Document of

The World Bank

FOR OMCIAL USE ONLY

Report No. 5384

PROJECT COMPLETION REPORT

COLOMBIA

CERRO MATOSO NICKEL PROJECT

(LOAN 1762-CO)

December 28, 1984

Industry Department

This document has a restricted distribution and way be used by recipients only in the performance oftheir official duties. Its contects may not otberwise be disclosed without World Banlk authozation.i

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FOR OFFICIL USE ONLY

PROJECT COMPLETION REPORTCOLOMBIA: CERRO MAOSO NICKEL PROJECT

(LOAN 1762-CO)

TABLE OF CONTENTS

Page No

PREFACE .......................... a... O..* ..............e. *.. iBASIC DATA SHEET ...o............................ ................ ...HIGHLIGHT ........ ............... . ***.........e....... iV

PART 1 .................. **** *********.. ............. I

I. PROJECT IDENTIFICATION, PRE-APPRAISAL AND APPRAISAL .......... III. PROJECT iMPLEXENTATION AND MANAGEMENT ........................ 3III. OPERATING PERFORMANCE . ............... . 19IV. FI,NANCIAL AND ECONOMIC PERFORKU{NCE ........................... 34V. TABLES

1. Implementation Schedule2. Project Capital Costs3. Disbursements for Bank Loan

.4. Disbursements for the Project5. Organization Chart of Project Team6. Chronology of Significant Events7. Procurement Schedule Under Bank LoanS. Production9. Financial Projections

PART 2 ............................................... 58

I. PRODUCTION BUILD-UP AND PLANT CAPACITY ......... o ............ 58II. NICKEL PRICES .......... ............... .... . 59III. FINANCING PLAN .............................................. 60IV. FINANCIAL AND ECONOMIC RATES OF RETURN ...... ................ 61V. OVERALL ASSESSMENT ........................................... 62VI. LESSONS FOR SIMILAR PROJECTS ................................ 63

PART 3 .. ......... 65

I. COMMENTS RECEIVED FROM THE GOVERNMENT ................. ..... 65II. COMMENTS RECEIVED FROM THE BORROWER .o ........................ 67

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROJECT COMPLETION REPORTCOLOMBIA - CERRO MATOSO NICKEL PROJECT

(Loan 1762-CO)

PREFACE

This is a completion report on Loan 1762-CO which providedfinancing for the development of the mining and processing facilities toproduce annually about 50 million pounds of nickel contained in ferron-ckel,

for the export market. The project has been implemented by the Borrower,Cerro Matoso S.A. (CMSA). a Colombian corporation specially created forsuch purpose. A loan for the amount of US$80 million was approved onOctober 16, 1979; the Closing Date was June 30, 1983.

The Borrower has prepared a comprehensive and well documentedProject Completion Report, covering project preparation, implementation,operating performance and financial and economic performance. This ispresented in part 1 of the report. Bank staff shares by and large thejudgements and conclusions of the Borrower's PCR. However, certain aspectsare discussed in more detail in part 2 (prepared by the Staff), to enabledrawing conclusions of general applicability to the Bank's involvement insimilar projects in the future.

The Government and CMSA have offered specific coments andclarifications; these have,been taken into account in finalizing the reportand are reproduced as part 3.

This project has not been audited by the Operations EvaluationDepartment.

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PROJECT COMPLETION REPORTCOLOMBIA: CERRO MATOSO NICKEL PROJECT

(Loan 1762-CO)

BASIC DATA SHEET

A. KEY PROJECT DATA AppraisalEstimate Actual

Total Project Cost (USS Million) 320.5 a/ 433.4 b/Overrun (x) - 34ZFixed Assets 276.8 387.5Working Capital 16.3 a/ 11.3 b/Interest during Construction 27.4 34.6

FinancingEquity Contribution 114.0 200.0World Bank 80.0 80.0US Exim Bank 25.6 25.7Commercial Banks 100.9 150.0

Loan AmountDisbursed 80.0 80.0Cancelled 0 0Repaid to IBRD

Physical Project CompletionCompletion of Physical Component (date) April 1, 1982 April 1, 1982Start-up of Operation April 1, 1982 May 1, 1982Production Level '83 (lbs nickel

contained) 40.6 million lb 28.7 million lb

Financial Rate of Return 17% 2-7% Cl

Economic Rate of Return 19% 4-9% C/

a/ The.e figures have been adjusted to reflect working capital requirements byDecember 1982. The SAR estimate is based on working capital requirements tofull production.

b/ The actual project cost indicated by CMSA in its PCR is US$427.7 million(Table 2). This figure has been adjusted to reflect the Company's workingcapital by December 1982, as indicated in its balance sheet.

c/ Based on revised estimates for costs and benefits.

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B. OTHER PROJECT DATA

Board Approval October 16,1979Loan Agreement Date December 20,1979Effective Date July 3, 1980Closing Date June 30, 1983

MISSION DATA

No. of No. of Date ofMonth/Year Weeks Persons Manweeks Report

Identifi ation 08/71 n.a n.a n.a n.a

Preparation 08/76 n.a n.a n.a n.a

Preparation 11/76 0.4 1 0.4 11/05/76

Preparation 01/77 1.0 1 1.0 02122/77

Appraisal 03/78 4.2 3 12.6 05/02/78

Supervision 05/79 1.0 4 4.0 05122/79Supervision 05/80 2.0 2 4.0 05/27/80

Supervision 03/81 1.4 2 2.8 03119181Supervision 11/81 0.8 2 1.6 11/23/81Supervision 08/82 0.6 1 0.6 09/15/82

CURRENCY EQUIVALENTS

Currency Unit - Colombian Peso (Col$)

April 1979 USI.0 Col$42.40Col$1,000 US$23.58

December 1983 US$1.0 - ColS88.77Col$1,000 - US$11.27

GLOSSARY OF ABBREVIATIONS

CMSA - Cerro Matoso, S.A.CONICOL - Compania de Niquel Colombiano, S.A.CONPES - Consejo de politica Economica y SocialCORELCA - Corporacion Electrica de la Costa AtlanticaDNP ' - Departamento Nacional de PlaneacionECOMINAS - Empresa Colombiana de MinasECONIQUEL - Empresa Colombiana de Niquel, Ltda.

ECOPETROL - Empresa Colonbiana PetroleosIFI - Instituto de Fomento IndustrialINCOMEX - Instituto Nacional de Comercio ExteriorINGEOMINAS - Instituto Nacional de Geologia y MinasISA - Interconexion Electrica, S.A.SENA - Servicio Nacional de Aprendizaje

COLOMBIAN FISCAL YEAR

January 1 - December 31

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PROJECT COMPLETION REPORTCOLOMBIA: CERRO MATOSO NICKEL PROJECT

(Loan 1762-CO)

HIGHLIGHTS

The Bank involvement with this project dates back to 1967.During the mid-1970s, after project preparation was fairly advanced, theownership structure of the new company to be created began to take itspresent shape, with the Government holding 45Z of the shares, the ShellGroup (through Billiton) 44% and the Hanna Mining Company (through CONICOL)11%. CMSA was incorporated in March 1979, shortly before implementationbegan, and a project management organization was established with supportfrom the shareholders and engineering, procurement and project managementservices provided by a major US engineering firm. (Part 1, section I).

Implementation proceeded quite expeditiously and constructionactivities were completed in April 1982, as planned on the originalschedule. There was, however, a cost overrun of US$113 million,representing a 34% of the appraisal estimate. This cost overrun, someinitial technical difficulties resulting in a production buildup at a lowerrate than anticipated, and present and projected trends in theinternational nickel prices have resulted in additional financialrequirements and lower financial and economic rates of return thananticipated. Price trends were acknowledged at appraisal as the main riskaffecting the project. Actual prices during the initial two years ofoperation and current trends are well below the original projection. Thishas been the major cause of the very tight financial situation faced by theborrower. Additionally, current changes in the metal markets have expandedthe uncertainty associated with price projections, widening the possibleranges and adding a new dimension to the analysis of project risks. Conse-quently, a careful assessment of the Bank's price forecasting methodologyappears warranted for its use in future appraisals. (Part 2,paras. 2.03,2.12,2.18).

Overall the project made an important contribution to theColombian mining and industrial sector as well as to the development of aremote area. CMSA was very successful in establishing a very competentmanagement team, integrating Colombian staff with expatriates, which alsoprovided a positive influence in the interaction with local consultingfirms and contractors. Recruitment and training of the workforce wasanother successful achievement of the project, by making available adequatenumbers of skilled operators needed for a plant utilizing a sophisticatedtechnology. The support provided to the project by CMSA's shareholders,.can also be singled out as positive lesson of good cooperation between ahost government of a developing country and foreign investors. Theapproach of joint ownership between local (state and/or private) andforeign interests are found to provide a good basis for undertaking miningprojects by combining the availability of-natural resources and knowledgeof the local environment with the access to technology, internationalmarkets and managerial capabilities, as well as facilitating access tocapital markets. The Bank can play a catalytic role in bringing togetherlocal and foreign interests for the implementation of mining projects.(Part 2, para. 2.17).

PART 1

COLCiBIB: CERRO HATOSO NICKEL PROJECT - LOAN 1762 CO.

PROJECT COKPLETION REPORT

PROJECT IDENTIFICATION, PR'A RAS AMD APPRAISAL.

(a) The Project.

The Project consis:s, generally, of mining and production facilitiesfor the processing of up to approximately 120 dry metric tons oflateritic-nickel ore per bour to produce approximately 38.000.000 to50.000.000 pounds per year of contained nickel in the form offerronickel -when operating at full capacity.

In 1979 CERRO MATOSO S. A. (CISA), the owner of the Project, wasorganized with the participation of Empresa Colombiana de NiquelLtd. (ECONIQUEL), Billiton Overseas Ltd. (BILLITON)X and The Hanna-mining Company (ILANNA).

ECONIQUEL is the Colombian entity which possesses the consessioncontract with the Colombian Government to produce ferromickel f omthe mine at Cerromatoso, in the Municipality of Montelibano,Departamento de C6rdoba, Colombia.

BII.ITON is a company of the Royal Dutch/Shell Group, anothercompany of that group having the contractual coanitment with CISAfor selling the ferronickel produced by the Project.

Eanna is a Corporation incorporated under the laws of the State ofDeLaware, United States of America.

Eanna assisted COSA in connection with the engineering,construction, testing and start up of the Project. Also, Hanna hasthe contractual commitment to assist C1SA in reaching the designcapacity of the Project and in monitoring the Project providingtechnical and administrative services.

She first activity to define the project scope was an extensiveexploration drilling and sampling program which was the basis for acomprehensive study covering geology, mining, marketing, operatiag.costs, cash flow analysis and financing.

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Regarding the process, two experimental programs were developed intotwo major pilot plant campaigns. One of these was at theElkem-Spigerverket research center in Fiska&, Norway treatingapproximately 350 Rg of ore per bour.

Later tests were conducted at Riddle, Oregon, in a pilot plantdesigned to treat approsxiately two tons per hour.

Estimates for mining capital expenditures, preproduction costs,operating costs, overhead requirements, allowance for employeehousing, iirstrip and other Montelfbano improvements were alsoprepared.

Based on the above mentioned information, Bechtel Engineering,Incorporated, an affiliate of Bechtel International Corporation andOverseas Bechtel Incorporated (collectively Bechtel), prepared thefeasibility study, covering the original project scope.

(b) Role of Bank in formulating Project scope and implementationarrangement.

Role of Bank in formulating project scope and project implementationarrangements was that of a consultant to guide CISA in thepreparation and presentation of loan requests according to properprocedures and requirements.

(c) Role of Bechtel and Consultants in Project preparation.

Bechtel had a basic role in the project preparation because, aspointed out in I (a), they worked -on the feasibility study andprovided assistance in the implementation of that study.

Colombian consultants participated in the studies related to thL-arcbitectural design of the towosite and aocial aspects (sanitation,environmental protection, educacional facilities, training for localpersonnel), that C1SA had to consider in order to make the projectof ost benefit to the community.

(d) Bank involvement to formalize Loan.

As pointed out in I (b), the Bank's involvement was mostly as snadvisor to belp CISA in acccmplishing requirements and procedurr.astated by be 3ank and contributing with the experience gained by theBank in similar projects in tehe world.

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31 PROJECT IPLEHENTATION AND MANACEHENT

(a) Project Scooe

Neither project scope nor the teChnology has been cbanged except;

(i) The availability of natural gas, mentioned as a probability,was confirmed and is the fuel source for drying andcalcining.

(ii) It bas not been found necessary to dry ore to 7Z aspredicted. Drying to only 14 or 152 has resulted in excessdrying capacity available.

(iii) Test work did not prove the possibility of the reduction ofas much as 50Z of the nickel oxide to metal realizedcomercially up to now and in this way reduce the full loadrequirements of the smelting furnace by as much as 10. -

(iv) The subscitution of slag dispos:l by granulation rather thandeposit in slag pits.

Cv) No metal recovery equipment has yet been provided asdescribed to remove metal from refining slags.

Cvi) Reagents for refiuing have needed substantially more thanthe estimated amount of energy for melting.

(b) Project Management

(i) Organization Chart and Functions.

Table 5 shows the organization chart of CQSA's ProjectManagement.

Roles of parties involved in that organization were asfollows;

1. Board of Directors.

Board of Directors kept permanent control of the wholeProject covering financial, administrative and technicalmatters, decided about recommendations and approvalrequests presenced for their consideration and indicatedpolicies to be observed by 04SA's organization.

2. Engineering, Procurement and Construction Comittee.

The EPCC was a group organized with representatives ofthe stockholders with the main purpose to expeditedecisions and approvals in relation to engineering,procurement and construction requirements presented byBechtel and beyond the level of authorization of CISA'sGeneral Manager and Project Manager.

The EPCC was permanently informed about the status ofthe Project, received recommendations from OaSA'sGeneral Manager and held monthly meetings with theCOSh's General Manager and Project Manager andrepresentatives of Bechtel to discuss the monthlyProgress Report prepared by Bechtel.

Maiu subjects covered during those monthly meetings werethe schedule and progress of engineering, coastruction,commitments, ezpenditures, the control of manhoursexpenditures, the status of material requisitions formaterials and equipment and the status of importlicences.

3. General Manager of CMSA.

General Manager of OCSA received daily reports from theProject Manager, decided about approvals and/orrecoimendations presented by Project Manager, keptinformed the members of the Board of Directors about theprogress of the Project, presented recommendations tothe EPCC and the Board of Directors, maintained closerelationships with government officers to expediteapprcvals and/or authorizations necessary for theprogress of the Project, kept permanent contacts withfimnacial sources of CISA to comply with all formalrequirements on behalf of CMSA axd managed C4SA'sorganization.

4. Project Manager of CISA.

Project Manager of CKSA had a day to day coatrol andsupervision of the Project at the plant site in closerelationship with Becbtel and consultants and wasprovided by the stockholder with all necessary authorityto keep the project moving.

The system used by the project nager to plan andmonitor the implementation of the project included thefollowing activities:

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Review of schedules and estimates prepared by PrimeContractor.

Participation in project reviews, negotiations andimportant meetings.

- Moni.toring all activities for compliance with plans,schedules and budgets.

- Monitoring cuatoms clearance of material andequipment as required.

- Approval of purchase. of material and equipment asrequired.

- Approval of changes or additions to the scope of work.

- Analysis and choice of techniques, procedures,actions, etc., to acknowledge and respond to problems.

- Monitoring of detailed design activities to ensureconformity with specifications.

- Revieving and commenting on contractors' designdrawings.

- Reviewing layout drawings and plot plans.

- Providing technical assistance in review ofcontractors' plans to return to schedule.

- Monitoring of procurement activities by:

Revieving purchase requisitions.Reviewing and commenting on vendors' quotationsfor selected process equipment.Reviewing and commenting on inspections anaexpediting procedures.Inspecting selected process equipment duringfabrication.

- Attending the construction kickoff meeting to ensureunderstanding of quality control, field changes andacceptance procedures.

- Field iaspections at the sire as considered necessary.

- Monitoring of acceptance tests.

- Assisting in establishing checklists for plantcAmpletion.

(ii) Coordination Procedures.

Relationships during implementation betw*en borrower,consultants, technical advisors, contractors and supplierswere as follows;

: She representative of CISA for the project Vas theProject Manager.

2 CQSA entered into an agrecement with Bechtel forengineering, procurement And project coordinating.services.

3 According to this agreemeuc, and subject to thedirection and control of C1SA, Bechtel acted as COSA's-,agent and performed engineering, procurement, projectcoordination, pre-operational testing and start upservices.

Also Bechtel represented (C(SA in dealing with thirdparties in conneccion with those services.

4 Consultants, contractors and suppliers participatedand/or contributed to the implementation of the projectwithin the fraievork of the agreement between !MSA andBechtel.

(iii) Coordination problems found during implementation.

In general the coordination procedures were appropriate forall purposes.

One exception was the relationship between Bechtel and aColombian consultant firm.

In that relationship there were conf.icts for the followingreasons:

1. Traditionally that consultant, one of the most qualifiedengineering consultants in the country, has workedexactly in the position of Bc-btel, as ownerrepresentative before contractors, suppliers and otherconsultants and in direct communication with owner.

2. Bechtel's and consultant's systems to conduct planning,scheduling and cost control, contracts administratiou,

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field engineering, construction and procuremnetservices, vere different and this situation required anadaptation and learning process simultaneously with theexecution of the project.

To avoid the problems created by that situation vould haverequired:

Detailed discussions betweeu Bechtel/consultant, to-clarify systems and procedures to be used in the jobbefore the work started.

- Incorporation of some experienced Bechtel staff in theconsultant's organization in the field until thosesystems and procedures were clearly understood andpractised.

(iv) Bank involvement to forralize Loac.

Basically the Bank's role in the design of the projectimplementatioa was to provide assistance to formalizearrangements for the coordination between CKS&, Bechtel,Hanna and Contract.

(c) Performance of Consultants

C) In general, consultatnts performance was good.

The only dificulty found during project implementation hasbeen mentioned in point II (b) (iii).

(d) Performance of Contractors and Suppliers

(i) Problems found by contractors.

Performance of contractors was good with followingexceptions:

1. One contractor had troubles because of lack of adequateequipment and know-how to overcome difficulties insevere weather conditions.

2. One contractor had organizational problems because theywere overextended with the scope of work of theircontract.

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(ii) tSuStious to avoid problem suffered by contractors.

Those problems could have bee avoided by:

1. Here detailed analysis of bids to see What constructionequipment was available in the country.

2. Defiuing that necessary construction equipment to workunder difficult wether conditions bad to be availablein the country.

3. Expediting temporary import licences for that equipmeutwhich could be critical in case of those weathercaditions.

4. Sharing between different contractors the scope of workof any activity whenever there was the possibility thatsaid activity could have overextended the capacity ofone contractor.

(iii) Examples of lack of performance.

Specific ezamples to illustrate lack of performance bycontractors are:

1. Gas pipeline installation.

At a certain poiAt in the construction activities therewas the possibility that the plant would be completed onschedule without having gas for the start-up because ofdelays in the construction of the gas pipeline.

Therefore, the scope of work of the original contractorwas substantially reduced and a new contractor wasawarded a contract to cover the balance.

2. Tovwsite Construction.

The contracts L:\ build bouses (excluding prefabricatedand workers' houses) were awarded to only onecontractor, who simultaneously had other contractualcommitments in the construction of the Plant.

This fact caused delays in the construction of thetownsite and problems in other activities, as pointedout in III (f) (iii);

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(e) Procurement

Wi) Procedures.

05.5A employed the following procedures for the purchase ofmachinery equipment, materials, and -other goods during theconstruction period:

1. Preliminary Equipment List and Source Categories

Bechtel developed a Preliminary Equipment List and madean assessement of possible sources. CXsA and Bechtelconducted a survey of Colombian Industry to determinewhat equipment and material were available from Colombiafabricators and developed a preliminary list ofColombian and worLdwide potential bidders for each itemas appropriatae. This list (a copy of which wasfurnished to the Stockholders) was classified in thefollowing categories:

* Category I

Bulk materials, mining and process equipment (andcorrespond:ng spare parts) which could be purchasedcompetitively from Colombian fabricators, in compliancewith specifications, and which was available insufficient quantities to meet delivery schedules.

Category II

Bulk -aterials, mining equipment, process equipment,accessories, and spare parts which could be fabricatedin Colombia, but purchased on a worldvide competitivebasis, wherein Colambian fabricatcrs receivedpreferential considerations within che limitations ofthe Project financing policy.

Category III

-Bulk materials, tools -or construction -mining

equipment, process equipment, accessories, and spareparts which were not available in Colombia and should bepurchased from foreign suppliers.

Category IV

Nop-process equipment and tools required exclusively forconstruction which could be either rented or purchasedand could be imported under bond, exempt from ducies and

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taxes on the same basis as process equipment but subjectto export or to be otherwise disposed of when no longernaceded.

In its preliminary form this Equipment List waspresented to CISA and the stockholders for cornents.From time to time the Preliminary Equipment List wasrevised 4ad updated and copies of 5uch revised list wereissued by Bechtel and furnished to CHSU and toStockholders.

Bechtel prepared an estimate of the cost of equipmentand bulk materials for use by CiSA in projecting loanrequiremements or allocation of equity funds as theyrelated to funding of purchases in Colombia and fromforeign sources.

At the appropriate time when estimated costs wereassigned to items on the Preliminary Equipment List. andBechtel considered that data and information containedtherein was sufficiently developed, OIS& submitted suchList to the Board for approval. After approval by theBoard, significant changes in such List were presentedto the Board for approval from time to time. Based oaBoard approval, CiSA autborized Bechtel to proceed.

On the basis of the Preliminary Equipment List, CISAwith the assistance of Bechtel made applications to theninistry of mines, Income% and the CustomsAdministration for a Global Import Licence. vith copies.-to Government agencies, as required.. At this time theList was classified according to the BrusselsRomenclature.

2. Procurement Procedures and Approvals.

In general. procurement of machinery, equipment,materials, and other goods were carried out as follows;as Bechtel proceeded with detailed engineering of theProject, technical specificationz were prepared for eachitem, bidders were pre-qualified, bids weze solicited,suppliers selected,. purchase orders awarded, fabricationand shipment were monitored and expedited and equipmentimported, all in accordance vith the General Procurement -

Procedures.

These General Procurement Procedures were designed toprovide a broad general framework within which there wasflexibility to- utilize different purchase methods other

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than the standard equipment purchase order, such asnegotiated awards and unit price purchases. Bechtel andrWSA from time to time proposed to the Board for itsapproval the use of these special purchase concepts forspecified items, which also were identified in the-progrw:s and budgets presented to the Board for approval.

The general sequence of steps in the procurement processwas as follows:

2.1 Technical specifications for each item ofequipment and a corresponding list of bidders weresubmitted by Bechtel to the stockholders forreview and to CKSA for approval, prior to issuingfor bids. Any written comments of CoS& thereonwere furnished to the stockholders.

QISA, taking into account comments from thestockholders advised Bechtel of its approval orcomment s.

2.2 After receipt of CMSA's approval of the technicalspecifications, Bechtel incorporated changesrequested by C1SA and then issued invitations tobid to pre-qualified bidders.

Copies of complete bid packages and correspondinglists of bidders were forwarded to CkSA and thestockholders.

2.3 Imediately after receipt and opening ofproposals, Bechtel forwarded copies- directly toCKSA and the stockholders for information, whileBechtel condurted technical, commercial, andfinancial evaluations and prepared itsrecommendations for award. Upon completion,Bechtel forwarded these to CKSA and thestockholders. CISA, taking into account therecomendation of Bechtel and any commentsreceived from the stockholders, forwarded itsrecommendation for the award of the stockholdersand presented the same for approval by the properapproving body as follows:

A. Project Manager of OiSA - ItL s under $l00.OOOB. General Manager of 01SA - items under $500,000C. EPCC -items over $500,000 and under $2,500,000D. Board-items over $2,500,000.

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2.4 The approving body acted an each purchase orderproposal submitted to it vithin the followingpolicies and procedures:

2.4.1 Procedures were in effect to assure thatall required information -relative topurchases was available to the stockholdersas the information was developed.

2.4.2 The purchase order recoimnndations ofBechtel and OLSA were furnished to thestockholders.

2.4.3 The approving body (during the constructionperiod) held regular monthly meetings.

2.4.4 It was the intention of the stockholdersthat decisions with respect to purchaseorders were to be takeu by the approvingbody as promptly as possible and in anyevent, unless CISA indicated otherwise, nolater than the next regular monthly meetingfollowing the furnishing of thereco mendations as described in (2.4.2)above. Notwithstanding this general rule,which applied to the great majority ofpurchase orders, the Parties recognizedthat in certain cases it could be necessaryfor the approving body to act moreexpeditiously on selected purchase ordersbecause of their importance to acontinuation of the conitructioan inaccordance with the project - schedule, andfor these cases the two followingprocedures were available.

Emergency orders. Bechtel and QiSA whenfurnishing the recommendations as describedin (2.4.2) above certified that a purcbasCorder was an "Emergency order" and providedan appropriate explanation and in this caseCQSA called a speciaL meeting of theapproving body to act upon such purchaseorder with a minimum of 48 hours noticeafter furnishing sucb re..ommendations. Ifsuch a purchase order was not rejected atthat meeting, CQSA proceeded with theavarding of the purchase order. It was the

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itntjn3f of the Parties to utilize theemergency order procedure only in the mostabnormal situations.

Critical orders. Bechtel and CHSA whenfurnishing the recommendations as describedin (2.4.2) above certified that a purchaseorder was a "critical order". If a criticalorder was not rejected by the approvingbody on or before the next regular monthlymeeting of the approving body following thefurnishing of such reco-mendations, QiSAcould any time aftez such second meetingproceed with the awarding of such purchaseorder. It was the intention of the Partiesto utilize this critical order procedureonly 'where the postponement of approvingbody action could result in a substantialcost exposure to the Project.

A purchase order awarded by CMSA undereither the emergency order or criticalorder procedures and neither approved norrejected by the approving body within thespecified time periods was resubmitted by-OISA to the approving body as promptly aspossible for confirmation and, in the eventsuch- order was, not confirmed, any costs dueto cancellation would be for CMSA account.

2.4.5 The Parties, considering the magnitude ofthe investment required for the project andits importance to the development of thenational and regional economy, made everyeffort to act as quickly as possible underthe procedures described above.

2.5 CKSA notified Bechtel of the approved award anddirected that the award be carried out, in whicb.case Bechtel placed the order with the selectedsupplier. At this point application was made tothe Ministry of Mines, Incomex, and the CustomsAd-inistration for an individual import licence.

2.6 As detailed engineering prcveeded supplierafurnished data and detailed drawings of theequipment to be supplied. Such drawings werereviewed by Bechtel for compliance withspecifications and afesr approval the supplier

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certified such drawings and forwarded final copiesto Bechtel for distribution to CISA, and thestockholders.

2.7 When a revision to an approved purchase ordergenerated an increase in the approved purchasepriCe (or estimated total value of a purchaseorder) and if such increase was more that$2.500,000 or its equivalent, then such revisionwas brought to the Board for approval. When theamount of an increase in an approved purchaseorder was greater than $500,000 and l.ss than$2.500,000, such revision was submitted to theEPCC for approval. When the amount of an increasein an approved purchase order was less than theamount stipulated above or wben the revision tothe purchase price was due to escalation asprovided in the terms of the purchase order, CISAand the stockholders were kept advised of suchincreases though the information transmissionprocedures but it was not necessary to submit suchincreases for approval.

2.8 Bechtel's expediters monitored each fabricator fortimely transmittal of certified drawings, purchaseof materials, subcontracting, shop fabrication,and shipping schedules.

Expediting extended to the shops of subsuppliersand subfabricators. Bechtel furnished periodicexpediting reports to CISA and the stockholders.

2.9 During the course of manufacturing and prior toshipment, Bechtel's inspectors examined the goodsfor compliance with specifications, quality ofworkmanship, comoliance with codes and Vitnessingtests. Copies of inspection reports were.forwarded to CISA for record and to thestockholders.

2.10 When the material was ready for shipment by thesupplier, Bechtel traffic representative assistedin determining the routings, monitored, andexpedited the shipment and, if purchased outsideof Colombia, arranged for ocean shipping space.

2.11 In the case of purchases from foreign suppliers, afreight forwarder assigned by Bechtel received thecargo at the port of exit and arranged for storage

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or delivery to shipside as required. The freightforwarder prepared and asseabLed all thedocumentation required by the shipper, theconsignee, and the Colombian customs authorities.These documents were then forwarded to theirdestinations in accordance with the instructionsissued by Bechtel.

2.12 At the port of entry in Colombia, Bechtel or itsagent arranged for unloading the vessel andshipping the goods via truck, under seal, directlyto the customs zone at Cerro Matoso for clearance.

2.13 Purchase of mining and mobile equipment was madeby CISA, with the assistance of Bechtel.

2.14 Purchases of bulk and consumable materials weremade by CtSA or Bechtel. Procurement proceduresfor such materials were the same as -theprocurement procedures applicable to fabricatedequipment.

3. Cormitment Authority

Items within the approved Program and Budget and havingan estimated purchase price of $500,000 or less werepurchased by Bechtel with the approval of CXSA without

- further reference to the Engineering, Procurement andConstruction Co mittee and the Board. Items having anestimated purchase price of more than $500,000 and lessthan $ 2,500.000 required approval of the EPCC. Itemshaving an estimated purchase price of more than$2,500.000 required approval of the Board. Thestockholders, however were kept- informed of alltransactions reLating to such procurement.

(ii) Problems with standards and units.

Some problems occurred during construction because ofdifferences in specifications and units used by differentsuppliers in U. S. A., Europe and Japan.

There were no tabulations or lists presenting standards fromdifferent countries to determine equivalances -in

specifications for certain materials (hetals, plastics,lubricants, insulating, etc.). -

For steels, for instance, there are the standards ASTH, AISI(USA); JIS (Japan); DIN (Europe); ICONTEC (Colombia); etc.

- 16 -

Sometimes in a document the specifications referred. tocertain standards and in some other document there were-eferences to some other different standard for the samematerial.

To use units according to the International System (SI)requires mathematical operations to couvert those units tothe traditional units used in every country.

SI system utilizes Newtou, d4eter, Second, Pascal, Joule,whereas in Colombia the units used are kilogram, meter,second, Kg/cm2, Xi/hr, etc.

None of these problems had any relation with the procurementguidelines of the Bank.

(iii) Some problems occurred during construction because ofdifferences in specifications and units used by differentsuppliers in U.S.A., Europe and Japan.

None of these problems had any relation with the procurementguidelines of the Bank.

(iv) One specific benefit that international competitive biddingprovided to QiSA was the obtaining of better prices.

(f) Implementation Schedule

(i) Comparison between appraisal and actual implementation.

Comparison between appraisal and actual implementation isshown in table I.

(ii) Major factors of delays.

Major factors causing delays in the project were importationtime and housing.

(iii) Actions taken by CMSA to remedy delays.

Actions taken by CQSA and contractors to remedy delays were:

1. Project Manager was provided witlh all necessaryauthority to expedite decisions as mentioned in point(II) (b) (i).

2. The scope of work of contractors who were causing delayswas reduced and the job split between two or more othercontractors.-

- 17 -

3. Programs with wore intensive rhythm of work using morevorkers and equipment to compress the schedules

4_ Close supervision of euployees responsible for obtainingtbe import licences.

Summarizing, the main achievement on implementationschedule was that in spite of delays that occurred inimportation of some materials and equipments in theconstruction of the houses and in the installation ofthe gas pipeline, those delays were properly correctedand the overall program was not affected.

Importations were finally expedited by CfSA throughaction taken by General Manager with the Government.When the materials and equipments were at the plantsite,contractors were organized according to accelerationprograms.

To overcome housing problems the contractor giving riseto delays was reLeased and the balance of that job wassplit between other contractors and COSA with Bechtelintensified supervision.

The installation of the gas pipeline was timelycompleted because CXSA decided to reduce the scope ofwork of the original contractor and to engage a highlyqualified contractor to complete the work.

(g) Capital Cost, Financing and Disbursements.

(i} Breakdown of actual and estimated project cost.

Information about actual and estimated project cost ispresented in Table 2.

Table 2A presents summarized information about the mainitems which caused the difference between the estimate andthe actual cost of the Project.

One additional aud general reason of that difference, whichis not particularly mentioned in table 2A, was the Colombiancontractors productivity.

It vas observed that actutl productivity was better thanexpected, but the cost per hour was higher than forecasted.rhe net result was a 10 to 15% increase in contracts prices.

- 18 -

The principal reasons that cost per hour was higher wer-:

- host of the qualified labor came from other places farfrom Cerro Natoso, and required imcentives to vork atthe plant site.

- Was necessary to organize works with intensive use ofoVTartime to complete .the job.on schedule.

J6i) Financing plan.

The financing plan that was developed envisaged acombination of shareholder investment and third partyborrowing.

There was a commitment from the shareholders tc contributean initial US$25 m increasing to a minimum of US$75 i andthereafter up to US$ 200 m to the extent that the additionalfunds were needed for the project.

Lenders undertook to provide the following:

The World Bank US$ ac.o XEximbank of U.S. 12.85 aChase Manhattan/Bankers Trust 12.85 nChase Manhattan plus 12 other Commercial Banks, 120.0 m

TOTAL 225.7 m

With the exception of the World Bank loan that carries theguarantee of the Republic of Colombia the remaining loansdepend on the success of the proj'ect for the repayment ofinterest and principal.

The loans were all fully drawn and the full investment ofUS$200 u made by the shareholders by mid-1982, the period ofstart-up and the period of sharp reduction in theinteruational nickel price.

The cormercial banks agreed to coutribute a further US$30 ain 1982 on the same terms as their initial loan and agreedto some deferment of the principal repayments due to them in1984/85 to the later years of the term f the loan. -Theprincipal shareholders agreed to contribute up to a furtherUS$44.625 m either as equity or as subordinated debt shouldthey be r!quired and these funds had all been drawn by July1983.

- 19 -

(iii) Follow up system.

By the nature of the loan agreement and shareholderconitments the control of the sources of financing wasstraigbt forvard and the follow-up straight forvard.

(iv) Delays in disbursements.

These delays are shown in table 3.

Retsons for deviations and delays on disbursements by theBank were:

1. The loan was not declared effective until July, 1980 and- most disbursements were therefore obtained via thereimbursement procedure.

2. The time spent in gathering all supporting documentationrequired to obtain reimbursement from the Bank alsocaused some delays.

(v) Problems witb Bank procedures.

The borrower did not experience any problems with Bankprocedures nor encounter any unreasonable delays.

(vi) Performance of other Lenders.

1. Chase Syndicate Loan.Good performance

2. Eximbank Loan.Good performance.

3. Exim related Commercial Loan.Good performance.

(vii) Disbursement schedule.

The schedule of drawdowns of the loans is given in Table 4.

III OPERATING PERFORMANCE

(a) Commissioning and Start-Up

(i) Major problems in start-up and comaissioning.

- 20 -

Dry out and heat up of the electric furnace commenced April10 1982 with the aid of gas burners followed by first power'to the electrodes on April 26 1982.

First slag was tapped on May 11 1982.

First uetal was tspped on June 25 1982; this activity waslater than expected due to the gradual loas of thesacrificial lining in the furnace crucible which resulted inthe need to make an additional 1000 tonnes of Fe-Ni toreplace that volume of sacrificial lining lost.

The following are the major causes of lost production sincestart-up through to mid-1983:

1. Calcinine crane hoist motors

During May 1982 it became apparent that there was aninherent design problem in the two calcine crane hoistmotors. Repeated failure of these motors severelylimited the capacility of hoisting calcine as feed forthe electric furnace. This cendition prevailed throughJune and most of July, at which time modified motorssupplied by the vendor resolved the problem. Since thenthe calcine crane bas not been a limiting factor inachieving production 'capacity.

2. Electric Furnace Hetal Tapboles

See section III (d) (ii) 1

.3. Refining

See section III (d) (ii) 4

4. Casting

Sticking pigs and poor quality pigs bave resulted inpoor cast-to-product recoveries. The main reason forthis has been a mould-wash application system design notconsistent with the pig mould desiga. In colaborationwith the pig machine supplier and the mould washsupplier the application system has been revised and theproblem of sticking pigs has essent >lly been resolved-.-The quality of the pigs still requires improving butoverall recoveries have now improved to more acceptablelevels.

- 21 -

5 Ladle burn - throughs and electric furnace rum-outs

On two occassions molten metal has burued throughrefining ladles causing damage to electrical andmechanical components associated with the ASE& refiningsystem. Carbon boils, resulting in slag and metal splashinto the same components, have additionally caused lostproduction.

In the electric furnace, a small run-out occurred at ametal taphole and two larger rum-outs occurred from oneof the slag taphole areas.

In total, approximately 7 weeks of lost production timehas occurred because of these reasons.

(ii) Effectiveness of performance guarantees.

As stated above, there were problems with the two calcinecrane hoist-motors. Eovever, the supplier provided modifiedmotors which have performed satisfactorily.-

(iii) Cooperation from suppliers during start up.

Response from ASEA in resolving start-up problems wasinitially not satisfactory. Only after considerablepressure had been exerted by QiSA through Bechtel and Hannawas a =-re positive attitude forthcoming. Even then, theircooperation fell short of that provided by most othervendors, a good ezample of Vaich was Elkem. At all timesthe response and attitude of the latter company was one oftotal cooperation to resolve any problem.

Manpover Developments

(i) Staffing Recruitment

The following forms of staff recruitment were used.

1. Local Personnel:

1.1 CASA's officers visited locations where similarindustrial activities to those of OiSA are beingcarried out in order to establish contact withqualified perionnel.

1.2 Interviews with candidates in different ciciesfollowing advertisements in local newspapers.

- 22 -

1.3 Advertiseuents in newspapers iuviting all possiblecandidates to send in their resues.

1.4 Recruitment of cIltidates through specializedagecies.

2. Expatriate Personnel:

Expatriate personnel were mainly hired through. theservices of HAnna.

The =ost successful forms of recruitment were 1.1 and 1.4

(ii) Training and Development Programs.

The programs were laid out principally on the basis ofrequirements of labor to support the development of themine, plant and supporting facilities taking -- intoconsideration the following points: -

- -Educational leveL of the local people

- Non-mining and nom-industrial tradition of the area.

- 'Technical requirements of the plant.

- Development of the socio-economic structure of thv area.

- Use of external training facilities. For this purpoeeCISA obtained the cooperation of the National trainingservices (SEN) .

(iii) Training Objectives.

1. Provide the most efficient way to train SupervisoryNanagement to meet present and future needs.

2. Provide the most efficient way to train craftsmen andoperators to meet present and future needs.

3. Assure an adequate supply of skilled tradesmen inrelation to employment opportunities of QISA.

4. Increase the individual vorker's productivity. - -

5. Give the individual worker a greater sense of aecusrity.

6. Improve employee-management relations.

-23-

7. Elln=nate close supervision because the craftsmen aretrained to use their initiative, imaginatiot and abilityin planning and performing their vork.

8. Ensure compliance with CXSA's obligations under thesupplemental coucession so that Colombian personnel cansubstantially replace the foreign personnel in theac.ivities they have been performing.

(iv) Training Programs.

1. Training for the construction of plant.

* 1.1 In order to provide contractors an essy access toa skilled and semi-skilled work force a trainingprogram with SENA was started in Moncel bano. The-courses included the following crafts: -

1.1.1 Electricians (Basic)

1.1.2 Auto Uechanics (General)

1.1.3 Diesel Mechanics

1.1.4 Carpentry

1.1.5 Construction

1.1.6 Welding, etc.

The duration of the courses was from 4-6 montbs.Sena took about 500 people from Moatelfbaho area.Almost all were employed by the contractorsbuilding the plana. COSA provided financialassistance to SENA. The training activities lastedfor 1 1/2 years.

2. Training for start-up needs.

2.1 Training in SENA Centers.

Twenty three high school graduates fromMontelfbano were sponsored by CISA in July 1980,to study in the Centc.rs of SENA, Electricity,General Mechanics, Smelting, Refining,Instrumentation and Mining at Technician level.The majority of them are now working with CHSA,.

- 24 -

2.2 Mine Training.

All the training for Kine operators and Kech anucswas arranged through GENERAL ELECTRIC C=TRPILLARof Colombia. Xechanics received a six weekscourse at ,the CAT. installations in 2Barranquilla.

Operators received theoretical and practical "onthe job" training at the site for six weeks, underthe direction of a CAT. Instructor. LIEBRERRoperators and maintenance workers were given onsite training by the LIEBHERK representatives.Also two maintenance Supervisors took a course inU.S.A.

One special operator course was given on site by aCAt. Representative from Peoria, r. S. A. CSATraining Dept. provided safety training usingaudiovisual aids from CATERPTLIAR. Manuals werevritten and distributed among operators..

2.3 Plant Operators' Training

This activity included two main phases:

2.3.1 Writiug of Operators Hanuals: In February,1981, Training Dept. hired or borrowed from

- other departments five engineers tQ prepareseven manuals of operation covering,Primary Crusher, Stacker, Secondary Crusher-ad Dryer, Rotary Kiln and Peletizing Disc,Calcine Transfer, Electric Fur--ace, andRefining. Since the plant was stiLl underconstruction, the process andinstrumentation drawings were used as themain source of technical information.Almost eight months was required tocomplete the preparation. Most of themanuals were revised by expatriate staff.

2.3.2 Hiring and training of operators: Highschool graduates from Montelfbano wereselected for training as operators. ProcessDepartment hired Supervi-ors - Colombisiaifor the Oreprep area and expatriates fromGuatemala. Their first job was thetraining of their operacors. Thesupervisors took charge of this training inOctober 1981.

-25-

The theoretical part lasted almost threemonths with frequent visits to the plantunder construction. In February 1982 allthe operators were put on shift work forpractical and "on the job" training.

The engineers who wrote the manuals wereheavily involved in the training efforts.

2.4' Plant Maintenance Training

It was the intention to hire all craftsmen with asmuch experience as possible. However refreshercourses were arranged, including a one monthcourse for General Maintenance personnel. SENAalso provided courses on welding and electricity.

Expatriates provided "on the job" training formechanics and electricians. Almost all ourelectricians have considerable experience andneedec only some time to familiarize themselvesiith the plant under the guidance of equipment

vendors.

3. Safety Training.

Almost all the workers in the Hine and Plant havereceived safety courses of about 2 weeks durationcovering:

- Safety rules and regulations (Mine and Plant)- First aid- Basic fire fighting

A ten hours safety course was given to all Supervisorscovering:

- Responsibility of supervisors- Investigation of accidents- Accident reports- Instructions to workers

Extensive use of audiovisual aids was made througboutttraining programs.

4. Training by Vendors.-

4.1 Instrumentation and computer training was given atthe sir.e for four weeks to all Maintenance and

- 26 -

Control Room operators by_,an instzuttor fromtaylor USA. Two engineers attended OD TTI9aintenance courses iu U.S.f. for Ce month.

4.2 General. Electric, U.S.A. provided courses on SCRRotors and other equipment.

4.3 CATERPTLTTAR training on heavy equipment (see 2.2above).

5. Training Abroad.

Over twenty five QtS& technical personnel have takentraining courses or attended seminars and conferences indifferert parts of the world. Similar courses are beingarranged for 1983.

6. "On the job" Training.

Considering the new technology being introduced into

Colombia, it was necessary to bring experienced, skilledstaff from similar operations such as E=XI3AL(Guatemala) to help train tappers and over-head craneoperators. They started training activities on slag on11 May 1982 and metal tapping on 26 June 1982.

(v) Numbers of professio*als trained.

-MINE Mining Engineers 3Xining Technicians 2Sbift Supervisors 3Geologist I

ORE PREP ARWA Control Room Operators 5Shift supervisors 5General Foreman 1

=ELTING ANDREFINING Control Room Operators 5

Shift Supervisors 2MAINTENANCE AREA Electrical 3

Mechanical 5Shop 3Instrumentation 5Computer 3

(wi) Number of workers trained.

)4flN.E taintenance 24Operators 32

- 27 -

ORE PREP.AREA Maintenace 12Operators 48

SMELTING/REFINING Maintenance 30AND PIG HANDLING Operators 155CENTRAL MAINTENC. Shop 8

mechanical 12Electrical 6Instrumentation 16Brick Layers 22

SUPPORT SERVICES Laboratory 6Materials 12

383

(vii) Obstacles in Staffing.

The following obstacles were encountered during staffingwith Colombian Nationals.

- Local residents from the coastal region were givenpreference for policital and socio-econimic reasons. Itwas hard to find suitable candidates from the regionbecause the area is more agricultural thau industrial.

Since the ferronickel smelting operation was new to theColombian industry professionals were accepted withlittle or no experience, being trained later on the jobby the expatriate staff.

mKnmoledge of the English language was another restraintin hiring the staff.

It was difficult to attract established professionalsfrom other regions of the country because of remotenessof the area.

(c) Borrower'-s Organization.

It is the policy of QMSA to train and qualify local personnel tocarry out the jobs required to operate and administer the plantefficiently.

Changes have been made in CKSA's organization to allov localpersonnel to take over most staff positions originally occupied byexpatriates.

- 28 -

(d) Build up aof Production and Capacity.

(i) Projected, bud v ted and actual production build-up.

Table 8 presents the information about planned productionfor the second year of operation according to thefeasibility study, the production budgeted, by quarters, for1983 and the actual productiou build-up.

Reasons for the differences between projected and actualfigures are:

1. The skull plant to recover ferronickel from refiningslag, included in the feasibility study, was notinstalled.

2. Up to second quarter of 1983 the ASEA refining systemwas a limiting factor to production. This probiem wasthen resolved.

3. In third quarter furnace reached design capacitydemoustrating ability to run at full load on acontinuous basis.

4. Production curtailed in fourth quarter due to a majorrunout on November 28, 1983.

(ii) Problems in production build up.-

Major problems affecting production build - up sincecommercial start - up are as follows:

1. l1etal Tapholes

Physical deterioration of the metal taphole blocks in ashort period of time was causing a. potentiallyhazhardous situation for both men and equipment. Inorder to maintain the safety of the operation, thetaphole blocks were having to be changed on a frequentbasis; often, it was necessary to take power off thefurnace for several hours, (sometimes one or two days)to cbange these blocks safely. There were originallynine blocks installed in each metal taphole; each block.is 9 x 9" x 6" deep and has a 50 mm 1ameter hole.

The problem is not unique to Cerro Matoso S. A. It isbeing experienced to a lesser or greater degree at moatferro-nickel smelters. It is caused by a combination ofthermal shock on the refractory material used, type of

plugging mixture used to plug the taphole after tapping,metal composition and tempera-ure, tapping practice,general furnace operating practice and, to a minordegree, erosion of the refrActory by the metal stream.

Many different types of refractory taphole blocks bavebeen tried, based on the experience of other operationsand vendor recommendations. OiSA personnel made visitsto other plants, including those in Japan which seem, tobave the best taphole life. From these visitsinformation was gained not only on type of refractorybeing used but on preparation and use of plugging mixes,tapping practices and any other practices which couldconceivably improve taphole block life. Based on thisiAformation gained and on in-house experience andexpertize, the plugging mix originally used has beenchanged to a magnesite/tar mix; some types of refractorytapbole blocks are no longer used, tapping practice(used of drill and oxygen to open the hole) has beenimproved and standardized as far as possible,experimental water cooling plates have been installed -

around the blocks, more rigid maintenance of the tapholeguns has been implemented- and the metal temperature iscontrolled as far as possible. -.

Tie result has been a greatly improved taphole blocklife and a safer operation. The problem has not,however, been solved completely and a task force, set upseveral months ago, continues to. examine furthermaterials and methods which can extend the life of c.ae

*tapholes.

2. Slag Tapholes

The slag tapholes consist of water cooled copper conesset into a carbon block, which in turn is built into thefurnace wall. Notwithstanding the cooling effect of thecopper cones, the carbon was corroded away, resulting inleaks of slag. Additionally differential movement of therefractory bricks around the carbon block caused gaps tooccur between the bricks and the block, again resultingin leaks of slag. Sometimes che slag leak wasaccompanied by metal when the lower two of the fourtapholes vas giving a problem.

Tominimise the problem, the lower to slag tapholes havebeen eliminated, and modifications made to the remainingtwo as follow.;

- 30 -

2.1 The carbon block has been replaced by a high ngOmaterial.

2.2 Additional water-cooled jacketing bas been provideat the interface between the magnesia block andthe surrounding brickwork.

3. Furnace Roof

Loss of castable and brick refrac:ory in the delta areaof the furnace roof, primarily around electrode, chargepipe and inspection hole openings, was giving rise tothe possible danger of widespread failure of the roofrefractories and support steelvork.

The cause of the problem has not been definitelyestablished; it appears to be a possible combination ofmechanical spalling and chemical corrosion. The-refractory material used in high alumina, and in thisparticular case was manufactured from andalusite ratherthan bauxite as the source of A12 03 One body of-expert opinion asserts that the grains of andalusite aremore susceptible to spalling than bauxite-based grainsand consequently thermal cycling, which has occurred -dueto other problems, was the reason for failure. Thisopinion was based on samples of failed brick sent tovarious laboratories; the samples indicated littlechemical attack although visual observation of the roofin situ indicated at least some surface chemical attack.

Although high operating temperatures have not been citedas a possible reasoa for the failure, steps have beentaken to operate the furnace under a more pcoitivepressure, eliminating any ingress of air which canreact with carbon monoxide in the furnace atmosphere andproduce locally high temperatures. This also has thebenefit of maintaining a more uniform brick temperatureacross the furnace roof. For this and other reasons, theaim has been to attain a constant operation, reducingdowntime to a minimun; that is, thermal cycling has beenreduced to the minimum possible. The roof is being keptclean to avoid build up of dust vhich might cause localoverheating of steelvork supports. -

4. Refinery

The length of time being taken to refine a ladle ofcrude ferronickel was excessive, resulting ininsufficient - refining capacity to meet productionrequirements-

31 -

The ;rocedure :iD.itially envisaged for refining the ASEAladle refining system was based on traditional methodsemployed in small electric a c refining furnaces. Thekinetics of the metallurgical process and the chemistryof the slags were not adequate for the COSA unrefinedmetal composition.

An itnv.-sive metallurgical program was initiated, inconjnaction with ASEA, and other consultants, which hasculminated in a metallurgical procedure specificallydesigned for QiSA conditions. Additionally, a separateoxygen blowing test station was constructed whichenabled simultaneous refining activities to proceed,further reducing overall refining cycle time. Cycletimes have been reduced to levels consistent whithoverall plant capacity requirements although much workremains to further optimize practices and materials.

5. Stacks

The stacks on the electric furnace became plugged withdust causing Loss of pressure control in the furnace andexcessive evclution of f:lame above the furnace roof. Toremove the plug, it was necessary to take power off thefurnace and clean the stacks by various methods, all ofwhich were time consuming.

Dust produced in the electric furnace adheres to therefractory lined stacks, gradually closing off the crosssection. Depending on the temperature in the stack, thedust was either quite soft or very hard; the latter wassintered material resulting from locally hightemperatures and became very difficult to remove. Testsindicated that ingress of air through the furnace roofand around inspection doors in the stacks was causinglocally bigh temperatures and sintering. Additionallycertain areas of the stack system were more prone toplug than others.

To alleviate the problem, the furnace is nov operatedunder a more positive pressure, eliminating ingress ofair; inspection doors have been sealed. Water cooledsections (not refractory lined) have been installed inthe more critical areas on a test '-sais. On a longerterm basis the dust produced in the furnace vill bemainimised by the use of extensions to the charge pipesinside the furnace below the furnace roof. To-date,experimentation has not found a material which willsurvive the furnace environment for a significant lengthof time.

- 32 -

(e) Environmental Effects.

At this moment, the activities of Cerro Matoso S. A. are too recentto make an analysis of any significant environmental consequences ofthe project.

So far only the following points are relevant:

1. - CXSA produced its "Environmental Impact Statement" to complywith its legal obligation to 1 ensure the environmentalqualities be compatible vith the productive survival ofvegetable, animal and human species".

2. Based on the "Environmental Impact Statement", whichittdicated the type of processing equipment and environmentalcontrol program to be utilized, authorization was obtainedfrom, the appropriate governmental entity to startmining-metallurgical activities.

3. The following facilities to control pollution have beeninstalled.

3.1 Air pollution.

3 3.11 Electrostatic precipitators, installed after thedryer.

3.1.2 Scrubbers. One is installed at the inlet of thekiln and the other collects gases produced in therefining unit.

3.1.3 Bag houses. These pollution control units areinstalled as follows: -

- One at the discharge of the secondary crusher.

- One at the transfer house of the fine oreconveyors.

- One at the top.of the coal bin.

- One at the fine ore bin discharge.-

- One at the balling feed conveyor discharge.

3.2 Water pollution

- Waste Water Treatment Plant for primary and secondarytreatments.

- 33 -

- Settlizg pond.

- Settling ditch at the base of the bill near farmingand cattle-raising lands.

3.3 leat pollution

There is a settling pond to discharge the water comingfrom the Process Plant, specially from the slaggranulation section, so that the solids in suspensionsettle and the water cools down before being poured intothe natural flowing water.

3.4 Noise pollution

In areas withiv. the plant, especially at the west sideof the electric furnace around the cooling fans, wnerebigh levels of noise are reached -above 85 decibels-recommended earplugs are used.

* CMSA is engaged in the implementation of the solidresidual3 handling through the use of sanitary wastedisposal.

To check the efficiency of the pollution controlfacilities there is a program, which is part of the"Environmental Impact Statement", which envisages theinstallation of equipment to measure emissions and theestablishment of biosensory stations. All this equipmenthas been acquired and its installation and calibrationis foreseen within the next three months.

Biosensory stations are functioning and up to the momentno environmental changes of any nature have beendetected.

- 34 -

IV FIHAZCIAL AND ECONOKIC PERFODMACZ.

(a) Revenues.

Sales QCSA RevenueVolumes Selling Price

Actual M. lbs Ni US$Ilb Ni USt (US$ 1983)

1982 1.4 1.55 2.2

Estimates

1983 34.8 1.56 54.31984 47.0 2.01 94.61985 54.3 2.56 139.01986 50.3 3.23 162.51987 47.6 3.52 167.6

Notes

Estimated volumes assume a build up of scrap ferronickel between1982 and 1984 whicb is recovered, remelted and refined as necessaryin 1984/85 in additional facilities to be instal-ied in 1983-4.

Estimated prices beyond 1984 are tbose prices required to camble thecompany to meet its projected financial obligatious without recourseto additional shareholders' funds under a .)roposed refinancingscbeme uuder consideration as of May 1983.

(b) Operating Costs

(i) Inputs and Utilities

Consumption Cost / Unit Cost/Lb Ni(US$ 1983) (US$ 1983)

Gas -Ore Preparation - Dryer 1.3 MCF/DtT Ore 1.46 /KCP 0.03-Rotary Kiln 2.64 MCF/IDT ORE 1.46 /I1CF 0.07

Coal 6.5 Tonne/100 DLT-Ore 52/Tonne 0.06

- 35 -

Electric Power-Furnace 520 KWI/IhT Ore 0.042/J1E 0.39Furnace Electrode Paste 3.5 Kgs/DIHT Ore 0.89 Ks 0.05Casing 0.4 Xgs/DKtT Ore 0.66 Kg 0.005Oxygen-Furnace and Refining 6 L/Tonne FeNi 0.53/M3 0.005Refining- Electric Porwer 168 KM/tome FeNi 0.042/DI 0.01

- Graphite Electrodes 6.267 Kg/Toone FeNi 3.43 /Kg 0.03- Reagents:.Lime 80 Kg/Tonne FeNi 0.13 Kg 0.01.Fluorspar 12 Xg/Tonne FeNi 0.50 /Kg 0.01..Aluminu 18 Kg/Tome FeNi 2.28 /Kg 0.05.FeSi 4 Ig/Tone FeNi 0.86 /Kg 0.005

Ladle Refractory Replacement.

-Basic Refraccories 12 Tounes/Reline-Every 6 beats 918/Tonne 0.06

-A1203 Refractories 9 Tonnes /Reline-Every 15 heats 664/Tonne 0.01

Personnel Establishment and Cost

Establishment Labor Cost/Year/Person(As From July 83) US$ 000

Staff - Expatriate 23 64- Colombian 257 23 -

Labor 402 8682

(ii) Financial projects 1983-88. (Table 9)

The financial projections are expressed in US$ 1983 andassume uo differential inflation/devaluatiou between the US$and Colombian peso costs arising over the period of theprojections.

(c) Other Benefits

Other economic benefits of the project include the following:

(i) Construction of a road from the main highvay to Montelfbanoand the Plant.

- 36 -

(ii) Rebuilding and paving of the )lontel$bano airport, which h-apermitted the establishment of comercial setvices.

(iii) Construction of a housing development adjacent to the town,intended for company personnel.

(iv) Expainsion and upgrading of the Xunicipal Hospital.

(v) Contribution to provide a stable electric -power for themu=icipality and adjacent areas.

(vi) Royalty advance to finauce the conatruction of water supply,sever system and the electric power network in Montelfbano.

(vii) Organization and support of studies related to heaLth andeducation in lontelfbano to desiga programs nov in operation.

(viii) Upgrading of educational establishments of the area. -

(ix) Impetus to commerce in Montelfbano through salaries paid bythe Company to its employees and the acquisition ofmaterials, consumables aud services for construction andoperation of the plant.

TABLE I

PROJECT IMPLEMENTATION SCHEDULE A CTUA_ -N

1.079 1.900 ' 1.9PZ

J A_ ON 0 J F MP A U J J A S O N 0 JiF _ MA U J J A ION M O MA MI11-UNtl IIIg CC41RACtl

l l l. l l l l

~it COLOCMiAS IN(MI19EINdN

j0;. STUN EI

OUIIANiZ AViON- - - - …-- - -

ROAD AND AINRPOaRT

UTitiTit 3l"SlA9y?1 E TttH

URUANIZATION - - -- J - -4 -- -4-I 4.

1R0A0 &HP Ai3POiT-

UIIL IT II 2

5TACKCIIlQ AND BLINOIN*

CALCINNIN - …

SWiiLTIAO II hIFSININS…

AU41LLAAY §UlLDIWIOI

~lpf… tr

TABLE 2

SUMIMARY OF PROJECT CAPITAL COST(In thousands of US$ Dollars)

APPRAISAL ESTIMATE A C T U ALOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL

H in.Mining Equipment - 6.8 6.8 1.9 8.8 10.7Drilling Deyelopment andpreproduction stripping 2.9 2.8 5.7 3.6 0.3 3.9General and Administration 6,7 5.0 11.7 15.2 1.4 16.6Civil work, installatioa andBulk MIaterials _ - 4.1 - ' 4.1

Sub-total (Mine) 9.6 14.6 24.2 24.8 10.5 35.3PlantProcess Plant Equipment 2.8 39.2 42.0 3.5 50.5 54.0Bulk Materials 14.4 8.5 22.9 22.7 8.4 31.1Distributables 17.6 3.6 21.2 7.7 9.8 17.5Furniture - - - 2.3 2.3

Sub-total (Plant) 34.8 51.3 86.1 33.9 71.0 104,9 0Gas PIpeline 1.0 2.0 3.0 6.8 5.8 12.6 1Plant Hodification - 2.5 2.5 1.3 1.7 3.0Civil Works, Installation,Erection 24.1 5.0 29.1 102.2 17.6 119.BEngineering and Proj.Services 16.4 28.8 45.2 5.9 15.5 20.9Freight and Insurance 3.0 13.1 16.1 6.5 15.5 22.0Duty and Taxes 2.4 - 2.4 9.3 - 93Initial operating expenses - - - 10.5 17.6 (1) 28.1Pre-Operating Expenses 9.0 16.0 25.0 9.2 15.2 24.4Exchange loss dollars sold-net - - - - 7.2 7,2

Total Base Cost 100.3 133.3 233.6 210.4 177.1 387.5Physical Contingency 8.7 9.4 18.1 - - _Price Escalation 11.2 13.9 25.1 - -Working Capital 3.6 32.2 35,8 - (2) 5.6 5.6

Total Project Cost 123.8 188.8 312.6 210.4 182.7 393.1Interest During Construction - 2714 27.4 - 34.6 34.6

TOTAL 123.8 216.2 340.0 210.4 217.3 OMi~~mnm .mu... m.m. - mum. * mm...""""'!''"

362 641 100% 492 512 1002

(1) at Harch 31sto 1980(2) at March 31st, 1982

s~~~~~~~~~~~.

TABLE 2APROJECT CAPITAL COST

SUMMARY OF COST VARIATIONS

Description Amount exceeded Remarks(US Millions)

1. Interest during construction 7.2 Originally underatimated

2. Exchange loss 7.2 Not included in originalestimated ,

3. Initial operating 28.1 Not included in originalestimated.

4. Duties and taxes 6.9 Originally underatimated

5. Cas pipeline 9.6 see Pg. 8, (iii)

6. Workera housing (Jagus) 5,0 'Not included in originalestimate.

7. Townsite and road 18.0 Originally understimatedand problems mentionedin pg 8 (iii)

8. Additional spare parts 5. Not included in originalestimate.

TOTAL 87.0

- - 40-

TA LE3DISUEURSDITS SCEEDULE FOR TEE BANK LOAN

(US $ xlILLIOiS)

Bank Fiscal Year Appraisal Estimate Actualand Quarter Period Cumulative Period Cumulative

F.!. 1980'

Oct-Dec. 1979 4.2 4.2Janw-arch 1980 12.8 17.0 -

April-June 1980 10.0 27.0

P.T. 1981

July-Sept 1980 11.0 38.0 5.7 5.7Oct-Dec. 1980 10.4 48.4 13.5 19.2Jan-March 1981 10.4 58.8 4.9 24.1April-June 1981 6.5 65.3 16.2 40.3

F.!. [982

July-Sept. 1981 4.5 69.8 21.4 61.7Oct-Dec. 1981 3.8 73.6 9.6 71.3Jan-March 1982 1.4 75.0 1.5 72.8April-June 1982 - 75.0 4.6 77.4

P.Y. 1983

July-Sept. 1982 - 75.0 0.3 77.7Oct.-Dec. 1982 0.5 75.5 1.1 78.8Jan-mareb 1983 2.0 77.5 0.5 79.3April-June 1983 2.5 80.0 0.7 80.0

TABLE 4PROJECT DISBURSMEUNT SCLtEDULE

a) .Barrower's Capital Disbursementa

(us$)

Tho Chase Export-,Import The Chase ManhattAnRetf. Letter No. Manhattan Bank World Bank Bank Bank-Bankers Trust

_ . . . . . .~~~~~.

FNB-3111 Oct. 29, 1981 83.745.904.23FNB-3105 Oct. 29, 1981 3.322.676.35FNB-3106 Oct. 29, 1981 3.011.171.75FNB-3107 Oct. 29, 1981 3.011.171.75FNB-8640 Jul. 12, 1982 8.776.506.11FNB-8641 Jul. 12, 1982 6.708.688.74FNB-8643 Jul. 12, 1982 4.864.848.77YNH-8642 Jul. 12, 1982 4.864.848.77FNIB-8713 Jul. 16, 1982 6.285.466.94FNHB-8707 Jul. 16, 1982 4.965.354.48FNB-8708 Jul. 26, 1982 4.965.354.48FNB-8829 Jul. 26, 1982 10.960.634.87FNB-8941 Ausu. 4, 1982 21.192.122.72FN -8940 Augu. 4 1982 10.242.025.77FN -8952 Augu. 4, 1982 8.967.600,43FM -8953 Augu. 4, 1982 10.144.048.90FN -8951 Augu. 4, 1982 24.559.014.15FN -9188 Au&u. 20, 1982 2.737.102.36F1B113 9805 Sept. 24, 1982 14.003.578.04FNB/13 9865 SEpt. 29, 1982 5.196.421.96FNB/13 102'9 Oct. 27, 1982 (130.027.72)FNB/10507 Nov. 17, 1982 5.000.000.00FN/11019 Dec. 30, 1982 5.000.000.00FNB/14 11018.Dec. 30, 1982 1.087.679.12?N-12412 Apr. 12, 1983 840.847.15FNITB 13627 Jul. 12, 1983 559.709.88

Total Draw-Down 150.000.000.00 80.000.000.00 12.841.375.00 12.841.375.00

-42-

TABEU 4PROJECT DIS UESEET SCHEDULE

b) Sha-reholder' s Capital Cash Contributions

Us$

Initial Investments 27,005,002

Marbch, 1979 333.334August, 1979 2,096,000October, 1979 400,000November, 1979 8,466,666January, 1980 3,100,000Febtuary, 1980 5,900,000March, 1980 - 10,500.000April, 1980-a 4,412,704May, 1980 4,986,056June, 1980 7,800,000July, 1981 10,833,334August, 1981 10,833,334September, 1981 bO,833,334October, 1981 15,000,113November, 1981 15,000.113Tebruary, 1982 26,699,940April, 1982 14,679,091May. 1982 9,786,058une,. 1982 . 11.335.495-

Total Shareholder's Capital Investment 200,000,574

TOTAL a) + b) 455,683,324

TABLE 5

PROJECT MANAGEMENT. ORGANIZATION CHART

BOMD OF DIRECTORSC. M. S. A.

[GENERAL MANAGER-I C. M. S. A. .

1 1 1 1 1 PROJECT MANAGER1

PROJECT MANAGER… - - -- - - PRIME CONTRACTORC. M. S. A.J I

TECHNICAL 1 _ PRIME CONTRACTOR

CONSULTANT ,ZRA RY ORGANIZATION

PROJECT 1 1CONSTRUCTION CONTRACTORS 1ENGINEER . SUPERINTENDENT . . CONSULTANTS

. .. 1.MECHANICAL: CIVIL MECHANICAL FILE ELECTRICALENGiNEER ENGINEERS ENGINEERS CORDINATOR ENGINEER SECRETARY JANITOR

- 44 -

EIITIM FdRECAtITEM DESCIP`TCIN SCIEDMLE SC5EDUZ NA 3 ACTUAL

START CONSTRUCTION 10/16/80START TACASALUMA AREA CONSTRUCTION 03/15/80 05/23/80START DRIVING PILES - FUMlACE AREA 03/15/80 02/27/80STAM PAIMANA AREA CONSTRCN 04/15/80 06/05/50START DRIV'ING PIlE - KILN AREA 04/25/80 04/16/80(=OCRETE FOR PILES CAR - FURNACE AIEA 05/20/80 08/27/80CONCRETE FOR DRYER FOUNDATION 06/15/80 10/27/80 10/27/80START OF CONCRETE FOR PILES CAP - RILN AREM 06/20/80 10/01/80 Ob/25/80CONCRETE FOR PRIMARY CRUSHER FOUNDATION 07/15/80 10/27/80 10/23/80START STRUCTURAL -STEEL SMELTER BUILDING 08/01/80 10/20/80 10/11/80START FURXACE INSTALLATION 08/01/80 01/07/80 02/24/80START KILN INSTALLATION - BASE PLATES 08/15/80 01/07/81 03/04/80ACCESS ROAD COMPLETE 03/31/80 10/17/80 09/15/80BECHTEL & CM5A OFFICE BUILDING COMPLETE 09/01/80 12/13/80 09/08/81CONCRETE FOR DRIED ORE STORAGE FOUNDATION 09/01/80 12/08/80 01/21/81CONCRETE FOR STACXING & BLENDING FACILITY FOUND. 09/15/80 12/01/80. 03/30/81.CONCRETE FOR CRUSHING & MIXING BUILDING FOUNDAT. 09/21/80 12/08/80 12112/80START DRYER INSTALLATION- 11/01/SQ 02/01/81 03/21/81START STRUCTURAL CRUSHING & MIXING FACILITY 01/02/81 03/09/81 02/03/81START KILN-SSELl ERECTION 01/13/81 02/15/81 05/13/81START STRCCTURAL STEEL FOR DRIED ORE STORAGE 01/15/81 03/09/81 03/07/81START STRUCTURAL STEEL FOR BALLING & CALCINING FA 02/01/81 04/06/81 06/12/81START STRUCTURAL STEEL FOR STACKING & BLEND. FAC. 03/01/81 05/04/81 08/29/81START PRIMARY CRUSHER INSTALLATION 03/17/81 06/15/81 07/06/81START MNVEYORS - MECHANICAL INSTALLATION 05/15/81 05/04/81 08/29/81START TRAVELLING STACXZR INSTALLATION 07/01/81 07/27/81 07/23/81START REFINING SYSTEM INSTALLATION 08/15/81 08/24/81 09/27/81START PRE-OPERATIONAL TESTING 09/15/81 11/02/81 10/19/81PRIMARY CRUSHER FACILITY COMPLETE 12/31/81 12/28/81 01/16/82MAIN SUBSTATION READY FOR EXERGIZATION 01/15/82 12/15/81 02/20/82STACXING & BLENDING FACILITY COMPLETE 02/01/82 12/17/81 01/16/82CONVEYOR SYSTEM CO.UPZTE 02/01/82 01/25/82 02/20/82CRUSHING & -MIXING FACILITY COMPLETE 02/15/82 02/15/82 03/06/82DRYING FACILITY CO.LAZTE 03/01/82 02/15/82 03/15/82BALLING & CALCINING FACIL"-Y COMPLETE 03/15/82 03/19/82 03/15/82SMELTING & REFINING FACILZTY COMPLETE 03/31/82 03/19/82 03/27/82PIANT RE:aZ! TO ACCEPT FEED 04/01/82 04/01/82 04/01/82

START TACASALUMA PREFABRICATED HOUSES 06/02/80.

TABLE 7

CERO HATOSO NICKEL PROJECT I

EQUIPMENT- AND HATERIAL PROCUREMENT U.

ITE1S PROCURED UNDER WORLD BMNK LOAN

Purchase Order ,No,. Description Value US$(1.0O) Country of Origin

C-201 structural Steel and Hiscellaneous Metal 4.612 JAPAN

C-201 Structural Steel and Miscellaneous Metal 522 JAPAN

C-202 Reinforcing Steel 247 USA

C-202 Reinforcing Steel 326 USA

c-i06 Metal Decking 119 USA

C-213 Protected Metal Roofing and Siding 1.032 , USA

C-220 Unfabricated Steel 949 JAPAN

SUB - TOTAL 7.807 5

E-001 M1ajor Electrical Equipment 4.291 USA

E-009 4.16 KV. Diesel Generators 789 USA

E-010 Main Substation Hardware 143 USA

E-014 . Instrumentation Cables 176 USA

E-017 Cable Trgy and Fittings 568 COLOMBIA

E-019 Battery and Charger 25 USA/UNITED KIZNDOI1

SUB - TOTAL 5.992

Purchase OrderNo. Description Value US$(1.000) Country of Origin

F-5 150 Ton Low Boy Trailer 180 USA

F-7 Rubber Tired Self Propelled Compactor 31 USA

F-8 Rubber Tired Forklifts 112 USA

F-9 Mobile Cranes . 812 USA/U.K

F-9 SB-W4 Hovile Hidraulic Boon Crane 99 USA. * ~~~~~~~~~~~.9

F-24 Welding Mlachines 50 USA I

?-28 Flatbed Truck 165 USA s

F-36 Truck Tractor for 150 Ton Low Boy 155 USA

SUB - TOTAL 1.604

Purchase OrderNo. Description Value US$(1.O00) Country of Origin

M-101 Rotary Dryer ; 5.5 m diam; 45 m long 2.452 USA/Denmark/Japan/Others

M-102 Reduction Kiln ; 7.2 m diam 9.032 USA/Denmark/Japan/Others

M-103. Balling Disc 334 USA

M-104 Electric 6melting Furnace; 51 HVA. 8.407 Norway/Others

1H-105 Refining Crane 692 FINLAND

11-106 Primary Crusher 312 USA

14-107B Miscellaneous Refractory 29 MEXICO

}1-108 . Travelling Stacker; Rail Mounted 1.174 JAPAN c

M-109 Belt conveyor 1.484 USA

M-110A Conveyor Belting 304 , JAPAN

I4-lIOB Stacker Conveyor Belting and Belt Rip 203 USADetector

M-111 Reciprocating Feeder 26 USA

14-112 Electrostatic Precipitator 1.246 CANADA

M-113 Screw Conveyors & Dust Valves 97 COLOMBIA

t1-116 Apron Feeders 410 USA

14-118 Secondary crushers; Impact Type 249 WEST GERMANY

M-119 Tramp Iron }Magndtu 21 USA

.~~~~~~'

PL'rcha66 OrderNo. Description Value UO$ (.000) Country of OriRin

H1-120 Vibrating Screens, 86 USA

H-121 Hydraulic Breaker 61 CANADA

11-122 Sampler Systems 190 USA

M-123 h1oists and Cranee 104 USA

11-123 Ihoists and Cranes 820 USA/COLOMBIA

M-124 Baghouses 131 USA

It-125 Air Conditioning and Ventilation Equipment 192 USA

H1-126 Slurry Pumps 27. USA

H-127 Thickener Mechanism 47 USA

M-129 Vertical Turbine Pumps 321 USA

M-130 Mud Mixer 30 USA

t1-133. Fuel Oil Pumps 29 , USA

M-134 Twin Paddle Mixer 131 USA

i1-135 Centrifugal Fans 410 USA

M1-136 Air Compres8orsi 167 USA

11-137 Kiln Dust Collector, Wet Scrubber 121 USA

Purchase OrderNo. Description Value US$ (l.000) Couitry oE Oriftin

tS-139' Cooling Tdwer 49 US&

M-141 lhorizontal Contrifugal Pumps 39 USA

h-t43 Pig Casting Machine 574 US&

M1-144 Expansion Joints 70 USA

H-l45 Scales (Truck Scales) 15 USA(COLOMBI!

H1-146 Strapping Machine 18 USA

H-147 Freiglht Elevator 155 v. cEBMAMY

H-148 hleavy Gauge Ducting 667 USA.

M-149 Refining System 4.029 SWEDEN

H-161 Spiral Classifier 147 USA

H-200 Valves 146 USA

H-201 Carbon Steel Yard Piping 605 VENEZUELA/USA

H -202 PVC YARD PIPING so50 USA

H-203 U/G Yard PLping Carbon Steel Fittings 77 JAPAN

H4-204 Above Ground Carbon Steel Piping 124 JAPAN

H-205 Above Ground Carbon Steel Fittings 92 USA

t5-301 Machinp Toole 471 USA/SPAIN/SWEDEN

Purchase Order.No. Description Value US$(1.000) Country of Origin

M-302 fleat Processing Equipment 40 COLOMBIA

* -303A Welding Equipment 15 USA

M-303B Welding Equipment 10 USA

t1-305 Automotive Repair Equipment 29 USA

M-305 Autoumotive Repair Equipment 4 JAPAN

.1-310 Miscellaneous Slhop Equipment '27 USA

H-401 Laboratory Equipment 112 USA/W. GERMANY

M-402 Atomic Absorption Spectrophotometer 53 USA

M-403 Gas Chromatograph 44 USA

SUB - TOTAL US$ 37.001

Purchase OrderNo0. Description Value US$ Country of Origin

E-019 Spare Parts 2 USA

F-7 Spara Part- 4 USA

F-8. Spare Parts 6 USA

M-103 Spare Parts 28 USA

M-104 Spara Parts 4 FRANCE

M-104 Spare Parts 22 USA

M-104 'Spare Parts 28 Japan ILAt

M-104 Spare Parts . 11 Finland

M-105 Spare Parts 82 Finland

M-IU6 Spare Parts . 30 USA

M-108- . Spare Parts 78 JAPAN

M1-109 Spare Parts 155 USA

tI-1 OA Spare Parts 6 CANADA

M1-111 @Spare Parts 4 USA

M-116 Spare Parts 34 USA

M-118 Spare Parts . 6 W. GERMANY

t1-119 Spare Parts I USA

M-120 Spare Parts 10 USA

Purchase OrderNo. Description Value US$. Country of Origin

}1-121 Spare Parts 4 CANADA

M-122 Spare Parts 6 USA

11-12 3A Spare Parts 8 USA

M-123B Spare Parts 39 USA

Ml-124 Spars Parts 6 USA

1i-125 Spare Parts 1 USA

M1-127 Spare Parts 3 USA

M1-129 Spare Parts 14 USA

11-130 Spare Parts 3 USA

M-134 Spare Parts 13 USA

lt-135 Spare Parts. 28 USA

1-136 Spare Parts 8 USA

1-139 Spare Parts 1 USA

M-141 Spare Parts 2 USA

1-143 Spare Parts 46 USA

t1-145 Spare P,arts 6 USA

H1-146 Spare Parts 4 USA

ti-149 Spare Parts 672 SWEDEN

H1-206 Spare Parts 12 , USASUB-TOTAL 1.387

CAS PIPELINE

Purcihase OrderNo. Description Value US$ Country of Origin

300-J-1' Pressure Relief Valvas 6 USA

300-J-2' Pressure Valves 1 USA

300-J-4 Sphere Detector I USA

300-L-1 Electric Resistance welded Pipeline Kainline .1.114 . JAPAN

300-L-2 Valve 33 FRANCE

300-L-3-SA Valves 27 CANADA

300-L-3-5BC Hinged Closures 2 USA

300-L-4 Insulating Joints 3 W. GERHANY L

300-L-5 Sphere Launches, Receivers and Spheres 10 USA

300-L-6-SA Pipe Flanges and Fittings 18 France

300-L-6-SAC Pipe Flanges and Fittings 2 USA

300-L-7 Casing seals and Insulators I USA

300-L-8 Skid Mounted Metering Station 86 USA

300-L-9 Skid'Mounted Pressure Reducing Station 121 ITALY

300-L-10 Polygthylene Tape Coating 125 USA

300-L-11 Cleaning Scrapers 1 USA

300-L-12 Spare Parts 2 USA

300-P-1 Cathodic Protection MAterials i7 USA

SUB - TOTAL . 1.570. . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I

B U H A R Y

SUB - TOTAL C 7.807

SUB - TOTA a 5.992

SUB - TOTAL Y 1.604

SUB - TOTAL H 1 37.001

SUB - TOTAL SPARS PARTS 1.387'

SUB - TOTAL PIPELINE 1.570

GRAND TOTAL 5.361

TA5LE 8

PIOJECTED, SUDOUTD AND-ACTUAL PRODUCION BUILD-UP

Dry Hetric Tons Orec Plant Recovery IProduction 5Meot 1000 round. of Nickel.______uarter . Quarter Q9!rter

1 2 3 4 Total .1 2 3 4 _ 2 3 4 Total

1: Fesibvility Scudy _ _ _ _ 680 0.900 0.900 0.900 0.900 -_ _ U.11S(1.9)6) _ _ _ _ _ _ _ _ ---- -

2. Budget (1983) 165.7 193.9, 199.8 200.8 760 0..90 0.890 0.890 0.890 7.283 0.6U0 9.S52 9.929 35.64?

3. Actual (1983) 103.642 114.493 201.055 134.7A0 553.970 0.756 0.730 I.812 0.692 4.923 A.6l3 11.061 7.089 23.137

Eatimate for December 620.000 Pounds

-57 -

TABLE 9

.FINACIAL PROJECrIONS FOR THE NEUC FIVE YEARS

NM p10s "a8 IT1 190 3901 I"1? Wm601 Jul3 3114 gm3 nu1 My

ask W La Li?6 L eI11 i s 5.22 1.1 SMU -l4.3 4 9 11.50 -lV." 413.10

la FFUl 616 31.3 31.3 31.3 37.3 17.3 aulI..0 251 0.50 21.d.o G36.107 PM31 ?4 482h6 3543 59682 4152 31313UI -31.00 -31.00 -30.0 -33.0 -30.00offLmmI off 14 M6 os* too I" V3-2E 2." -V1." -11.114 -23.0 -20.00IMC=? PIkI jWdN MZRE MI -3401 -4017 0 I -13.13311 3 -I.20 4.30 -L -1.40 4 -1.409233 CIII Tqg5 40713 56123 6349 "M35 I= -mIL1C3 4-1 -3.60 -6.9 -5.3 -4.30h1.Mj1u. t14M1 2421 g I o o -if#lJW 1006 -3.29 -3.30 -,.20 -6.94 -L7.OPMBI 0f TatLl 42014 * 592 M513 609 553 V711Ta rim OJO L." L.0 -4.2 -9.23

83.IUS - U~~ILIS 34.3 4a 54.1 50.3 47.8 IISwuJz. -~~~~~~~~~~~~~~~~~~~~~~~~~~~~1. -4I -M 7.6 CLI

Wtum . LI? L .17 3.27 0.21 0.21H_z_ CI o. ' 0.4 . 0.17 423 #.23 1UFIUSSI- 2.0 -66 2.0 10 37@s2 SU. 230 Lo0t LII La2 LIZ we3 I~t-F cV.0 30.5 3a.m. 25.00 -30.00

Wl6WEUIll -IN!."5* -E1.6 StI -1.0 LSam- LM2 in..eu-,aIAlIsa

- -- ~~~~~~~~~~~~~~~~~~~~~~~~~~~-WC M ~ -T."o -1.9 -3.13 _L -1.1 .631 4 441 1L .40 * W.352 45g- 311 .00 0.00LO

9= Gpi= ZLIf 34-40 31-40 34.0 34.00 -1.ox=~I 0.OG 0.06 L34 340 540 3. -L30 40.40 -94.4 -L0.

- - - ULISZS~~~~~~~~~~~~~-12 am6 L40 0.40 A.0 .3.00 0.00

-033 -1.30 22.00. L.O 0LO -amE -1.00 0.64 L6 LOG0 0.00

£.L" M109 91130 12-" 11.10 TOLYALIX-IMPl~ --2t.70 -7.80 7.50 -3.6 -1.0

- -- -- ~~~~~~~~~~~~~mkr=-M-Vo 120U" R

I1~~~~~~ 1~~~.U.40 4210 -3.90 - 3.10 330 -5 L21

Wins. - 3.00 3.00 3~~~~~~~~~~~~ff -~~~~ ~~ 5)W3 IlL. 4L0 540 * L.2D 8.90 7.7

omrk ~~~~~23.5 23.10 17.40 24.40 20.f60I -W -. 9 Z60 -A

zaiin 0~~~3.40 23.00 27.3 2.00 21l8 179 LOO5 1. 5.5 L.0 L42 LOD

~~X.32T. Lull 3l0C~~'LD Le lo S 1A2.23 LOD6 L.0 LO.0 0.00 0.00-15 la 611.- 12.21LO1LG?.0

LM 6.0 LOD 0.00 LO =JLUL ~ ~ .0 -. 00 1L4 2360 -3.9

L.0 3LO4 0.06 0.00 3.30 -0.06ULMLO L -16.1 -to."0 -I."0

L0.0 L2. L 1.40 10 L01O9L .7 L.6 L490 3.40 440 KrSLK42 11061 -O -I? -L

331.9213 0.40 1.30 640 6.00 4.60 u~~~~~~~~~~~~~METIorM6IL06 Q.30 46.40 37.00 34.06

0.26 L38 L40 1.40 2.40 -~~~~~K s iswc, L 4-3 -. 8 -Q -.L1

0.06 3.06 1.44 1.40 1.06 ~~~~~~~O SNMEII L7.4 La. -#-l0 -019 -wLa

-58-

PART 2

I. PRODUCTION BUILD-UP AND PLANT CAPACITY

2.01 Actual production build-up during 1982-83 was at a much. lowerrate than that estimated in the SAR. During 1982 (the first eight monthsof operation) actual production only reached 8% of effective annualcapacity1/ compared with 66Z assumed at appraisal.2/ During 1983,however, there was a substantial increase in outputi and saleable productionstood at 58% of effective annual capacity, contrasting with the SARforecast of 82% for the same year. Most of the difficulties faced by CMSAfor achieving higher ferronickel outputs during this period, have beenrelated to reaching a stable and continuous operation of the electric arcfurnace, and to constraints in the refinery capacity. The specifictechnical difficulties are described in 1-III. (d).

2.02 Additionally, after extensive testing it has become apparent thatthe refining section does not have sufficient capacity to handle both crudemetal from the electric furnace and metal recovered from slags, scrap andoff-spec material, thus limiting the effective overall capacity of theinstallations to about 42 million lbs of nickel per year, equivalent toabout 84% of annual capacity. To remedy this bottleneck, CMSA iscontemplating additional investments of about US$20 million in the refiningsection, including an off-line oxygen station, an 5 MW arc furnace forre-smelting and refining scrap and a ferronickel recovery system fromslags. A shotting machine is also contemplated to enable the marketing offerronickel in shot form, in addition to the cast pigs now produced.3/

II. NICKEL PRICES

2.03 Actual prices in the international market showed widefluctuations during the period 1978-1983. The table below compares theofficial Bank nickel price projection at the time of appraisal (EPD, ReportNo. 814/78) and the forecast estimated in the SAR with the actual prices.

1/ Effective annual capacity is taken as 49.8 million lbs. of nickelcontained in ferronickel (Section 1.01(f) Loan Agreement).

2/ It should be noted that start-up of the plant took place in May 1982,practically on the original schedule.

3/ This investment was subsequently revised downwards as a consequence ofreduced refining requirement by producing a higher grade ferronickel.

-59-

Nickel Prices 1978-83(US$ per lb. current terms)

EPD Projection a/ SAR Actual1978 2.20 [2.00] 1.931979 2.39 [2.241 2.561980 2.60 [2.48] 3.081981 2.88 [2.721 3.051982 3.25 2.96 2.331983 [3.60] 3.27 2.18

t ] interpolated values.a/ Report No. 814/78

2.04 Although the estimates used in the SAR are somewhat moreconservative than the official Bank projections, they still led tooverestimated levels during 1982-83, the first two years of operations.The deterioration of prices after 1981 appear not only to be due to a sharpshort-term contraction of demand, but also to long term excess in plantcapacity.

2.05 Current projections of nickel price compared with those assumedin the SAR (adjusted to 1983-terms) are shown in the table below.

Projected Nickel Prices 1984-1995(US$ per lb. - FOB Cartagena, Colombia)

Appraisal Estimate Present Projection a/1983-terms Current terms 1983-terms Current terms

1984 2.69 3.61 2.25 2.321985 2.81 3.99 2.32 2.59

1990 2.73 5.15 2.60-3.00 3.70-5.001995 2.59 - 2.80-3.50 5.00-7.80

a/ Staff estimates

2.06 The underlying assumption behind the nickel price projectionestimated in the SAR was for prices to remain fairly constant in real termsduring the period 1984-95. The present price projection for the short-term(1984-85), is estimated to be some 17% lower than the price levels assumedin the SAR for those years, for prices expressed in 1983-terms. Thepresent assessment of the long-run trend in nickel prices is that thesewill show increases in real terms at average annual rates, ranging between2% and 4% during the period 1985-95.4/ The lower end of the ranges in the

4/ The basic assumption behind this increase in real terms is there-establishment of price levels in line with long run marginal costsof production, deriving from a balance between supply and demand. Theranges in the long-term projection are explained by the uncertainty inthe time required to reach the balanced supply/demand situation.

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present long-term projection leads to price levels, in real terms, notsubstantially different from the SAR assumptions.

2.07 Presently, nickel prices for 1984 and 1985 are estimated, incurrent terms, at levels about 35% lower than those projected in the SARfor the same years. This affects the internal cash generated by CMSA,which is expected to be substantially lower than the appraisal estimates.In its Completion Report CMSA projects for 1984 a price which is well inline with present market prices. For future years, however, the Companyhas not prepared a projection of future nickel prices. Its approach hasbeen to determine (during 1985-87) the nickel price required to achieve acash break-even position, including debt service. Meeting this objectivewould require prices to increase by about 25% in current terms both during1985 and 1986. This is regarded as unlikely, and CMSA would most probablyneed to seek additional financing during those years.

III. FINANCING PLAN

2.08 The financing required by the project, until the end of 1982,totalled US$455.7 million, compared with US$320.5 million estimated atappraisal. The additional requirements of US$135.2 million, originatedfrom capital cost overruns (US$112.9 million) and cash flow deficienciesduring initial operations (US$22.3 million). The latter derived fromproduction buildup at a lower rate than anticipated and lower nickelprices. The table below compares the financing plan foreseen at appraisal,up to the end of 1982, with the actual situation.

Cerro Matoso - Financing Plan 1979-1982(US$ million)

Appraisal Estimate Actual

Equity 114.0 (36%) 200.0 (44%)

Long Term Debt- IBRD 80.0 a/ 80.0- US Ex-Im 25.6 25.7- Chase Syndicate 100.9 b/ 150.0

Sub-total 206.5 C64x) 255.7 (56%)

Total 320.5 455.7

a/ Last disbursement totalling about US$1.4 million actually completed inJuly 1983.

b/ The original Chase Syndicate loan was for up to US$120 million. Thisfigure represents the staff estimate (at appraisal) on disbursements upto end of 1982.

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2.09 By the time the plant was about to start up (in March 1982), CMSAwas forecasting financing requirements in excess of the funds committed tothe project by the shareholders (up to US$200.0 million) 5 / and the lenders(up to US$225.6 million), totalling US$425.6 million. ti order to closethe financing gap, CMSA negotiated with the Chase syndicate to increase itsloan by US$30 million (from the original US$120 million), and arescheduling of repayments, reducing principal payments falling due duringthe period 1984-86. Additionally, CMSA's two major shareholders(representing the Colombian Governaent and the Shell Group) made acontingent subordinated loan of US$44.6 million. The Bank agreed to thearrangements proposed by CMSA in July 1982, and the legal documents weremodified accordingly.

2.10 In early 1983, it became apparent to CMSA that given thedifficulties experienced in achieving the planned production levels (paras2.01-2.02) and the depressed market situation (para 2.03), additionalfinancing would be needed even after fully utilizing the contingentsubordinated loan from the major shareholders mentioned above. OriginallyCMSA sought a rescheduling of maturities of long-term loans, a new loanfrom the Chase syndicate of up to US$80 million,6/ and a supplemental loanfrom the Bank to finance the additional investments in the refining section(para 2.02). These arrangements did not materialize basically because CMSA(and the shareholders) could not reach agreement with the lenders oncommitments for additional equity contributions. Consequently, interestpayments due to all lenders in August 1983 were not met by CNSA. TheGovernment, as guarantor, covered CMSA's obligations with the Bank, whilethe other lenders granted a 30-day extension, upon which payments were metwith additional contributions from the shareholders. In early 1984,arrangements for providing the additional financing required had not beenfinalized and the first maturity (and interest payments) on the Bank's loandue on February 15, 1984 was again met by the Government as guarantor,while CMSA requested an extension of 60 days to service the debt from theother lenders. The company is currently planning to cover the additionalfinancing required with contributions from the shareholders.

IV. FINANCIAL AND ECONOMIC RATES OF RETURN

2.11 In the SAR, the pre-tax financial rate of return was estimated at17%. On the basis of actual project capital costs and estimates for futureoperating costs and net revenues based on the nickel price projections(para. 2.05), updated cost and benefit streams have been prepared. Thefinancial rate of return is now estimated to range between 2% and 7%,associated with the lower or upper end of the range for the long-term

5/ The shareholders had the obligation to provide a limited amount offunds, to cover cost overruns, until completion date (i.e., when CMSAmet certain production and financial tests). This obbligation wasactually met well in advance of completion date.

6/ The proposed new loan from the Chase syndicate, was to be (i)subordinated to the existing long-term loans; (ii) senior to theshareholders' subordinated loan; and (iii) to be guaranteed by theprincipal shareholders.

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nickel price projection. The main factors affecting the significantreduction in the financial rate of return are the capital cost overrun andhigher operating costs than those projected at appraisal. To a lesserdegree, nickel prices during the early lears of operation and the rate ofproduction build-up also contributed.

2.12 The capital cost overrun, excluding fluctuations in workingcapital, amounted to US$110.7 million in current terms, corresponding to a40% excess over the appraisal estimate. However, when actual capital costsare expressed in April 1979 prices, the overrun is higher (about 46%) dueto price escalation increasing during project implementation at a lowerrate than anticipated. The main cause for this overrun lies in highercosts of civil works and erection of equipment (CMSA's PCR-III (g)(i)).With regard to operating costs, these have been re-estimated based on theactual operating experience during October-November 1983, when theinstallations were run at 76% of rated capacity. Operating costs(excluding depreciation and financial charges) are now estimated at US$1.60per pound of nickel, some 25% higher than the appraisal estimate. Withreference to nickel prices, as discussed earlier (paras 2.03-2.05), theappraisal estimates were above actual levels during the first two years ofoperation, and the difference is expected to be reduced in real termsduring the next three years. For the long term, the trend of nickel pricesestimated in the SAR (expressed in 1983-terms) is lower than presentprojections. Although prices have had a negative impact on the rate ofreturn, this has not been as critical as its influence on the financialposition of the Company (para 2.10). The learning curve has also affectednegatively the rate of return due to the lower levels of output (actual andexpected) during the first three years of operation.

2.13 The economic rate of return was estimated at 19% in the SAR.This has now been re-estimated to range between 4% and 9%, depending on thenickel price projection (para 2.05). The significant reduction is due tothe same reasons mentioned above for the financial rate of return.

V. OVERALL ASSESSMENT

2.14 Notwithstanding the financial difficulties that the project hasbeen facing (and may continue to face in the near future) it has had anoverall positive impact in the Colombian mining and industrial sector aswell as in the region around Montelibano, where the installations arelocated. Firstly, project implementation was accomplished on scheduleunder the direction of a strong and competent management team, which mergedvery successfully Colombian managerial capabilities with foreign expertiseon design and construction of mining and metallurgical plants. From thispoint of view the project represented a spin-off of modern projectmanagerial techniques deriving from the interaction of the projectmanagement team with local-consulting firms and contractors. Secondly,CMSA implemented very successfully training programs which enabled theavailability of skilled foremen, operating labor and maintenance personnelfor the operations. These programs also included close collaboration withGovernment agencies by providing financial assistance and sponsoring

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fellowships for high school graduates from the region. Finally, theproject had a very positive effect in the development cf a relativelyisolated rural area, mainly by creating employment opportunities, andupgrading social services in the area, including sewerage and power, roadsand an airstrip, and schooling and medical facilities.

2.15 Clearly, the major uncertainty about the project's successderives from the current status and future trends of the internationalnickel market. The availability of the take-or-pay sales contract7 / withBilliton, ensures CMSA's ability to place all its production, but it aprice subject to the market fluctuations. The financial viability of thecompany will be dependent on this and on the shareholders' decision tocontinue to support the project.

2.16 The high level of investment involved and the unstable situationof metal markets require that mining projects be approached at present morethan ever, with a clear awareness of the risks associated with sharpdownturns in the markets. The Bank can continue to play a role assistingborrowers in carefully structuring mining projects with the clearobjective of reducing the risks involved, by seeking and devisingprote:ction mechanisms against possible changes. However, lenders ingeneral and the Bank in particular, have a very limited capacity forassi3ting projects facing serious difficulties deriving from severedownturns in the markets.

VI. LESSONS FOR SIMILAR PROJECTS

2.17 The ownership structure adopted for the Project has been a goodexample for creating adequate conditions for a close collaboration betweenthe host government of a developing country and foreign investors. Thesupport provided to the Project by its sponsors led to the establishment ofa well run company, despite the fact that its activities were totally newin the country and whose management and staff came from three quite diverseorganizations and backgrounds. The scheme of joint ownership, in varyingproportions, between local (state and/or private) and foreign interests canprovide a solid basis for reducing the risks associated with new miningventures. Local interests enable the access to natural resources, whichcan be developed competitivalv in a well known social, economical andpolitical environment, while foreign investors provide access to therequired technology, markets, managerial capabilities and facili-ate theaccess to capital markets. The Bank definitely can play a catalitic rolein bringing together foreign and local interests for the development of newmining ventures.

7/ During project preparation, the Bank insisted in the need to have along-term sales agreement, in order to reduce the acknowledged marketrisks. The availability of such a contract, acceptable to the Bank,later became a condition of effectiveness.

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2.18 Nickel prices were singled out in the SAR as the main riskelement affecting the project. As noted earlier (para 2.03), price trendsduring the iaitial years of production were substantially over-estimated incurrent terms. Metal markets appear to be currently undergoing structuralchanges which considerably wider the ranges of possible price projections,adding a new dimension to the analysis of project risks. The SAR included,as part of the risks discussions, an analysis of the sensitivity of debtservice coverage to price fluctuations. However, actual prices in 1982-83have been even below the lower end of the range used in the aralysis. Thisalso calls for the Bank to carefully assess the methLdology for priceforecasting currently being used.

2.19 The difference in approach for assisting borrowers facingfinancial difficulties, between the Bank and commercial lenders becameapparent during the discussions held with CMSA and the Chase-led syndicatein 1983 (para. 2.10). The Bank's concern was to seek long-term solutionsregarding the financial viability of the Borrower, and to that effectconditioned consideration of a supplemental loan to further commitment fromthe shareholders co continue to support the project. By contrast,commercial lenders placed the emphasis on obtaining adequate guarantees forthe additional loan. Cofinancing operacions with commercial lenders arelikely to be exposed to this incompatitiliby of objectives, which may limitthe Bank's ability for further expanding its cofinancing capacity.

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PART 3

TRANSLATION OF COMMENTS RECEIVED FROM THE GOVERNMENT

NATIONAL PLANNING DEPARTMENTBogota, Colombia

November 9, 1984

Doctor Yukinori WatanabeDirectorOperations Evaluation DepartmentWorld BanklWashington, D.C.

Dear Dr. Watanabe:

With respect to the document prepared by the World Bank on theCerro Matoso project, we should like to make the following comments.

The report presents in a detailed manner the development of theproject in all its aspects. Emphasis is put on the technical and ad-ministrative aspects during construction as well as the initial operatingperiod of the plant.

Nevertheless, the report has gaps relating to the current Part 2financial situation especially with respect to the impact on the paras. 2.08project's operation of current and future nickel prices in the inter- and 2.13.national market. This aspect is included more completely in thecomments on the Bank's report which was prepared by CMSA.

In addition, the report should make mention of the contracts Part 1which CMSA currently has with two of the partners for technical I(a) andassistance and for sale of the nickel since this is an integral III(b);part of the development and operation of the Project. Part 2

para.2.15 andSincerely, footnote 5.

Jorge Ospina SardiChief of the Department

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COMMENTS RECEIVED FROM THE BORROWER

~~~~~~~~~CGGH-

COWt@ mattr 'inG MontelZbano, November 2, 1984

Mr. Yukinori WatanabeDirectorOperations Evaluation DepartmentTHE WORLD BANK1818 H. Street, N. W.Washington

Ref.; Project Completion Report onColombia-Cerro Hatoso NickelProject (Loan 1762-Co)

Dear Mr. Watanabe;

I have reviewed the document prepared by the Bank Operating Staff inrelation to the Project Completion Report and consider that only anup-date on the present operating situation here at Cerro Matoso isrequired apart from some specific clarifications/queries on yourstaft comments which we attach separately.

Thus, it should be pointed out that ferronickel shotting equipmenthas been installed and is operative, and that the equipment requiredto improve the refining section recovery has been purchased and willbe operative by mid-1985 at an installed cost of US$11 millionincluding the shotting equipment. The smelting furnace stabilityproblems have been brought under control but expenditure of US$3.5million is planned in 1985 for replacement of the existing furnacewall with an improved design since maximum furnace power levels arepresently limited to 45-47 -W to minimize loss of refractory.

Year to date operating costs are less than US$1.50 per pound ofnickel with a downward trend continuing. Nickel production to theend of September was 25.8 million pounds; the total 1984 productionis expected to be 37-38 million pounds.

Yours truly,

/r RI 0 DELGADOPre ident neral Manager

lsb/

Cef@ f lCt@oto .@A. CARRERA 10. No. 27-27. PISO 4c.- CONM. 2840700- TELEX 41216- A. A. 6823 - BOGOTA. COLOMBIAPLANTA MONTELJBANO, CORDOBA . TELS. (94) (3174 06) - (94) (S1 7419) - TELEX 66000 CEMI-CO

CERRO MATOSO NICKEL PROJECT

PROJECT COMPLETION REPORT - PART II

QUERIES / COMMENTS FROM CERRO MATOSO S. A.

Basic Data Sheet

The financial / economic rates of return stated under the head- footnote c.ing "actual" are, of course, not actuals but revised estimates.

2.01 and 2.02

Reterence is made to percentages ot design capacity. Since,however, no refinery slag and casting reject recovery systemhad been installed at time of mechanical completion, the design footnote 1.capacity should be 40 m. lbs. and not 50 m. lbs. on which thepercentages are apparently calculated.

2.01

tMost ot the ditticulties taced by C2SA for achieving higherterronickel outputs during this period (1982/83) have beenrelated to reaching a stable and continuous operation of theelectrical arc furnace".

Although in itselt correct, the reason for not achieving astable arc turnace operation during most of this period was notthe furnace itself but the retinery. A significant contribu- Text amended.tion to improvement in refinery capacity was achieved by chang-ing the ferronickel grade specification trom 37.5 % nickel to42.5 X nickel.

2.02

To remedy the retinery bottleneck was indeed initially estimat-

ed to require investments of US$ 20 m. However, further study footnote 3.and progress in refinery know-how (reverse refining cycle stor-ing with an exothermic oxygen blo-w to remove silicon) showedtnat only US$ 7.5 m. was required. Moreover a signiticant re-duction in refining requirements was obtained by accepting a

higher grade terronickel.

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2.05 and 2.12

It is not understood how the 1984 price ot the SAR estimatecould bave been US$ 2.69 in 1983 terms vs. uS$ 3.61 in currentterms. The SAR prices seem not to have been adjusted to 1983terms.

The comments on prices in 2.12 may need revision since it is Text amended.stated that appraisal estimates were below actual levels in thetirst years of operation.

2.10

"These arrangements did not materialize basically because C24SA(and the sbareholders) could not reach agreement with the lend-ers on commitments tor additional equity contributions".

It would be more correct to say "no agreement could be reached Text amended.on cash flow guarantees".

In the tinal sentence it would be more precise to reter to "theadditional financing required tor 1984 ..... ".