory because of the characteristics of theproject and because qualified personnel was not available,especially for rine discipline, and taking into considerationthat a cost plus contract had been concluded with them, whichbecause of its characteristics would increase the expectedfinal cost, the demobilization of the management staff wasrescheduled so that it would take place as soon as possible.
(iv) Comparismn between the original and actual financing plans
The original financing plan estiraated the total investment ofUS$176.2 million, of which US$160.9 million was for the CobrizaMine Project and US$15.3 million went to the Mine Water PlantProject. These amounts are covered with funds from the IBRD,IDB and COFIDE loans, and the project's own funds (See Table3.3).
In implementing both projects, it was found necessary to makesubstantial chanyes in the financing plan, mainly because ofcost overruns, especially for Cobriza, and the sizeablereduction in the COFIDE loan from US$99.8 million to US$5.4million. The resulting financing gap brought the Cobrizaproject to a halt early in 1978.
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Because of the increased fund requirements, Centromin Peru,after gettlng the authorization required, arranged foradditional loans in foreign and local currency and forcontributions from the federal government through directsuRport and support for capitalization of taxes and through IDBloans (48/XC-PE) and (352/OC-PE). The latter loans became partof the company's capitaL In addition, the disbursementdeadlines for the IBRD and the IDB loans were expanded fromfour to six years for horld Bank loans and from four and a halfto six and a half years for the IDB loan.
Table 3.3 shows the current financing plan for both projects.Table 3.4 shows the characteristics of the loans extended forparticipation in financing both projects.
(v) System for management of financial resources
The system used to manage the financial resources provided bythe World Bank takes into consideration the two opposingcurrents represented by the agencies providing and using thosefunds. In this connection, the project management negotiatedthe form of payment with suppliers, and the procedure adopt.edwas to make payrient for goods and/or services againstsubmission of documents, letters of credit, etc. Havingdefined these conditions, they were reported to the financingagency concerned to request payuent through disbursements(direct andor reimbursement) or to request guarantees ofreimbursement for letters of credit.
In most commitments, bridge loans have been used for timelydisbursement of the arount due the supplier, and these amountshave been paid with the reimXbursement from the financial agencyof the project. While this system raised the project's costs,the increases were justified by the discounts received, and forthat reason, incurred costs were lower. In addition, this madeearly delivery of the equipment purchased possible, which wasof great importance in implementing the project.
Letters of credit were used when required, and commitments weremade from the time credit was opened with the financing agency,as established.
In handling financing from the IDB, the above-mentioned systemwas employed, and advance payment for future expenditures weremade, which substantially lowered the aaount of the bridgeloans required.
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Freely available credits were used as required (expenditures inlocal currency), and the same was true for buyers credits(Swiss loans in the Cobriza project), in which the u&ode ofpayment was defined when the loan was extenled.
In addition Peruvian Government funds were used to cover localcosts, particularly customs duties and income taxes onflfidomiciled firms, for which notes were employed as the formof contribution.
(vi) The disbursement programs of the World Bank loans were alteredsubstantially because of changes in the execution program ofboth projects. For the Cobriza project, this shift becamesubstantial, because of the approximately one and a half yearsuspension of this project from early 1978.
Based on the foregoing, extension of the loan disbursementperiod to 31 December 1982 was negotiated (the original datewas 31 December 1980).
The loan disbursement program coincided with the progress ofthe projects, and the largest disbursement for Cobriza was inthe second half of 1980 up to the end of 1981 and in the MineWater Project from the start of 1979 to the second half of 1980(see Table 3.1).
The amounts budgeted by category varied with the actual fundrequirements for specific categories, due mainly to highercosts for the project!s goods and/or services, and the terms ofthe additional loans extended, particularly regarding thenationality of goods purchased. The latter compronmised theamounts of certain equipment with some financial resources.
The pari-passu percentage financed was maintained throughoutthe project, as originally established (see Table 3.2).
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TABLE 3.1
PERU: CENTROMIN EXPANSION PROJECT
PROJECT COMPLETION REPORT
DISBURSEMENTS OF BANK LOAN
(USS Milliors)
BANK FISCAL APPRAISAL ESTIMATE ACTUALYEAR AND QUARTER DISBURSEMENT CUMULATIVE DISBURSEMENT CUMULATIVE
(1) The contribution of the credit for the originally agreed upon amountof US$99.8 millior.
(2) Loan extended in national currency for S/. 9.46 billion(US$14.5 million equivalent).
(3) The Peruvian Government's contribution of SI. 9 billion, of whichS/. 3.1 billion was a direct contribution and SI. 5.9 billion was usedfor capitalization of taxes.
.oANS FINANCING TERHS Table 3.4
Grace UsefulAmotint Interest Additional Commitment Guarantee Period Life Contract
LENDER ('000 1tI Rate Rate Commission Commieion (Year) (Year) Date
(*) The contractual disbusement deadline was amended on 21 Sept. 79.(1) Deadlines were changed on 31 Hay 79.(2) Participants in financing 42.52 of capital goods and/or services of the Cobriza project. G(3) Was changed to 10.75Z as of 15 Dec. 82.(4) Financing of the Cobriza project and others.(5) 1.125% for the first 36 months.(6) .3752 for the first 18 months on 802 of the balance of the unutilized loan.(7) Financing of 852 of capital goods and services of Swedish origin (includes other projects).(8) For unutilized balances from acceptance of the SEB of delivery contracts.(9) Flat comnission - 0.52 management coumission and 2.5% credit insurance comLassion.(10) Repayment in ten biannual quotas, beginning with the equipment delivery date.(11) Starting with the effective date of the first disbursement.(12) Was changed to 32 starting December 1982.
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(vii) Problems in the world Bank's Disbursement Procedures
Several problems have been found in the IIRDs loandisbursement procedures regarding the timing of disbursements.
Specifically, some disbursement requests were only partiallymet, apparently because purchase orders and/or exchange orderswere not submitted or because bidding documents were notapproved, so that receipt of the amount requested was delayed.
In addition, confirmation of disbursenents has been receivedafter their effective date, which prevented the net amountsavailable in the project's account from being known.
we believe that these problems can be solved in time if thereis better coordination between the areas involved, andregarding the problem in the previous paragraph, the borrowersbould be informed by telex of the tiue of each disbursement.These measures will enable funds to be obtained on time, andtherefore, to reduce the gap between submission of thedisbursement request and confirmation of it. There is oneaspect of this subject that deserves special attention, andthat is the length of processing of a disbursement request.The problem begins with the inappropriate rethod of resissionby maiL. On average, a disbursement takes 40 days from thetime the request is sent. This has caused bridge funds to bepreferred for paying suppliers, and these funds were laterreimbursed by the bank.
on the other hand, we recognize that the disbursement systemhas produced good results where there has been appropriatecoordination.
(viii) Performance of other lenders
Commercial loans extended to finance the projects have beenfreely available and have required a simpLt disbursementprocedure. Therefore, the more complicated requirements fordisbursement requests, such as the World Bank procedures, andto a considerable extent those of the IDB and EXIfBANK, wereeliminated. However, EXIMBANK deserves special mention becauseof the rigidity and more complicated requirements of itsprocedures, which has caused delays in receipt ofcisburseu-ents. rhe timeliness of disbursement by the financingagency has been the difficulty encountered with this type ofcredit.
In addition, the reduction in the amount of the COFIDE loancaused a substantial change in the projects' financing plan.This reduction was brought about by Perus difficult economicand financial situation in 1977-78, when the government wasforced to cut its capital contributions to COFIDE and thatagency had to decrease its contributions of funds earmarked forimplementing project
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After this situation, a loan in national currency was agreedupon with COFXDE for US$14.5 million equivalent, which has notbeen entirely disbursed because of that agency's liquiditylimitations.
It should also be mentioned that, while the World Bank grantedan extension in the loan disbursement deadline because theproject coiqpletion date was deferrec, the bank did not grant anextension for starting the repayment period, or in any case, areduction in the amount of initial amortization payments, sincethe loan had not been entirely disbursed. This caused anadditional cost, which Centrorain Peru had to cover.
(ix) Table 4 shows the disbursement schedule for 1976-83.
II$. OPERATIONS PERFOHMANCE
a) Plant Tests and Star
(1) The major problems encountered in the plant startup were asfollows: the electric locomotives bad to be modified to passthrough the loading station of the bottom dump cars. The lowcapacity of the hopper under the crusher did not permitcontinuous unloading of the mine cars if the ore contained theusual amount of fines, so that cars had to be unloadedIntermittently instead of continuously. The delays indeveloping and working the mine shaft prevented Centromin Perufrom extracting the ore below level 2&8 As a result, mineproduction is not up to design capacity because only the stopesabove level 28 can be worked. A large amount of fines dustoriginating in the storage zone has caused the electricsubstation equipment to malfunction.
Large breaks occurred in the concrete cone slap of the tailingsthickener because of subsidence under the structure.
(ii) one problem in the plant startup, the modification of thelocortotives, caused a delay of about one monti. However, theproblem has now been entirely solved. In the primary crushingsystem, the problem still fiersists, so that ore has to behauled in three sh.ifts to make up for the time lost inunloading the trains. A claim has been made against themanagers who are responsible for designing the primary crushingsystem, and the performance bond is Deing executed.
The ore from the level 10 stopes cannot be extracted at thistire because the mine shaft and its installations are not yetready. This means that the amount of ore needed to reach thedesiyn capacity of the concentrator plant cannot be extractedyet. Starting July 9, 1983, the CNtP will impose a contractualpenalty on the contractor which performed the work.
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COBRIZA NINE EXPANSION PROJECT
PROJECT COMPLETION REPORT
CAPITAL COST DISBURSEMENTSCHEOULE'
* I~~US Miom
Appraisal Estimate Acimd Toa.ig Local Totw Fl o gn Loeal Totil Acmm_ed
1976 7.588 7.712 15.300 - - _
1977 18797 19.103 37.900 3.102 3.153 6255 6.
=78 2635 26.865 53.300 3.051 3.101 6.152 1237
979 299 25.101 49800 456 ' 4 8a2 2OS0
1980 22Bt 2319 4.600 21.144 21.489 42.6I 63*2
1981 _- - 1vim77 61.859 79.J36 143.38
1982 _ _ - 32.831 35672 6850 211tl
JaqflIIay/83 _ _ - 7 3.tS4 T1121 2221I
ConelIjatomAccounts - _ 452 2.567 12019 235m0
hn~~ecI_ - _ 1.080 3.920 5.000 240JOO0
TOTAL 79.800 81.100 160.900 100.759 139.241 240.000
S*d upon final forecast of S240.000 MM.lIluu financial chargs up to May 1983
Appraisal frrm concillration between CMVs and DMK's costs registered.Tbee quantities hav already been expended but not regired correctly yet
4'e IA
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Pollution in the fines storage area continues to causemalfunctions in the adjacent substation, which has compelledCentroauin Peru to install a pressurization and air conditioningsystem.
The tailings thickener cannot be used because of the serioussettlement that occurred during its construction, whichcoiopelled Centroimin Peru to install another water supply systemfor low water periods. Payment for dariages to the thiLckenerhave been negotiated with one contractor, and a claim has beenmade against the contractor responsible for the compacted filLIn addition, a claim has b en made against the managers of theproject, responsible for the design and supervision of thethickener construction.
(iii) The managers drew up the plant test and startup program incoordination with Centromin Peru. Specialized experts of themanagers were assigned to the various areas to carry out theprogram, and they were entirely responsible for this work.
The technical staff of Centromin Peru and contractors gave fullsupport to the managers in providing equipment, labor andsupvlenaentary facilities needed to achieve this objective. Thecoordinated work of the managers, Centromin Peru and thecontractors made it jossiole to carry out the crash constructionprogram to start up the plant on May 30, 1982.
b) Work Force
(i) The project was managed on the basis of a time schedule forpersonnel requirenments, both for managers and their nationalassociates. Project activities were implemented in theUSA, Lita and Cobriza. The managers had to hire specializedpersonnel in each field, and the national firm providedadditional technical staff in Peru. In addition, CentrominPeru provided through its Project Administration theexperienced technical staff required to represent theenterprise and coordinate the work. For some of the mainplant, mine and services equipment, the managers and CentrominPeru assigned technical personnel for inspection and finaldelivery. In addition, they were given training in some areasof their specialized field.
In implementing the project, the managers encountered manypersonnel rotation problems, since many of the managers'technical staff had to be replaced because of deficiencies. Themain staff problem was in the mine area, because neededspecialists were not available. This gap was filled with theaid of Centror,min Peru specialists.
The Cobriza Expansion Project for the Mine and Concentratorrequired a hwaan resources infrastructure in keeping with thevoluziLe of work and the aiL,ount of investuient involved.
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In May 1979, a staff organizational chart was defined withdynarmic criteria, taking into account that minor changes wouldbe required in the structure during the perforancie of thework.
The firm selected to manage this project provided the foreignstaff required for the organizational structure mentioned, andasked Centrojuin Peru to take charge of all human resourcesmanagement, as stipulated in our labor laws. So in Septeiaber1979, Centroiain peru providea, through its Industrial RelationsDepartment, an agency in charge of recruitment, selection,hiring, training, and other personnel managerent functions.
From 1979 to date, this departnent has also been responsiblefor the already specified functions of wage acministration,labor relations, and social welfare and education prograr's. Animportant achievelment is tne fact that during this period (1979to date) no interruption in the work occurred for reasons ofwork stoppage or strikes,
The following tables summarize the Cobriza Project personnelmanagement:
- Project Organization Chart for the Lima Management Office-Table C-1.
- Project Organization Chart for the Field.
- Summary of recruitment, selection, hiring and mobilization ofpersonnel contracted: (see Table C-2).
December 198December 1982June 1983
- Annual s-umary of man hours worked for the project in the USA,Lima and in the field -- Table C-3.
In implementing the Cobriza Project, no specific CmP stafftraining program was set up for a specified period, but actionswere establislhed to be carried out on resuzaption of basicengineering extension by the project managers, such as:
- Appointment of a CMP representative in the U.S. offices,who would approve and return all plans, documents andtechnical information to the project managers within fivedays. This action was taken to speed up the basic enginee.ring. The *]Srepresentative, a sp.ecialist in structural design, was at thatpost from July 1979 to September 1980. Also during thal:period, the CmP specialized staff were assigned to themanagers' offices, both in the Operations Division, and in theProject Execution Division to 1.articipate in review anddetermination of the final scope of the project expansion invarious fields, suchi as:
During the period for procurement of materials and equipment,follow-up of purchase arnd inspection of the manufacturing ofboth foreign and national suppliers was the responsibility ofthe managers, who, through their offices in USA, and theiraffilia:es in other countries, sent specialized techniciansfor inspections and tests.
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Table C-2
SUMMARY OF RECRUITMT AND SELECTION
COBRIZA EXPANSION PROJECT
SEPTEMER 1979 - JUNE 83
SEPT. 1979 to 1983 1983 1983 1983DMC 1982 JAN-"ARCH APRIL MA JUNE TOTAL
Perso[melinterviewed 2,168 - - - - 2,168
Psychologicalevaluation of 875 - - - - 875
applicants
SUMMARY OF HIRED PERSONLAUGUST 1979 - JUNE 1983
WHITE COLEARLimu 102 - - - - 102
Cobriza 151 - - - - 151 253
BLUE COLLARLiza 25 - - - - 25
Cobriza 933 - - - - 933 958
PERSONNEL SUMMIARY
COtRIZA EXPANSION PROJECTINCOME AND EXPENDITURESSEPTEMBE 79 - JUNE 83
INCOME EPENDITURES TOrAL AMUAL NET
WIE COLLAR Lima 102 75 27Cobriza 151 135 16 43
BEJE COLLAR Lima 25 22 3
Cobriza 933 833 100 103
146
TABLE C-3
COBRIZA EXPANSION PROJECT
PROJECT MANAGER'S PERSONNEL
(IN US$)
SUMMARY OF MAN IIOURS AND COSTS
PERU (*) U.S.A. - ADMIN. BASIC ENG. EST. (U.S.A.) BILLINGS SOCIAL GENERALPERIOD MANHiOURS AMOUNT MANHOURS AMOUNT MANIIOURS AMOUNT AMOUNT BENEFITS SUBTOTAL COSTS TOTAL
Only in a few cases did the CMP assign technical and
professional staff to some countries for final inspection andtraining in the equipment purchased for the project, such as:
- Xray analyzer2 "gs. 7 days
- Electrical Equipment2 Engs. 5 days
- Electric Locouotives1 Eng. 7 days
- Raise boring1 Eng. 7 days
- Transmission LineSubstation
1 Eng.
- In addition, practical technical training courses were givqn inPeru by the C2P training department for mine area personnel,operating in maintenance work on the various equipmentpurchased for working the mine.
This training proqram involved the following personnel:
Note that this training program was conducted by the CMP
training department, whose staff translated manuals, drew upthe training plan, selected nine operators, coordinated themechanical and psychotechnical examinations, and set up a mineschool for this purpose.
In addition, the suppliers of some equipment for both the mine
and the concentrator plant sent representatives to Peru forstartup of operations aria tests with and without load. Afterstartup, some equipmennt suppliers instructed the CMP technical-professional st,zx on maintenance of the equipment.
c) Organization of the Borrower
(i) 'rhe Project Administration provided coordination between themanagers and Centromin Peru and acted as the officialrepresentative of the comIpany. It was comLposed of experienced
professionals in the fields of management, engineerilg,
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procurement, and so oam This organization was maintained withslight changes throughout the project, and help was provided bythe specialized offices of Centromin Peru in engineerinyj,logistics, finance, and so onr
The organization tables of the administration and the managersare included, and in general have not changed their structureto date (Tables 0-1 and D-2). However, it should be noted that
Centromin Peru substantially increased its participation in themine development and preparation work, for which purpose it hadto establish a field unit to take over the managersresponsibilities in the mining area.
(ii) To carr'y out the Cobriza Project, the Company had to set up andimprove theproject accounting area. In addition, Centromin hadto create in both Liria and Cobriza specialized areas such asfinancing, logistics, industrial relations, informationscience, traffic and custoims clearance and an operationsdivision for the mine, plant and services. The ProjectExecution Division participated actively in coordinating thework performed at the company leveL
d) Work Force Increase
Project activities required an increase in the Cobriza work force,as broken down below:
2600 $IS= 20,000 I'NS
Top Management 21 33White Collar 80 116Blue Collar 337 500
TOTAL 438 649
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d) Production and Capacity EstStQ
(i) The following table shows productior for may-December 1982 andJanuary-June 1983 (Table E)..
(11) The main problems that prevented the program estimate frombeing attained are the following:.
Mine Probleurs
- Failure to complete the production shaft (contractor).- Failure to complete mine development work-ore pass,
stopes, zig-zags5 etc. (contractor).- Failure to complete mine services works-underground
workshops, ventilation, etc. (contractor).- Technical difficulties with the DUyK low profile trucks
(supplier).- Low grade of the copper ore.
Plant Problems
- Primary crusher (design).- ore transport system (supplier).- Primary and secondary crusher belts (supplier).- rTailings thickener (design-contractor).- Filters (supplier).
In all cases, the company solved the problems through theProject Execution Department and the Operations Division, madethe changes required, and took alternative steps to permitcontinuous operation of the concentrator plant. The problemsthat prevented meeting the production schedules were due insome cases to engineering design errors and in others to poorperformance and quality of the equipment as well as poorperformance of the contractors.
(iii) The projects future production is as follows (in tons of 26%CU concentrates).
NUMBER OF WORKEeRS 16,120 17,880 17,880 17,880 17,880 17,880
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d) Envirornental Pollution
(1) The possibility of solving the problem of tailings disposal ofthe new concentrator plant by building one or more dumps tostore the solicis is limited or almost nonexistent because ofthe number of major and even overwhelming difficulties and/ortechnical complexities and risk factors, the extremely highcost, or shortage of capacity.
Dumping tailings into the Mantaro river has some impact on theriver but it would not be major. In the present circumstances,that would be the least damaging and most practical course ofaction.
In addition, using most of the tailings (55 to 65%) as minefill means that the tonnage of unutilized tailings dumped bythe new plant is only 7a% higher than the tailings dumped bythe old plant.
(ii) The physical-chemical analyses of the plant tailings shows thatthe impact of the liquid tailings on the Mantaro water coursewOuld be completely negligible (Table 10.
For example, when manganese, one of the major components (.860milligrams/liter of sample) is diluted in the river water, theresult is .29 micrograms/liter of river water, which is.about1/20O0 of the permissible level for class III water courses,under the Peruvian Waters Act.
Several -components of the solid wastes would exceed thepermissible ceilings for class III water courses. However, itshould be noted that the high density (3.6), the moderate watervelocity and the long length of the river before it flows intothe Apurimac River promote sedimentation of these materials sothat farming areas along the river would not be affected.
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TABLSE H
PHYSICAL-CHEMICAL ANALYSIS OF THE COCRIZA UNIT TAILINGS
Sample collected on May 20, 1982Analysis made by the Centromin Peru Safety Department
Liquid Phase Solid PhaseELENI53M MG/Liter Z of Total
Equivalent to a maximuu of .337 milliliters per liter of river water.
- Solid phase: 160 ton/hrEquivalent to a maximum of 337 milligrams per liter of river water.
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V. =OLE aE T. MMs
The World Bank took an active part from the outset in 1976 inarrantements with other foreign and local financial institutions andre ee that Centrom.in take direct or indirect action to implenmentthe loan as soon as possible.
To achieve that goal, it coordinated, through the CMP, expansion of theCobriza mine to 10,000 tpd with Peruvian government and financialagencies and the WI. In addition, it drew up with specialists of thatfinancial institution and the IDB an investment estimate of $160.9 andconcluded a loan contract on 6/1Z/76.
During the project, World Bank staff members held coordination meetingswith the project managers to improve their efficiency in carrying outbasic engineering extension, procurement, detailed engineering and plantconstruction, and particularly, mine preparation and development works.in addition, it coordinated procurement procedures for material andequipment dir.ctly with Centromin Peru, so that Bank staff memberstravel to Lima and Cobriza to inspect the progress of the work under wayand supervise appropriate use of its loan to Centromin Peru.
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TABLE 6
m'aRmlr PRJRJECT DATES
March 11, 1977 Contract awarded to project uAnagerprovide services for the CobTiza mineand concentrator expansion project.
January 20, 1978 Notification to project manater tosuspend work.
April 25, 1979 Letter to reactivate the project andextend the basic engineering.
Hay 22, 1979 Project manager begins mobilization in the USAStartup of basic engineering extension.
July 27, 1979 Prc,ect and site manager arrive in Limato plan startup of construction. Thesite manager will remain at the camp.
August 13, 1979 Resident representatives of the client arrivein the USA.
August 21, 1979 Opening of proposals begin in San Mateo.
November 28, 1979 The flrst purchase order for major plantequipment (Ball Mills is issued in the USA).
Decsnber 27, 1979 Leveling and platform contract signed
March 26, 1980 Mine development contract signed(EC-2).
April 15, 1980 Contractors start mine development.
April 22, 1980 Revised mine development plansubmitted to the CMP.
May 19, 1980 Proposal for the mine hydraulic fillsystem submitted to theclient.
June 19, 1980 Change in purchase order for thetransportation systeu approved.
June 26, 1980 Contract for the aggregate andcement plant is signed. -
June 26, 1980 Effective date for opening letterof credit in favor of project managers.
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July 22, 1980 Clvll Constructlon Contractsigned (EC-8).
August 29, 1980 Basic engineerlng extension in SanMateo completed.
September 29, 1980 Cement preparation plant comesonstream
october U, 1980 Contract let for concentrator steelfabrication.
December 15, 1980 Purchase orders issued for mine carsand locoaL-tives.
December 22, 1980 Contract for electromechanical worksawarded.
Deceuber 31, 1980 Implementation of the compressed programis decided, and 6/6/82 is set as thekey date for mechanical completion of
- the concentrator.
January 15, 1981 Contract awarded for fabricationOf steel beams for the mine.
February 2, 1981 First steel structures for thewarehouse fabricated.
March 11, 1981 Contract signed forstructural steel fabrication.
March 23, 1981 Mill installation begins.
April 3, 1981 Call for bids on mine services contract.
April 11, 1981 Ball mill erection begins.
Aprll 20, 1981 Mine shaft construction contractawarded.
May 22, 1981 Contract for mechanical fabri of structuralplates awarded.
May 30, 1981 Pines crusher installation begins-
July 9, 1981 Mine services contract awarded.
July 17, 1981 Proposals received for buildingtransfer yard.
July 31, 1981 Mine services contract beginsmobilization.
t
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August 21, 1981 Primary crusher Installation begins.
August 26, 1981 Flrst work areas earaarked for mineservices contractor.
septedber 16, 1981 Civil construction for concentratethickener and supports for pipingbetween concentrator building andthickener are accepted.
September 30, 1981 Cleanup at the 285 level and tunnelfor water pipes installation iscompleted.
October 19, 1981 Aggregate production contractcompleted - EC-3.
November 16, 1981 Civil construction for waterrecovery well accepted (Area O6A).
November 30, 1981 Civil construction for tailingsthickener accepted (Area 06).
December 1, 1981 Civil construction for fines storagearea (Area 03), coarse storagearea (Area u2A,) and lime plant (Area 07)accepted.
December 31, 1981 Civil construction for primary crusher(Area 02) and concentrator (Area o5)accepted.
December 31, 1981 Contract awarded for constructionof chimuny AS.
January 15, 1982 Contract awarded for Chute A2and Level 28N.
January 22, 1982 Preparation of first 600 m of the 28Slevel tunnerl for installation of pipelineand trolley line awarded to contractor.
February 28, 1982 Engineering offices in Lima areclosed.
March 19, 1982 Specialized staff of project managersarrive in Peru for olant start-up.
April 8, 1982 First fines crushed in primary crusher.
Pay 29, 1982 Processing plant and urban areainaugurated by President of theRepublic, Fernando tielaunde Terry.
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Jurm 24, 1982 Mechanical completion and startup ofplant.
Augst 16, 1982 Start of telephone system for plantand mine.
August 20, 1982 Code account opened for control ofmine develolAnent and services.
October 5. 6 7, and 8, 1982 Full capacity tests conducted at plat(l0,a00 tpd).
October 30, 1982 Mobilization of managers staff responsiblefor supervising Cobriza project;supervision of work in chargeof Deputy Aduinistrator.
November 1, 1982 CMP takes charge of project costand accounting control, replacing manager'sstaff.
November 11, 1982 Hydraulic fill system comes onstream,facilitating move=ent of tailings tothe mine for fill.
November 19, 1982 Tbtal demobilization of manager's staffresponsible for administration in Lima,with CMP staff placed in charge ofadministration.
December 15, 1982 The Collpa transfer statIoncontractually completed, includingadditional work.
January 17, 1983 Negotiations begin with representativesof consultant Project Manager to terminate thecontract, and conciliatior, of accountsis performed.
May 17, 1983 Telephone system installation completedat concentrator and miire
June 20, 1983 Last housing units and communityworks in urban area co:pleted.
June 24, 1983 Startup of works for pumping waterfrom Nmntaro river to recovery wellsof cQpocentrator plant.
June 28, 1983 Completion of production shaftexcavation.
-64-Table 71 of 3
MAIN EQUIPMENT AND MATERIALS FOR THE COBRIZA PROJECT
PRINCIPAL EQUIPMENT FOR MINE AND PLANT
Requisition Estimated FOB Country ofNo. Description Amount ($) Origin
Requisition Estimated FOB Country ofNo. Description Amount ($) Origin
V-2@353-54 Steel mi acceeoul" s 23,53 U.S.A.12a5607-6 Rllr"ad ties 354.570 U.S.A.V-Z484-64 tall acc"srlee 58.236 U.S.A.
TOTAL 1'o341,90
INSTRUMENTATION
U-2S000-55 1ate Control sUotW-2533.4S5 l*srimmeg sf o acrol o.uh .s. A.
s0Tx *~434.1 1
T-TAL 183,111TOTAL SEgILAL 35389.5,2
NOTES:
1) 55Z of the general total was financed by the IBED (US$20,294,236).
2) Only purchase orders over US$50,000 were considered.
3) The O/C amounts do not include spares.
4) The amount financed by the IBRD for purchases under US$50,000 andspares amounting to US$3,138,762 are not included in the breakdownbecause their investment amounts are not important.
5) Since the IBRD loan (1281-PE) is for US$39,731,215, it has been usedfor the Cobriza and Mine Water projects. The attached sheets explainhow the engineering and services, plant and equipment, transportation,freight and insurance and commissions items were utilized.
I. PROJECT IDENTIFICATION, PRELIMINARY FEASIBILITY AND FEASIBILITY STUDIES
The Cerro de Pasco Mine Water Treatment Plant was a necessity that had been strong-ly felt in order to replace a cementation operation that was excessively contamina-ting the basin of the Mantaro [River] and that furthermore, in medium-rangeterms, would suffer from a shortage of its main input items [scrap iron) nation-wide.
For these reasons, Centromin Peru contracted consultants in 1974 for preparing atechnical-economic study to replace the existing process with another extractionprocess using solvents and electroplating whose operating capacity would be asfollows:
(a) Treatment of 13,600 lit/min of impregnated solution for extraction by meansof solvents;
(b) 0.8 g/lit of copper concentration for 19760. g/lit Of copper concentration 1986;
(c) 480 metric t of copper recoverable monthly by the middle of 1976366 metric t of copper recoverable monthly by the middle of 1981276 metric t of copper recoverable monthly by the middle of 1986.
Furthermore, the feasibility project took into consideration che fact that thenew plant would be located in the immediate vicinity of the Excelsior CementPlant, that there would be a preliminary neutralization stage to treat theproducts from the solvent extraction stage, and that, finally, the waste wouldbe subjected to a neutralization process prior to being dumped into the SanJuan River. The amount earmarked for investment came to U.S.$11,818,000 atconstant 1974 dollars.
These proposals were amended throughout the project and the design was completedwith the following features:
Output capacity 540 metric t of Cu per month;
Location in the area of Quiulacocha due to the fact that the previously selectedarea did not have the kind of soil that was suitable for the construction workthat had to be started;
Elimination of the preneutralization phase, improving the quality of impregnatedsolutions through the construction of new copper mineral cells;
.Temporary substitution of the neutralization process through the storage ofwaste in Yanamate Lagoon;
The investment amount rose to U.S.$15,300,000 at current dollars.
The World Bank expressed its interest particularly in financing this project bythe middle of 1975 and, after the corresponding negotiations and the updating ofthe budgec, loan contract 1281-PE was signed on December 6, 1976.
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During this period of time, prior to the start of work, our enterprise had theresolute cooperation of specialists from the consultant and frosu the WorldBank in spelling out the project's scope.
MINE MATER T9EATA1ENT PLANT PRojECT -----------
_1 T=T7 -
'.'
Legend: 1--Warehouse; 2--Copper-imfp eg-
noted solution tanks; 3--Electric power
substatiost aind distribution panel; 4--
Electroplatingl plant; 5--Extraction by
means of solvents; 6--Tank farm; 7--No. I. Engine control center; 8--No. 2
Engine control center; 9--Dining roomand locker room; 10__ReCtifier and Comprea-er; 1 l--Supervisory off icel 12-Laboratory
and control panel; 13--Material dump. 2
-71-
I1. PROJECT I1PLEMENTATION AND MANAGEMENT
(a) Project Scope
The project's objective and scope are designed mainly to contribute to thedecontamination of the tributaries of the upper basin of the Mantaro River byeliminating the dumping of acid-ferrous solutions, waste from cementationoperations of copper vith scrap iron, thus making the transfer of water fromthat river to the Pacific feasible.
The above is made possible through the installation of an integrated extractioncircuit using solvents, electroplatilg, and related operations, this vill permitthe production of 99.96% electrolytic copper as finished product, directlysaleable as cathodes with a higher added value, replacing 925 metric t of coppercement; it will thus be possible to eliminate the use of scrap iron and torelease the treatment capacity in the La Oroya Foundry and Refinery Circuit.
During project execution, we saw the need for partly amending the originallyplanned scope, mainly relating to the subsequent treatment of plant waste; thisappreciably increased the cost of the copper that was produced. In this wayand following approval by the financing agencies, it was decided to dischargesaid waste into che Yanamate Basin.
The main changes that were made along these lines were as follows:
Reject the preneutralization unit;
Eliminate the solvent extractionwaste neutralization unit;
Eliminate the limestone preparation unit;
Include a system for pumping SX -- solvent extraction - waste from the diecharge pointin the plant to the closed basin of Yanamate.
(b) Project Administration-
The system employed in project administration included the project managementsystem on the level of the foreign consultant outfit under the supervision ofthe Projects Execution Management Office of CMP.
For this purpose, we contracted for the services of foreign consultants, who,associated with a local consulting firm, were responsible for project management.
The work of the managers basically included activities dealing with basicengineering, detail engineering, purchasing management, construction supervision,training, start-up and standardization of the plant. This work was distributedprimarily as shown below:
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()ercentages)
Basic Detail PurchasingA:tivity Engineering Engineering Construction Management Total
General Facilities 1.200 9.550 6.863 17.613Extrac. by solvents 2.425 8.350 15.261 26.036Electroplating 3.550 7.100 15.375 26.025Mec. prep. of limeswne3.1. 3 3.113Neutralization 1.050 0.3Preneutralization 0.863 0.863L,icil purchases 14.250 14.250.mported purchases 10.750
Z 12.50 25.00 37.50 25.00 100.00
Parallel to the work done by the managers, Centromin Peru, through its OperationsDivision, was charged with doing the work necessary outside the battery boundarywhich included work relating to the activities initially planned.
Project execution was appreciably influenced by the effort and coordination ofthe outfits responsible for the project with respect to management activitiesdealing with suppliers of goods and/or services as well as contractors for thea.velopment of works projects activities. This facilitated acceptablt andtimely planning for project implementation
(c) Manager Performance
In general terms, the work of the managers was done in accordance with estimates;however, some inconveniences arose during project development and led to strictersupervision by CHP.
This was particularly true of work outside the battery boundary since thisactivity had not been conceptualized from the project study, done by the managers,on; this meant that these work operations were taken over by the Enterprise.
On the other hand, concerning equipment design, specifically in the case ofthe electroplating rectifier transformer, there was a mistake in the dimensioningand this caused problems at the moment of plant start-up so that the plant hadto be shut down for a period of 5 months, approximately, during which CMP wasable to solve the above-mentioned problem. This type of deficiency becameevident basically in the electromechanical equipment items.
Another significant aspect of managerial performance relates to the shortcomingthat emerged in project control and supervision--activities which were directedwithout standards that would be acceptable to the Enterprise. This caused theintervention of CPM in terms of the takeover of these administrative activities.
-73-
(d) Contractor and Supplier Performance
The activities carried out by contractors and suppliers were in line with theterms agreed upon between them and the project managers. Generally speaking,the job was done properly, under realistic working conditions, featuring thedelivery of equipment units and the completion of work activities; the latterwere accomplished with greater difficulty due to environmental conditions inthe project area.
It must also be pointed out that the quality of most of the equipment itemsacquired is adequate for a project of the kind that involves mine water, exceptfor the rectifier transformer which failed on two occasions and the centrifugalpumps.
(e) Logistics
The system used for the purchase of goods and/or services for the Mine WaterProject was standardized in accordance with the outlines established by theproject financing entities.
In this respect, purchasing management was under the control of the projectmanagers who made good recommer.dations during the bidding competition carriedout for the procurement of goods and/or services. The information was analyzedby the CMP and forwarded to the Bank for approval prior to the award of thesepurchasing contracts.
Procurements, as far as foreign suppliers were concerned, were handled mostlythrough letters of credit which committed the funds from the bank loans in therespective proportion!s (IBRD 55Z,BID 45%).
In this sense, purchasing management--through established bidding competitionregulations-did not present any major difficulties.
A separate sheet contains the diagram for the procedure involved in gettingsupplies and approving purchasing orders in excess of U.S.S100,000.
(f) Execution Program Implementation
Table 1 shows comparisons between the estimate and the actual programming. Themajor factor that caused problems in plant operation was the failure of th^lrectifier which caused the plant to be closed down. After the changing of thF rectifiertransformer, operationswere actually started on January 11, 1982, in other words,the plart was started 65 days ahead of time compared to the planned starting dateof March 17, 1983 [sic].
Here are the main activity scheduling dates:
Contract signing with consultant firm May 26, 1977Detail engineering completion May 30, 1979Mechanical completion October 30, 1980Start of operaEions February 7,-1981Operations Division receives plant June 16, 1981Rectifier failure July 24, 1981Start-up January 11, 1982
MINE WATER PROJECT ACTIVITY SCHEDULING CHANGES ACCORDING TO IBRD PROGRAM
The effective date of the contract with the managers was May 26, 1977; compared tothe date initially scheduled by the World Lank, this was a delay of almost twoyears.
However, basic engineering was newly started on September 1, 1977, due to thefact that the requirement for its official start by the managers involved themetallurgical tests that were carried out by CMP so that this project stagewas finished on March 31, 1978.
In the light of the above, detail engineering was started on January 30, 1978,and was completed on May 30, 1979.
Procurement began 2 months after the start of detail engineering and the deliveryof equipment and materials was completed in October 1980.
The mechanical completion of the plant came on February 7, 1981.
-77-.
UPPER WITARO BASIN MUM.CONCENTRATOR PLANTS
. * . g - '
< ~~~~~~~~~e. m;;e in
mmacae~ ~~~ cn ooNO-M
** __ ,ns . Legend: Concentradora-t Z ~~~~~~~~~~Concentrator plant;
REAL CONTRACT REAL TOTAL AMT.,CONTRACT STARTING COMPLETION COMPLETION REFERENCE
DATE DESCRIPTION DATE DATE DATE CONTRACT COMMENTS
04-21-80 Line to Yanamate 04-21-80 08-26-80 10-25-80 172,100 Additional work in the amountof US$27,854
12-03-79 Structural work, electro- 01-14-80 05-18-80 09-06-80 486,168 Additional work in the amountmechanical assembly, of US$181,453miscellaneous
08-20-79 Making and erecting 08-20-79 12-17-79 12-17-79 131,607 Additional work in the amountsteel structures for of US$26,039electroplating building
12-04-79 Prefabrication and 12-04-79 06-04-80 06-04-80 168,418 Additional work in the amountinstallation of tank of US$25,331lining
12-28-79 Prefabrication and 12-28-79 04-10-80 08-20-80 88,023 -assembly of steel tanks
04-11-79 Civil engineering 04-11-79 03-25-80 09-15-80 603,764 Additional work in the amountconstruction work of US$228,786
02-02-79 Construction of plant's 02-02-79 02-29-80 02-29-80 50,561perimeter fence andothers
01-24-79 Excavations, foundation 01-24-79 04-24-79 09-19-79 48,191 Additional work in the amountdrainage, and dining of US$9,840room and locker roombuildings
11-07-77 Construction of pre- 11-07-77 09-07-77 09-07-77 108,434fabricated houses
-79-
(g) Capital Expenditures. Outlays, and Financing
The project's final cost came to U.S.$15.3 million according to the budget esti-mate, of which U.S.$8.7 million went for expenses of local origin while U.S.$6.6million were connected with expenses of foreign origin.
Table No. 2 presents a comparison between the project's estimated and actualcosts, broken down by investment items and identifying the origin of the expend-iture for each one of them.
In this connection it is necessary to mentlon the fact that, although the project'sscope was reduced with regard to plant waste treatment, the total cost remainedthe same due to a considerable increase in the engineering, administration, andsupervision items, as well as in the corresponding civil engineering work andelectromechanical assembly and installation; the latter items led to increasedspending in local currency.
The project investment schedule is shown in Table No. 4 and indicates that themajor expenditures for the project were made in 1979 and 1980. The amountsinvested in 1981-1982 correspond to the payments and to unexpected amountsarising from the plant's start-up.
As far as project financing is concerned, it was covered by funds from the WorldBank, from the Inter-American Development Bank, Financial Development Corporation,the Peruvian government, and in-house funds. Table 3.3 shows the funding sourcefor project financing, broken down by expenditure origin.
A significant aspect of project finance management was rooted in the reductionof_the COFIDE [Financial Development Corporation] loan which meant that Centromin-Peru, together with the Peruvian Government, closed the financing gap caused bythe difficult economic situation of that corporation.
Funds from the above-indicated sources were controlled through the Enterprise.In relation to that, payment requests were filled out with the financing enti-ties and we opted mainly for repayment guarantee procedures based on letters ofcredit for the payment of suppliers of goods and direct payment in the case of.payment for services. Parallel to that, in the specific case of the BID [Inter-American Development Bank] loan, we used the rotating fund procedure through whichsaid entity, by way of an advance, paid out a sum of money which was then authen-ticated during the corresponding period of payment. This latter procedure waschosen for direct purchases involving smaller amounts.
As for COFIDE funds, they were used mainly by way of reimbursement of paymentsmade while funds coming from the Peruvian Government were used basically to payfor import duties and for the income taxes cf companies not domiciled in thecountry.
Coordination with these financing entites and the broad range of proceduresused made it possible to implement acceptable management at the time of the outlayswith the exception of direct payments that took a longer time than anticipated,causing problems of an administrative character. Another aspect worth mentioning-which emerged during this project-sprang from the rather slight control on the
part of the World Bank on the occasion of the repayment of letters of credit tothe correspondent bank. This caused an increase in financing expenditures
-80-
that had to be paid out for the period during which the outlays of the correspondentbank remained unpaid. We believe that it is advisable to suggest that deadlinesbe established for the correspondent banks when it comes to requesting the cor-responding reimbursements from the World Bank.
(*) The contractual dimbuneant deadline vs amended on 21 Sept. 79.(1) Deadlines were chanpd on 31 May 79.(2) Participants In financing 42.52 of capital goods end/or erviceo of the Cobriaa project.(3) Was changed to 10.75X as of 15 Dee. 82. (4) Financins of the Cobriza project and other. s.(5) 1.1252 for the first 36 eonths.(6) .375X for the firet 18 *mothe on 802 of the balance of the unutilised loan.(7) Financing of 852 of capital goods and serviees of Svedish origin (includes other project.).(8) For unutilimed balances from acceptance of the 833 of delivery contracts.(9) Flat co_mision - 0.52 *anagement commiusmon and 2.5X credit Insurance eo_mission.(10) Repayment in ten batnnual quotas, beginning with the qoulpment delivery date.(11) Starting vith the effective date of the first disburse nt.(12) Was changed to 32 starting December 1962.
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TABLE 4
PERU: CENTROMIN EXPANSWON PROJECT
PROJECT COMPLETION REPORT
CAPITAL COST DISBURSEMENT SCHEDULE
(USS Millions)
APPRAISAL ESTIMATE ACTUAL
Year Foreign Local Total Foreign Local Total
1976 1.500 2.367 3.867 - - -
1977 3.600 5.767 9.367 0.521 0.204 0.725
1978 1.600 0.466 2.066 0.759 O.c7l 1.330
1979 - - - 1.620 2.306 3.926
1980 - - - 2.811 3.649 .6.460
1981 - - - 0.839 1.950 2.789
1982 - - - 0.050 0.020 0.070
6.700 8.600 15.300 6.600 8.700 15.300
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111. OPERATION PERFOL'ANCE
(a) Initial Start-Up and Start of Operations
According to the project's development as planned in the Projects ManagementContract with the managers on February 7, 1981, the plant was ready as far asthe mechanical part was concerned. This marked the beginning of the period ofrunning trials which lasted until the 14th of that month; at that time it wasnecessary to shut the plant down due to the deadlock with local public agenciesover the use of Yanamate Lagoon.
Due to these difficulties, it was possible to start the standardization periodonly on April 24, 1981; following the construction of an alternate system oftributaries to Quiulacocha Lagoon and to Yanamate Lagoon, using a pumping system,the project was turned over to the Operations Division of Centromin Peru on June16, 1981; during that period, around 500 t of electrolytic copper with 99.98Zpurity had been produced; this period extended until July 24, 1981, at which time dueto serious breakdowns in the commercial cell circuit transformer, procured by themanagement firm from the supplier, the plant had to suspend normal productionuntil January 11, 1982; this was because the rectifier transformer had to bemanufactured all over again by another firm; the latter had taken over the assetsand liabilities of its predecessor.
While the plant was shut down, it was necessary to restart the production ofcopper cement due to ion drift in the CU [sic] cementation plant, vhich is whythere were no losses in the production of copper.
During the time the plant was shut down, moreover, plant maintenance personnelperformed various minor repairs and modifications, such as: Modification ofelectroplating cell crane, repair of electroplating cells, system of sulfuricacid addition, among others.
(b) Labor Force Development
Project management as such was implemented in accordance with the organiza-tional structure submitted to Centromin Peru by the project managers afterthe contract with Centromin Peru had been signed.
The project managers, as well as the project administration recruited professionaland technical personnel on the basis of a requirement timetable which wasadequately met; in accordance with the project execution stages, detailengineering, local purchasing management and construction supervisi3n wereexecuted by the managers. Parallel to that, Centromin Peru selected experiencedand technical personnel through the Project Administration for the purposeof representing the Enterprise.
The training pro-ram for personnel who would be responsible for operating theCerro de Pasco Mine Water Treatment Plant was carried out and supervised bythe project managers in coordination with the project administrator.
This program's scope included familiarization with the new plant's OperatingManual, with the operation of other plants, both in the United States and inPeru. The preparatory effort was worked out with. the proper headstart in termsof the scheduled completion uo thc mechanical part.
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The following staff personnel stood out in this program in the United States:General manager, assistant general manager, metallurgists and guard detailleader; the training period in that country extended from July 21 until August10, 1981.
The outstanding staff personnel at Arequipa (Cerro Verde) and at Cerro de Pascoincluded the following: General manager, assistant general manager, metallurgist,maintenance chief and four guard detail leaders; their training courses extendedfrom August 18 to 29, 1981, and from September 2 to 6, 1980, respectively.
(c) Centromin Peru Personnel Organization
There were no changes in the original organizational structure of the ProjectAdministration as well as in the Projects Execution Management Office.
Through its Administrative Division, the Projects Execution Management Officesubstantially improved the general information systems and procedures on requestof the financing entities and in coordination with the project managers a manualprocedure was implemented for recording costs, obligations, and the final estimatedcost of the project; computerized programs were also used for programing andchecking on project progress, using a computerized package implemented byCentromin Peru. Likewise, accounting procedures were established forthe recording of expenditures as well as foreign and local purchasing procedureswhich would meet the requirements established by the financing institutions.
In coordination with the Finance Management Office, the projects executionmanagement office prepared a manual procedure for requests and recording offoreign and local currency disbursements which met the requirements of the fi-nancing entities.
Plant operation and maintenance were taken over by the Centromin Peru OperationsDivision through adequate organization once the plant was ready to go intostandard operation.
(d) Output Estimate
Copper Cathodes Copper Cement
Months 1982 1983 1982 1983
January 185.9 367.088 93.95
February 122.7 272.3 137.5
Mbarch 165 269.5
April 175.6 385
14ay 176 313.5 20.02
June 264 385
JUly 334.4August 308 11September 31.5
October 313.86 17.607
November 345.301 8.34
December 374 5.6
Here is the projeet's future output (output figures given ir: tons of coppercathodes with 99.96Z purity):
1983 5,200 short tons1984 6,000 short tons1985 6,000 short tons1986 6,000 short tons1987 6,000 short tons1988 6,000 short tons
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IV. ECO]NOMIC-FINANCIAL ANALYSIS
(a) Revenues
Project revenues are determined by the output level and by copper prices prevail-ing from one year to the'next. In keeping with these factors, here, then, areour expectations:
(i) We are enclosing the profit and loss statements, Table F-l, general assetsbalance sheet, Table F-2, and general liabilities balance sheet and equity[net worth], Table F-3.
(ii) In Table G-1, we add the financing projects for the -period of 1982-1987.
Table ?-I
1982-1987 PROrT Anl WSS UTAStl!T
(In illicons of 0ola. and Dollars)
- ~~~~ ~ ~~~~~~~ . -
1982 6 3_ 19611 1985 1916 3987I T E M S OltoR.AL auT c tUUwr MOjtcT
SOLIS DnflLARS SOLIS US$ SOLIS USS SOLIS5 S$ S S US$ SOUS USS SOLES USNot earings 300,113 113'i 5311,780 196 729,31146 --476 l'571,1 563 I175,510 716 V i9 9 II -7139S,407 730Sales expenses (226,523) (405) (402,072) (3714) (398,727) (316) 8 390,327) (366) (1'590,689)(395) 2'5S7,2095(1 10) (3'S48,589) ('14)Gross Profit 73,620 19 192,708 122 330,619 160 682,505 197 1677,821 321 2'352,779 2911 3'549,I1.S 3.12Margin 21l.St 6.7t 32.41% AM6 015.3% 33.61 Xlulit 3s.at Sl.21 44.5% 47.9t 42.1 45 0% 4i.35Deprectation (12,776) ( 15) ( 30,691 ( 26) ( 25,520) (17) ( 95.112) (311) t 208,153) ( 41 4130,4051 ( 1 747,.926) (7-)Compensations and pensions (33,81%6) ( 20) (35,890) ( 30) 5 58,8119) (38) ( 683115) (214) C 10,981)( 21) 163,t6)( 213) 1 228,866) (23)OperatinR profit 26,998 ( 6) 126,125 66 246,250 1o0 519.978 139 1'360,684 252 107511S394 210 2'573,026 219Marisn 9.Ot (1.11) 21,2t 13.31 33,8t 22.1% 33,0 24.7 r 1115 35.22 35.86 30;.l 3,.Bt 30.02Earning, and financing ( 83,371) (57.1) (1466876) C 96) (196,920) ( 116) (309,379) (80) 1152,306) ( 67) 459,226 (s j) SO'.,PS9) (SO)S e 27.6:) (13.1%) (21472) 09.1) ( 27.0) (9,7%) (1947) (11.22) (13.3) (9.11% ( 9.41) (7.6% 16.1) (6.32)
NUMBER Of WORKERS 18,120 17,880 17,880 17,080 17,180 171,80
-97-
(d) Environmental Pollution
The objective of decontaminating the Mantaro River was accomplished 100% sincethe acid tailings from the plant were no longer discharged into that river follow-ing the final start-up of the plant whicn happened in January 1982.
1. Water Lejel in Yanamate Lagoon
The lagoon has been receiving acidic-ferrous solvent extraction waste sinceJanuary 12, 1982. The infformation supplied covers the period of January to April,in other words, the period of greater rainfall. The water level rose from 4,345.51to 4,347.08 m above sea level, in other words, 1.57 m for a period of 77 days or2 cm per day. This is apparently very fast which is why we must point out thatthe area that currently gets the waste resembles an inverted cone which explainsthis rapid increase; however, it must be mentioned that the receiving area'ssurface will increase since this cone is located in the lagoon's center. We arealso studying alternate processes for recycling the tailings.
2. Rainfall
Statistics for a period of 15 years give us an average of 855 mm/m per yearwhile the annual evaporation on the lagoons in the area reveals a similar evapora-tion rate which is why the precipitation and the evaporation compensace eachother annually.
3. Waste Flow and Makeup
Solvent extraction waste at design capacity is deposited in the Yanamate Basinat a rate of 3,200 gpm, with the following makeup:
H2S04 ....... .... 10.0 Na ............... 2.6Ti .<...... . 0.01 Si .<0.01Co .......... .... <0.01 Mg .0.26
Cd. <0.01
4. pH of Water in Yanamate Basin
The natural water stored in the Yanamate Basin has a pH of 1.8.
The influx of waste from extraction by means of solvents at this time has notmanaged to bring about a uniform content in the lagoon. In any case, the volumethat has been mixed indicates a pH of 1.8.
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5. Precipitation of Iron
The sedimentary layer that forms the basin's bed is a very fine chalk with 51%CaO or 91% Ca CO3, a reagent that acts as a neutralizer of the acid and a pre-cipitator of the iron, both of which are contained in solvent extraction waste.
It must be noted that this process is partial and of a limited nature.
The possible reactions take place in the following kinetic order:
In the course of contact between the solid and the liquid, Fe 3 precipitateswith a pH of 2.6 to 4.5 in a colloidal form at ambient temperature; the coagula-tion improves starting at a pH of 3.7, a condition which is attained in theinterphase and the samehappens in the case of copper. The precipitation ofother polluting ions takes place at a pH above 5.0 which would appear to takeplace for a very short time in the interphase; this is why we do not expect anygreater impact on the makeup; in any case, the sequential activiry would be thesame with zinc and cadmium. Fe2 + does not change since it requires oxygenationand a pH above 5.0, something which does not materialize.
The gels produced here, mechanically supplemented by crystallized gypsum, bringabout a diminution in the penetration of the solution through the chalk bed andthe bed rock; it eventually turns out to be zero and therefore the reactivityis terminated. This is a good thing since it makes the bed of the YanamateLagoon completely impermeable, thus preventing the filtration of acid solutionsat other points.
6. Apparent Porosity of Lagoon's Bottom
Geophysical methods were used to determine the depths of the bed rock and itsnature; we did not expect any percolation of contaminants due to the behaviordescribed in point 5. However, to be absolutely sure, we have a monthlysampling grid here and the composition of those samples is bound to increaseto the presence of contaminants.
As of this date, there have been no reports of leaks due to filtration and thisenables us to say that there is practically no possibility of filtration inthe future. We likewise do not expect any percolation due to the permeabilityof the rock as we go toward the subsoil.
7. Effect of Uaste on Aniwal Life in Yanamate Lagoon
The species in Yanamate Lagoon do not correspond to unique species but ratherto a wide range of species common in the ecological nucleus; this is why the
-99-
effect of waste dumping in Yanamate can in no way threaten the extinction of anyspecies; nevertheless, the species will continue to exist in adjacent lagoons,such as in the lagoons of Junin, Huascacocha, and Cunrun. It must of course beunderstood that the fauna species in the lagoon will be wiped out due to theeffect of the impounding of contaminating waste.
8. Useful Life of Yanamate Lagoon-for Waste Dumping
To confirm the useful life of the Yanamate Basin as a receptacle of SX waste,statistical on-ehe-spot checks will be performed for at least two precipitation-drought cycles, in the following manner:
Rise in lagoon water level,Rainfall,Evaporation,Temperature: Of water in Lagoon
Of environment,Flow of waste.
The best estimates give us a useful life of 5 years which is why the informationwill be in the nature of a confirmation.
V. BANK'S FUNCTION
The Bank's participation during the final design of the project as well asduring the configuration of the project's investment structure was quite signi-ficant since it required the CkP to speed up the governmental administrativeprocessing for the purpose of obtaining supplementary foreign (BID) and local(COFIDE) financing so that the project's execution could be launched as soonas possible.
During project execution, it became necessary to reduce the project's originalscope, replacing the limestone and preparation and neutralization units witha waste pumping line running from the plant to Yanamate Lagoon so as to eliminatethe pollution of the San Juan and Mantaro rivers. This modification had theapproval of the World Bank.
This institution furthermore participated in coordination meetings with theproject managers, a cooperative effort which signified support for the determina-tion of administrative alternatives in project management; as a result of that,there were deviations in the project which turned out to be contributingfactors in the project's investment costs.
-100- TABLE 6. MAIN DATES
Effective contract date May 26, 1977
Approval of soil study (time calculation) December 17, 1977
Real start of detail engineering January 30, 1978
Completion of basic engineering (real) March 31, 1978
Completion of basic engineering (planned) June 17, 1978
Completion of detail engineering (planned) March 17, 1979
Completion of detail engineering (real) May 30, 1979
Completion of mechanical portion (real) October 30, 1980
Completion of mechanical portion (planned) December 17, 1980
Start of operation (real) February 7, 1981
Start of operation (planned) March 17, 1981
Start of trial runs April 24, 1981
Reception of plant by Operations Division June 16, 1981
Breakdown of a rectifier and plant shutdown July 24, 1981
Re-start of routine operation and placementin service January 11, 1982
End of technical assistance and attainment ofoperational standard March 17, 1982
-101- TABLE 7
VA=N IINUITD ITS - HATR S r70 U
mm NI- ATflNAT E!W AT Co=IO Da PASCO
I03 COUiIrI OF
REUI5MON NO. izBSORMMM VALUI (S) ocD
T-00003}65 Electromechani cra 5574 U.S.A.
T-WO2"S-t5 Comfprssd sur uit 34.510 U.S.A.
T-00031A valves11 for pe. S1.U2 U.S.A.
T-00074-64 Stel gectio pieca 72.663 U.S.A.
T-00077-GA Reinforced plastic pools 33.764 U.S.A.
10430013-65 Pnwatrp c machbn cools 23.140 U.S.A.
T-00030-64 Pipe ed acc"eeries of S.S. 16114.5 U.S.A.
T-00006-65 Pmps and mizers 1US.24 U.S.A.
T-OOlOZ-64 Pipes and duct 8ceu ories 22,336 U.S.A.
T-00103-64 Electricel accea.ortoU 21.234 U.S.A.
T-00021-6 PVC protecton devices 24.476 U.S.A.
T-00025-64 Steel plate and auction piecs 62.526 U.S.A.
T-00111-64 Accee ories for busbers 32.S50 U.S.A.
T-0120.6 Special accessories for pipes 23.526 U.S.A.
T-oo104- Chlmical preparations 386,625 E9GLA.
T-00114-64 Pipes 168.919 U.S.A.
T-00024-65 Separators. TolYIPZPyl aD 24,693 U.S.A.
T-00114-64 Pipes and acc ssoris of S.S. 20,020 U.S.A.
T-00034- Centrifugal pump 46.109 U.S.A.
T-00129 Copper bars 49,211 U.S.A.
T-O0034-65 Centrifugal package 33.356 U.S.A.
T-00035-65 Tr-e for.sr 241.250 U.S.A.
Centrifugal packag 70.056 U.S.A.
Pinae ad acc esoriea 248.944 U.S.A.
TOTAL 2.186.456
Notes:
1) Out of the total. 55S were financed by the bIRF (U.S. 1.202.552)
2) Bere we consid-red only the purcaxsing orders in exceaa of U.S.S20.000.00
3) Theae expenses do not include Spar prts
4) The amount financed by the 3127 for purcheass of leas than U.S.520,000 nd spmre parts
add up to U.S.$167.501; this table does not include a detailed brabkdown of tboge ite,s
because their inwestment aDmots are not relevant
5) The JIF also financed ths freight charges which came to U.S.S131.232
-102 -
ATTACHMENT
E-1223/85 June 10, 1985Spanish (Peru)OED TS:cc
ADDITIONAL COMMENTS ON THE PROJECT COMPLETION REPORTPREPARED BY WORLD BANK OPERATIONS STAFF
I. HIGHLIGHTS
The last two lines of para. 2 are subjective so we do not feel thatPara.2 their inclusion adds anything to a factual assessment of the project but isText more likely, on the contrary, to prejudice recipients of the report againstamended. the project.
II. PROJECT BACKGROUND
On the basis of a feasibility study prepared by R.M. Parsons in1975, which calculated an optimum production scale of 7,000 tons of ore perday and an investment of US$67.7 million excluding escalation and financecharges, CENTROMIN and the World Bank prepared a report in May 1976 whichestimated that a higher return could be obtained by expanding production to10,000 tons/day. A capital cost of US$160.9 million was considered for thisexpansion, regarding which we felt there was a considerable degree ofuncertainty because no feasibility study for 10,000 tons/day had been made,which led to a budget in which direct costs were US$71.9 million andcontingencies and escalation were estimated at US$50 million.
Owing to financial problems the project had to be suspended at theend of 1977, after the Project Managers had completed the basic engineering.
Para. 8 and was subsequently reactivated in May 1979. During the intervening periodmajor exploration work was carried out which showed there were no economicallyproducible reserves in the Pumagayoc area, so that the basic engineeringperformed was no longer valid for execution of the project.
When the project was reactivated, the Project Managers were obligedto substantially modify this basic engineering, especially as regards mine
Para.14 development and preparation and additional procurement of mining equipment,Text construction of a mine shaft, hydraulic fill and the Mantaro-Cobrizaamended. transmission line, and to include a new ore transportation system. estimating
a capital cost of the order of US$277 million, together with a new executionschedule putting mechanical completion of the project in November 1982.
-103 -
It is important to note that this figure was the first realisticestimate, since it was prepared after the final basic engineering for theproject which, in any event, remains valid at the estimated US$160.9 millionalready referred to and included in the contract documents with the World bankas the base budget for the project.
CENTROMIN has carried out various projects with foreign consultants,always working in close collaboration with them, and has satisfactorilycompleted execution of these projects: by way of examples, mention may bemade of the Zinc Plant Modernization Project, the Mine Water Treatment PlantProject, the Lead Agglomeration Plant Project and the Interconnection Project,all of which were satisfactorily completed as a result of the good work by theforeign consultants.
Because of shortcomings of the Cobriza Project Management in certainareas, especially the mining area, CENTROMIN had to perform directly theplanning of the mine working and calculation of the mining equipment, designof the ore transportation system, design and construction of the hydraulicfill system. supervision of the construction of the shaft, part of theexecution and supervision of the mine development works and services, therebyreducing the scope of the work for which Project Management was responsible.However, the fact that the project was completed six months ahead of the dateprogramed by the Management and at a cost of approximately US$44 million lessthan the Management's estimate, indicates that coordination must have beengood, notwithstanding certain conflicts of interest between the two companiesas a result of the reduction in the scope of the services, a situation thatwas not exceptional in a project of this size. It should be noted in thisrespect that the World Bank staff members assigned to the project collaboratedactively toward improving, at certain times, the relations between CENTROMINand the Project Management which had deteriorated owing to the latter'sdeficient performance of certain services in the areas mentioned.
III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PROJECT COMPLETIONREPORTS
Ore Reserves
During appraisal of the project in 1976, the proven and probablereserves at Cobriza were estimated at 20 million tons of ore, with an average
Para.7 grade of 1.8% Cu and 5 oz silver per ton of ore, with an additional potentialof 90 million tons of ore, of which 30 million tons was thought to be locatedat Cobriza and 60 million tons at Pumagayoc; however, it is important to notethat these reserves are geological; moreover, it must be borne in mind thatthere are considerable losses during the mining process because pillars andbridges have to be left for suppport, together with the dilution caused in theblasting phase, especially in a bulk production system. These losses can beof the order of 10-15Z, which appreciably reduces the proven and probablereserves and their respective grades. Finally, because of its low percentageof certainty, potential ore cannot in any event be considered in calculatingthe economic life of a mine.
-104 -
The present grade being mined at Cobriza today is of the order of1.3S Cu. This lower grade than that estimatd for the project is due primarilyto three factors: (i) part of the pillars and bridges of high-grade ore Cdonly be exploited toward the end of the life of the mine; (ii) between 1975
Para.8 and 1982 production was continued at a rate of 2,600 tons/day, with an averagegrade of 2.2S Cu; (iii) the dilution inherent in the production methodpresently used at Cobriza.
As already mentioned, it should be noted that during the period theproject was in suspension extensive exploration work was done which
Para.5 effectively ruled out the existence of sizable proven ore reserves atText Pumagayoc, thus requiring modifications to the process and to the miningappended. system in the final basic engineering.
Increase in Production Capacity
The alternative mentioned of expanding production by 20X wouldrequire considerable expansions in the preparation and development of the mine
Para.10 and the mining equipment, an increase of the ore transport system, expansionFootnote of the concentrate thickener, installation of additional flotation cells and3/. pumps, expansion of the primary crusher discharge system, modifications to the
conveyor system and dust collection systems and water supply, while theshortening of the useful life of the mine to only 8.5 years in accordance withthe known present reserves would also have to be taken into account. All ofthis makes it very difficult to consider expansion of production at this time,especially in a situation as at present when copper prices are completelydepressed and there is no likelihood of any change in this situation in theshort or even medium term.
The only area at Cobriza that was studied during the locating of thePara.ll concentrator was the one known as "Plantanal," which is situated at the footText of the Miraflores area. The latter has a rather low safety factor, since itamended. could be subject to slides in exceptionally heavy rains, so this alternative
was dropped. The Pampa de Coris is formed of similar materials in its tales,but its slopes are much less steep and its base is broader in particular, sothat even if a slide were to occur any damage it might cause to theinstallations would not be irreparable.
Consultants for Cobriza
In addition to what is stated in II, it should be noted that thePara.13 Project Managers, in recognition of design errors and deficient supervisionFootnote for certain works, such as the tailings thickener, agreed to pay the full4/. compensation established pursuant to the contract, amounting to a sum of the
order of US$363,375 which represented 28.5X of the agreed fixed fee, followingnegotiations of a most gentlemanly nature during which there was never at anytime any friction or interpersonal conflict.
-105
Cost Adjustment of Cobriza Project
Regarding the adjustments of the capital cost of the CobrizaPara.14 Project, we feel that the points discussed display a certain degree ofText subjectivity and wish to affirm that the figures given by CENTROMIN are theappended best estimate it can make and one which has not to date drawn any commentsand from the external auditors who examine and report on our financial statementsamended. from year to year.
Regarding the working capital assigned to the project, the BankStaff's report takes rais to be the sum equivalent to the additional operatingcost of the project for a period of two or three months.
This would apply in the case of a project that represented thePara.15 entire operations of an enterprise, but loses validity when the sales of theand expanded plant only reprsent 10 of the enterprise's total sales, where someFootnote additional administrative rationalization measures could significantly reduce5/. the working capital requirements. Moreover, it is known that all of Cobriza's
new concentrates production is intended to take the place of the bought-inconcentrates that have been used in our La Oroya Smelter, so the fact thatthese concentrates no longer have to be purchased outside has reduced ourworking capital requirements, rendering the incremental working capital needsfor Cobriza insignificant.
With regard to interest during construction, and coinciding with theBank's viewpoint, our final internal report on the completion of the Cobriza
Para.15 Project includes the finance charges up to December 1983 as interest duringand construction. As of the date of that report, December 1984, the total projectTable I. cost can be summarized as:
Indirect costs 38,049.4
Direct costs 150,596.6
Working capital 1,638.4
Finance charges 42,700.0
US$232,988.3 million
We would point out that we are putting the final cost of thePara.36. Cobriza Project at US$7 million less than the figure reported a year earlierFootnote in the Bank PCR and US$44 million less than the estimate made by the Project10/. Manager in 1979.
1 L06 -
Mine Water Treatment Plant
The mine water treatment plant was intended basically to meetCENTROMIN's obligation to stop polluting the Mantaro river, and this primaryobjective has been accomplished.
Para.16Text In cost terms, we used to only produce a copper "cement" withamended. 60-70% Cu that was sent to La Oroya for final processing, whereas the present
plant produces refined copper of 99.9% Cu the cost of which is, of course,Para.18 higher than for cementation; moreover, in view of the scale of the copperText production the acidulated mine waters have to be viewed as a byproduct of theappended. mining operation and the copper content of this water will depend on the
content in the materials mined, especially from the open-cut workings.
The main equipment, such as the transformers and rectifiers andPara.18. pumps, had problems from the start of operation, which considerably delayed
start-up. The purchase of equipment is the outcome of the internationalcompetitive bidding required by the loan agreement which, to a certain
Para.18 degree, tends to hinder procurement of the most appropriate equipment sinceFootnote Lt is the bidder who meets the technical specifications and offers the lowest7. price who gets selected, as a result of which when start-up time comes the
equipment procured may not always prove to be the best suited.
Para.18 It must be emphasized that the project as originally designedFootnote envisaged a progressive manuaL reduction of 2% in production owing to a lower6/. copper content in the mine water.
CONCLUSIONS AND LESSONS TO BE LEARNED
In general terms we are in agreement with the conclusions andlessons as set forth in the Bank report. However, as we have noted in thecourse of our comments, we do not consider it fair to bring in the followingpoints which, as we have demonstrated, are without validity:
(i) Nonaccomplishment of the technical objectives of the Cobriza Project
Para.36 The Cobriza Project has met all its technical objectives, reachingText partially design capacity in the fourth quarter of 1983. Production isamended. currently 300,000 tons/month of an average grade of 1.33% Cu.
(ii) Execution cost overrun
Para.36 It is important to bear in mind that the final cost of the projectFootnote cannot be compared with the amount shown in the contract documents,10/. which is only of the order of US$160.9 million, since that figure
was arrived at without any feasibility study. The final cost ofthe project was US$232.9 million which, if compared with the finalestimate of US$277 million based on better knowledge of themineralized deposit by the Project Manager in 1979, represents asaving of approximately 20%.
- 107 -
(iii) Inadequacy of reserves
Para.9 As regards reserves, after having operated for more than threeFootnote years as a project there are sufficient proven/probable reserves2/. for ten years as a minimum, while there is also a significant
potential that would make it possible to continue operating for afurther five years.
We would also like to add the following suggestions forconsideration in future projects:
(i) Regarding the bidding and contract award process for criticalmain equipment, we feel that greater weight should be assignedto the quality of this equipment than to its cost.
(ii) To give greater certainty to the capital cost of a project,and its return, the loans granted by the Bank, based on thefeasibility study, should be oriented toward development ofthe basic engineering with some type of commitment that willguarantee for the borrower Bank participation in thesubsequent execution of the project if the economic andfinancial results of the basic engineering so warrant.
KEY PROJECT DATA
There is a sizable interval between the completion date of theproject and start-up of operations and the first year of operation.
This led to considerable variations in the total project cost andthe overrun on fixed assets, with the result that the rate of return on theproject was different from that expected.
Financial Covenants - Ratios
Regarding the financial covenants, our position is shown in a badPara.33 light in the projections in soles presented by the World bank, because theText exchange rate used is not the real one but the end one, since our income isappended in dollars. The distortion between the financial ratios in current soles andand in US dollars is due to the valuation of inventories in time of inflationFootnote (the selling price uses the average cost system) that is partially corrected9/. by the conversion into US$.
108 -
These projections are as follows:Projections in Soles 1985-89
1985 1986 1987 1988 1989
- Current Ratio (1.5) 0.78 0.85 0.89 0.90 0.91
- Debt/Equity Ratio (50.50) 62/38 69/31 68/32 73/27 77/23
Projections in Dollars 1985-89
1985 1986 1987 1988 1989
- Current Ratio (1.5) 1.07 1.10 1.08 1.06 1.07
- Debt/Equity Ratio (50.50) 40/60 45/55 47/53 50/50 55/45
In our opinion, the negative result observed in the Cobriza Projectis due to two decisive elements:
1. The significant reduction in Cobriza's metal content andPara. 38. reserves. These two factors, regarding which there is
always a degree of uncertainty at the time a decision istaken, turned out to be unfavorable.
2. The need for careful updating at the time the project wasPara. 39. reactivated; this aspect was not apparently accorded the
importance it should have received, which is is somethingthat should be borne in mind by both CENTROMIN and the banksthat financed the project.
