Document of

The World Bank

FOR OMFIAL USE ONLY

Report No. 9'o2PE

PROJECT COMPLETION REPORT

PERU - CENTROMIN EXPANSION PROJECT

(LOAN 1281-PE)

October 25, 1985

Industry Department

This doument has a resticte distribution ad may be used by recipients only in the performance ofthdir official dutie Its cotents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENT

Currency Unit = Soles

Average 1983 value US$1.00 = S/. 1,628.6Average 1984 value US$1.00 = S/. 3,466.9

GLOSSARY OF ABBREVIATIONS

Ag Price - Silver price

CENTROMIN - Empresa Minera del Centro del Peru S.A.

COFIDE - Corporacion Financiera de Desarrollo, aGovernment-owned development corporation

Cu Price - Copper price

EPD - Economic Analysis and Projections Department

IDB - Inter-American Development Bank

LME - London Metal Exchange

PCR - Project Completion Report

SAR - Bank Staff Appraisal Report

WFIGHTS AND MEASURES

Tons used in this report are short tons equal to 0.907 metric tons.

CENTROMIN FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

PERU - CENTROMIN EXPANSION PROJECT

Project Completion Report

Table of Contents

Page No.PREFACE .... .. ........................ i

BASIC DATA SHEET . ............ ii

HIGHLIGHTS ............................ iv

I. INTRODUCTION ............... .... . I

II. PROJECT BACKGROUND ......................................... I- Project History .. I- Role of the Bank During Implementation ................... 2

III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PCR .......... 2

- Cobriza Ore Reserves .. 3- Increase in Production Capacity . . 4- Consultants for Cobriza ............. 4- Capital Costs Adjustments of Cobriza Project . . 5- Mine Water Treatment Plant .............................. 6

IV. FINANCIAL AND ECONOMIC PERFORMANCE .......................... 6

- Metal Prices ............................................. 7- Financial Rate of Return ................................. 8- Cobriza Production Costs ................................. 9 - Cobriza - Projected Income and Cash Generation ........... 9 - CENTROMIN - Historic Financial Performance ............... 11- Financial Covenants ...................................... 11- Economic Reevaluation .. 12

V. CONCLUSIONS AND LESSONS TO BE LEARNED ....................... 13

ANNEX I : Completion Report - Cobriza Project 15(dated August 1983)

ANNEX II : Completion Report - Mine Water Treatment Project 67(dated August 1983)

ATTACHMENT : Additional Comments From the Borrower 102

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

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PROJECT COMPLETION REPORT

WORLD BANK COMMENTS

PERU - CENTROMIN EXPANSION PROJECT

(LOAN 1281-PE)

PREFACE

The Bank approved a Loan of US$40 million equivalent in June 1976to EMPRESA MINERA DEL CENTRO DEL PERU (CENTROMIN) to assist in financingthe Cobriza Mine Expansion and the Cerro de Pasco Mine Water TreatmentPlant.

The Project constituted an important part of CENTROMIN's Stage IProgram to expand copper production, to reduce pollution effects on theenvironment and to provide necessary industrial and social infrastructureto support the Project. Planning for the Project began under the company'sprevious ownership, the Cerro de Pasco Corporation. Initial feasibilitystudies were completed in 1975 for Cobriza and in 1974 for the Cerro dePasco Plant. Project implementation was suspended from the end of 1977 toMay 1979 due to shortage of Government funds. After reactivation,substantial project modifications were required. Consequently, thestart-up of operations of Cobriza took place in November 1982, that ofCerro de Pasco in February 1981, i.e., about three years later thanoriginally expected during the Bank Appraisal.

IND Staff visited Peru in August 1983 to discuss the draftProject Completion Reports (PCRs) for the two subprojects prepared byCENTROMIN. The Borrower's final PCRs were received on November 14, 1983 andsubsequently translated from Spanish. IND's comments on their PCRs weresubmLtted on May 17, 1984. The project has not been audited by OED.

Further comments, dated June 10, 1985, received from theBorrower, which are included as an Attachment, have been taken into accountin the revised text.

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PROJECT COMPLETION REPORT

PERU - CENTROMIN EXPANSION PROJECT(LOAN 1281-PE)

BASIC DATA SHEET

(US$ millions)

LOAN POSITIONAs of June 30, 1985

Original Disbursed Cancelled Repaid Outstanding

Loan No. 1281-PE 40.0 39.73 0.27 14.68 25.06

CUMULATIVE LOAN/CREDIT DISBURSEMENT

FY77 FY78 FY79 FY80 FY81 FY82 FY83

(i, Planned original est. - 23.00 36.00 39.80 40.00 40.00 40.00i)a Planned revised est. - - - 19.10 36.00 40.00 40.00(ii) Actual 0.27 2.37 3.38 7.90 24.41 35.12 39.73*(iii) (ii) as Z of (i) - 10.3 9.4 19.9 61.0 87.8 99.3(iv) (ii) as X of (i)a

(revised est.) - - - 41.4 67.8 87.8 99.3

* US$0.27 million was cancelled as of March 1980, thus reducing the loan amountto US$39.73 million.

OTHER PROJECT DATA

Original Loan/ Actual orCredit Date Re-estimated

Board Approval 04/76 06/76Loan Agreement 07/76 12/76Effectiveness 08/76 05/77Loan Closing 12/80 12/82

Cerro CerroCobriza de Pasco Cobriza de Pasco

Date of Physical Completion 10/79 03/78 09/82 10/80Completion Time (in months) 34 15 63 40Time Overrun (in months) 29 25Date of Start-up of Operations 12/79 03/78 11/82 02/81

Total Project Cost (USS m) 160.9 15.3 245.0 15.3Overrun (Z) 52.3 -

Financial Rate of Return (Z) 15.2 18.1 Neg. Neg.Economic Rate of Return (Z) 16.0 20.0 Neg. Neg.

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MISSION DATA

Month/ No. of No. of Date ofYear Weeks Persons Manweeks Report

Identification 03/72 1 3 1 03/72Preparation 07/72 1 3 1 07/72Preappraisal 08/72 2 3 5 09/72Appraisal 04/75 3 4 12 05/75Post-Appraisal 08/75 2 2 4 09175Post-Appraisal 12/75 0.5 1 0.5 01/76Supervision 06/76 0.5 1 0.5 07/76Supervision 10/76 1 2 2 11/76Supervision 02/77 1 2 2 03/77Supervision 11/77 0.5 2 1 12/77Supervision 02/78 1 1 1 02/78Supervision 07/78 1 1 1 08/78Supervision 06/79 0.5 1 0.5 06/79Supervision 11/80 1 2 2 12/79Supervision 07/80 0.7 3 2 08/80Supervision 10/80 1 2 2 10/80Supervision 05/81 0.5 2 1 07/81Supervision 08/81 1 1 1 09/81Supervision 05/82 1 1 1 06/82Supervision 09/82 1.5 1 1.5 10/82Completion 08/83 2 2 2 12/83

OTHER DATA

Borrower CENTROMINExecuting Agency CENTROHINFiscal Year of Borrower 1/1 - 12/31

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PROJECT COMPLETION REPORT

PERU - CENTROMIN EXPANSION PROJECT

WORLD BANK COMMENTS

HIGHLIGHTS

1. The IBRD Loan 1281-PE in the amount of US$40.0 million equivalentwas approved in June 1976 to assist EMPRESA MINERA DEL CENTRO DEL PERU(CENTROMIN) to implement two sub-projects of its Stage I ExpansionProject. The Cobriza Mine Expansion was designed to increase undergroundmine production to 10,000 tons of ore per day and to convert this ore to aconcentrate product. Plans for the Mine Water Treatment Plant at Cerro dePasco called for the construction of a solvent extraction and electro-winning plant to both replace the less efficient existing facility and tohalt the contamination of the San Juan and Mantaro rivers. The project wasalso to provide the associated industrial and social infrastructure (see para 1).

2. Due to shortage of Government funds, which accounted for 57X ofthe total project financing plan, implementation of both sub-projectsslowed down in late 1977 and was suspended from January 1978 until May1979. After reactivation of the projects, a host of serious management andoperational problems developed between CENTROMIN and its expatriate projectmanagement group. These problems are described in detail in CENTROMIN'sProject Completion Reports (see Annexes I and II).

3. While CENTROMIN has prepared in general good Project CompletionReports for the Cobriza Mine Expansion Project and for the Cerro de PascoMine Water Treatment Plant, a number of clarifications and comments arewarranted on the part of the Bank. These include the critical area of theCobriza ore reserves which during project implementation requiredsubstantial modifications to the original mine and concentrator plans (paras.7-9).

4. Due to the loss of virtually two years during project suspension,substantial engineering modifications required on the basis of unexpectedexploration results and the problems the company experienced with itsproject management group, original project cost estimates were exceededconsiderably. Total project costs are estimated at about US$260.3 million,i.e., a cost overrun of about 48X over the appraisal estimate.Consequently, both the financial and the economic rates of return of theproject based on the range of World Bank copper price projections arenegative. Nevertheless, analysis indicates that keeping Cobrizaoperational is justified on financial and economic grounds (see paras.22-29).

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PERU

CENTROMIN EXPANSION PROJECT

PROJECT COMPLETION REPORT

I. INTRODUCTION

1. The IBRD Loan 1281-PE provided financing for two projectcomponents, i.e., the Cobriza Mine Expansion and the construction of theCerro de Pasco Mine Water Treatment Plant of Empresa Minera del Centro delPeru (CENTROMIN). Both projects constituted an important part ofCENTROMIN's Stage I Program to expand production and processing and toreduce environmental pollution. Specifically, the Cobriza project wasdesigned to (i) increase underground mine production from 2,600 tons to10,000 tons of ore per day and (ii) to treat this ore in a new concentratorwith an annual output of 223,000 tons containing 252 copper and 5.5 oz. ofsilver per ton. In addition, industrial and social infrastructure was tobe built to support the project. The main objective of the Mine WaterTreatment Plant at Cerro de Pasco was to replace the existing cementationplant with a more efficient solvent extraction and electrowinning plant ofthe same capacity, which would produce refined copper in place of cementcopper and halt the contamination of the San Juan and Mantaro rivers.

2. At full capacity both project components will represent about 64%of the company's total contained copper output compared to only 34% beforethe expansion, and therefore comprise an important share of the company'sproduction and revenues. With total project costs estimated at aboutUS$260.3 million, of which US$39.7 came from the Bank and US$66.4 millionfrom the IDB, and revenues estimated to reach about 10% of CENTROMIN'sgross sales, b,th projects also play an important role in the company'sfuture.

II. PROJECT BACKGROUND

Project History

3. Plans for the modernization and expansion of CENTROMIN'soperations were originally formulated by the Cerro de Pasco Corporation,owner of the company before nationalization on January 1, 1974. With theformation of its own planning department in May 1974, CENTROMIN began tomodify and finalize a program to increase production of all major products(copper, silver, zinc, lead, gold and bismuth), improve productivity and toreduce environmental contamination. The company identified six projects asStage I of a long-term expansion program: Expansion of the Cobriza andCasapalca mines, the modernization and expansion of the coppersmelter/refinery, construction of a zinc refinery and a lead sinter plantat La Oroya, and the replacement of the copper cementation plant at Cerrode Pasco with a solvent extraction and electrovinning plant. Feasibilitystudies were prepared for all six projects.

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4. CENTROMIN requested the Bank to review the program and to assistin it 4inancing. Because of their high priority to the country, theiradvanced state of preparation and their self-contained nature, the Bankselected the Cobriza Mine Expansion and the Cerro de Pasco Mine WaterTreatment Plant for financingl/. For the Cobriza project a feasibilitystudy had been prepared in 1975 by the U.S. consultant firm Ralph Parsons.In 1974 a feasibility study for the Cerro de Pasco project was carried outby the U.S. engineering firm Holmes and Narver, Inc. The Bank appraisedthe projects in April/May 1975 and August 1975. The Bank loan (1281-PE)for US$40 million equivalent was signed on December 6, 1976 and becameeffective May 24, 1977. Basic engineering studies for Cobriza began onMarch 11, 1977, those of the Cerro de Pasco project on May 26, 1977.

Role of the Bank during Implementation

5. The Bank worked closely with CENTROMIN on the formulation of bothprojects. As a result of this work the scope of the Cobriza expansionproject was increased from 7,000 tons of ore per day to 10,000 tons per dayto realize optimal economy of scale and new investment capital costestimates were prepared. Due to shortage of Government funds which weresupposed to provide 57% of total project financing, implementation of theprojects slowed down in late 1977 and was suspended from January 1978 untilMay 1979. Overall, virtually two years were lost. However, explorationwork continued during this period showing that there were no economicallyviable reserves in the Pumagayoc area, from which ore was supposed to bemined for Cobriza's expansion. Thus, the basic engineering for the miningaspects of the project performed up to this point was no longer valid.After the reactivat ion of the engineering contracts a host of seriousmanagement and operational problems developed between CENTROMIN's internalproject administration and the expatriate project management group. TheBank attempted during its supervision missions and in special meetings toidentify solutions to those problems aimed at reducing further delays andcost overruns. Nevertheless, some of the problems remained and could notbe reso'ved. The most significant of these problems concerned the lack ofcoordination between CENTROMIN's project administration and the projectmanagei'ent group and detrimentally affected mine desigr., the constructionof the mine shaft and project scheduling. How CENTROMIN saw these problemsis described in their Project Completion Reports (see Annexes I and II).

III. BANK STAFF CLARIFICATION REGARDING CENTROMIN'S PROJECT COMPLETIONREPORTS

6. In general, CENTROMIN has prepared good Project CompletionReports for the Cobriza Mine Expansion Project and for the Cerro de PascoMine Water Treatment Plant covering almost all aspects required under theBank's guidelines. However, a number of clarifications and comments arewarranted on the part of the Bank concerning (i) the ore reserve questionof Cobriza; (ii) the possibility of increasing Cobriza's mine output; (iii)the relationship between CENTROMIN and its project management consultants;(iv) CENTROMIN's capital cost estimates; and (v) technical, financial andenvironmental issues relating to the Mine Water Treatment Plant as follows.

1/ The other projects in the stage I program have also been completed withthe major exception of the copper circuit for the La Oroya refinery.

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Cobriza Ore Reserves

7. At the time of the Bank appraisal, ore reserves which were minedfor the old Cobriza plant in the Coris area were estimated to total about50 million tons with an average grade of 1.82 Cu and 5 oz. silver per tonof ore. At the proposed mining rate this ore deposit would have beensufficient for 14 years of operation. In addition, the ore deposit wasbelieved to extend across to the Pumagayoc area where scout drilling andgeological interpretation indicated another 60 million tons of possible oreof similar grade. Therefore, overall reserves were considered reasonablyassured for the proposed expansion with over 20 years of mill-feed oreavailable.

8. Additional geological exploration, however, has not only beenunable to confirm the earlier estimates but also found the mineralizationat Pumagayoc to be economically unattractive owing to its very small size,lower grade and costly development requirements. In addition, the oregrade in the Coris area had to be revised downward to an average grade ofabout 1.3Z Cu or about 72% of the grade estimated during the Bankappraisal. The higher ore grades and larger reserves originally estimatedresulted from the erroneous assumption that the deposits were of stratiformnature, i.e., extending consistently to the West, increasing in depth, andreaching across the Pumagayoc ridge. This misjudgment was made by allparties involved in project preparation on the basis of insufficientphysical evidence through adequate drilling necessary to at least interceptthe assumed mineralized extensions. Drilling exploration to this effectshould have been completed prior to the actual project implementation or bythe latest at the time work on Cobriza was reactivated in late 1979.However, both CENTROMIN and Project Management personnel remainedoptimistic and little concerned about detailed reserve identification sinceproject implementation itself required their fullest attention. As we nowknow, this proved to be an essential error. The lower ore grade hasrequired considerable modifications of the processing circuits andincreased reagent consumption, and thereby critically affects the financialviability of Cobriza due to the fact that processing facilities were sized,designed and constructed for ores with significantly higher copper content.

9. CENTROMIN has recently accelerated its efforts to discover otherhigher grade ore deposits in the area, but it appears doubtful whether thiswill improve the project's finances in the short to medium term because ofboth the usual risks associated with such exploration and the additionalinvestment and time required to study, develop, and start mining a newlarge mineral deposit. Nevertheless, existing general geological trendsindicate that over the longer term it appears likely that additionalreserves similiar to the ore presently mined could be delineated throughCENTROMIN's ongoing exploration efforts. These efforts are given highestpriority by the com3any since they are needed to ensure the long-termfuture of Cobriza. _/

2/ As of June 1985, CENTROMIN estimated that sufficient proven andprobable ore reserves remain for a minimum of ten year production withsignificant potential of an additional five years.

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Increase in Production Capacity

10. A more immediate solution to improving the economics of theCobriza project may be found in raising the utilization of installedfacilities at a higher than the planned rate. The existence of someover-capacity of several major processing components due to over-design,such as two extra mills, suggests that a production increase of about 20Xto 12,000 tons of ore per day could be achieved with relatively minorinvestment needed to remove some bottlenecks, such as expansion of thecrusher discharge system, and addition of pumps and flotation cells.CENTROMIN is presently studying this solution for possible implementationas soon as project start-up difficulties have been fully resolved. 3 /

II. At the time of the appraisal, CENTROMIN decided to expand itsconcentrating capacity at Cobriza by erecting a new plant and dismantlingthe existing concentrator which had been inaugurated only nine yearsbefore. The old plant was located on the side of the mountain and exposedto potential hazards from unstable slopes and local talus slides. For thisreason it was decided to shut down the old plant. Unfortunately, the newmuch costlier plant was established also on the side of a mountain whichmay be subject to the risk of similar slides although the slopes aresomewhat less steep and its base broader. In retrospect, it appears thatmore consideration should have been given to the tectonic conditions of thenew plant location. This knowledge together with the uncertainty of thereserves may have resulted in a more modest expansion based on theirexisting plant facilities and infrastructure.

Consultants for Cobriza

12. Although CENTROMIN had voiced concern during the Bank appraisalas to the Bank's requirement of retaining an expatriate project managementfirm to assist CENTROMIN in the implementation of the project, the companyagreed to it before Board presentation. Nevertheless, the actual selectionand participation of the expatriate project manager for the overallexecution of the Cobriza project became a highly controversial subject.CENTROMIN felt that it could better implement the project by itself, andwas not keen on contracting management services for this purpose. However,the Bank held that CENTROMIN's staff did not have sufficient projectexperience. The relationship between CENTROMIN's project administrationand the Project Manager became increasingly difficult and deteriorated tothe point where the parties did not talk to each other anymore.

13. There is little doubt that the project did suffer from thissituation. And in fact some main project components clearly show majordesign and operational difficulties resulting from inadequate engineeringand poor construction. 4/ Designwise, this situation is typicallyreflected by the apparently larger than needed milling section of the

3/ After further investigations, the borrower informed the Bank (seeBorrower's Comments in the Attachment) that this alternative ispresently difficult to implement because depressed copper prices andlimited ore reserves could hardly justify the required expansionexpenditures.

4/ Further details are provided in the Borrower's Comments (see Attachment).

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concentrator. Operationally, the tailings thickener, for example, had tobe abandoned due to leakage from major cracks resulting from settlementattributed to poor compaction. In addition, the mining component of theproject had to be executed by CENTROMIN itself, since according to thecompany several activities under the responsibility of the Project Manager,such as mine plans, technical input and support for shaft sinking, were notsatisfactory. CENTROMIN completed this work on its own although about 15months after project inauguration in May 1982. This delay reduced theaverage mine capacity by about 40% during this period. In light of theseproblems, the question can be raised as to whether the Bank should havemore positively considered CENTROMIN's request in April 1977 to retain awatch-dog- firm to monitor the performance of the Project Manager.

Capital Cost Adjustments of Cobriza Project

14. When the projects were reactivated in May 1979, the ProjectManagers substantially modified the earlier basic engineering, especiallywith respect to mine development, mine equipment, an additional mine shaft,hydraulic fill, a transmission line and a new ore transportation system,estimating capital costs in the order of US$260 million for Cobriza andUS$15.0 million for Cerro de Pasco. CENTROMIN decided, however, to keeptotal actual capital costs for the Cobriza Mine Expansion Project belowUS$240 million. This was achieved primarily by allocating only a minorportion of the required working capital to the project.

15. Since working capital was not directly assigned to the project,no exact information is available but on the basis of increases inconcentrate and supplies inventories and in accounts receivable,incremental working capital neads for Cobriza have been estimated at abo"tUS$14 million. 5/ Peruvian accounting procedures require that interestduring construction be capitalized up to the time when the project hasoperated for three full months at a minimum of 80% of rated plantcapacity. CENTROMIN anticipated that Cobriza would have met this test bythe end of 1983. Thus an additional US$7.7 million would be chargeable tothe project. These adjustments are shown in the following table:

Table IPERU - CENTROMIN EXPANSION PROJECT

Capital Costs(in USS millions)

Cobriza CENTROMIN AdjustedAppraisal Final FinalEstimate Estimate Estimate

Total Fixed Assets 121.9 188.6 188.6Working Capital 12.2 1.6 13.7Interest during Construction 26.8 42.7 42.7Total Project Financing i60.9 232.9 245.0

5/ Although Cobriza concentrates will replace to a certain extentpurchased concentrates to be used in the La Oroya smelter, the networking capital requirement of Cobriza is believed to be considerablyhigher due to longer throughput and higher mining and processing costs.

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Mine Water Treatment Plant

16. At the time of the appraisal, the main objectives of the projectwere to replace the existing cementation process with a solvent extractionand electrowinning plant that would neutralize discharges and effectivelyeliminate impurities. With the same production capacity but at lower coststhe plant was supposed to recover copper in refined form with a high gradeof 99.9% Cu instead of the -cement product containing only 60-70% Cu. Thenew operation would eliminate the flow of polluting discharges into the SanJuan and Mantaro rivers. These discharges, which took place over manyyears have been characterized as acidic, turbid and containing iron andother impurities. In addition, the old cementation process required scrapiron which was expected to become increasingly scarce in Peru. Thisassumption did, however, not materialize.

17. In terms of the project's pollution control objective, afterdetailed study the neutralization component of this project was eliminatedwith Bank approval in order to avoid cost overruns and was replaced bydischarging the effluents to a tailings pond instead of the San Juan andMantaro rivers. The full environmental impact of this short-term solutionchiefly depends on the balance of discharges to the pond and actualevaporation rates. This is presently under study. To this end, CENTRONINhas requested that the Bank send an envirormental specialist for a detailedreview of possible options for the long-term disposal of both all effluentsfrom the Cerro de Pasco mine waters and the proposed tailings disposal fromthe Cobriza concentrator. A Bank mission will be scheduled shortly.

18. The mine water treatment plant without the neutralizationcomponent was constructed within the original budget estimate of US$15.3million. Data is not available as to the savings CENTROMIN realized onaccount of the scope change. Full production has not yet been reached.Output during 1983 is estimated at about 5,200 tons of contained copperrepresenting about 86% of installed capacity. Full capacity output isexpected to be reached some time in 1984. 6/ The relatively long start-upperiod, since June 1981, resulted primaril7y from major electricaldifficulties with transformers and rectifiers which halted plant operationsover a period of five months while they were replaced. 7/ Contrary to theSAR assumption, the new plant did not succeed in lowering operating costs,but is expected to require approximately US$1.0 million more per year inreal terms in production costs compared to the old plant owing to higherelectricity costs and larger use of costlier reagents. However, thepresent plant produces refined copper which does not require furtherprocessing.

IV. FINANCIAL AND ECONOMIC PERFORMANCE

19. Since the financial section of CENTROMIN's PCR is limited toassumptions as to copper and silver prices and five-year projections of

61 As copper content in the mine waters decrease over the coming years, a2% reduction of copper production per year is expected.

7/ See Borrower's Comments in the Attachment.

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sales revenues and operating costs of each project, this section expands onessential financial and economic aspects relating to the Cobriza and Cerrode Pasco projects.

Metal Prices

20. Copper aad silver prices as forecast in the SAR are compared inthe following table (Table II) to the actual average prices for the period1977 to 1982 and to the current price projections for the period 1983 to±988.

Table IIPERU - CENTROMIN EXPANSION PROJECT

Copper ard Silver PricesAppraisal vs. Actual and Projected

(in current terms)

Copper (US$/lb.) Silver (US$/oz.)Present Projections Present

Appraisal Actual By Appraisal ProjectionsYear Estimate (LTME) CENTROMIN World Bank Estimate Actual By CENTROMIN

a/ b/1977 0.90 0.59 5.50 4.621978 1.04 0.62 6.20 5.401979 1.11 0.90 6.70 11.091980 1.20 0.99 7.75 20.581981 1.28 0.79 8.30 10.521982 1.37 0.67 8.90 7.951983 1.46 0.78 0.72 0.72 9.50 11.171984 1.57 0.98 0.76 ;2.80 10.10 10.501985 1.70 1.29 0.83 0.88 10.76 10.301986 1.83 1.24 0.80 0.96 11.46 10.091987 1.98 1.26 0.90 1.04 12.20 9.891988 2.14 1.28 1.00 1.07 12.99 9.69

a/ April 1984 EPD projections.b/ SAR Zambia Export Rehabilitation and Diversification Project.

21. The table shows that the actual price development of copperremained consistently well below the forecasts used in the SAR. For thesix year period, 1977-1982, the copper price in current terms averaged 76cents/lb. while the SAR had assumed an average of US$1.15/lb., i.e., a 50%higher price level. CENTROMIN's price projections for the next five yearsexceed those by the Bank by an average of 31%. In contrast, CENTROMIN'ssilver price projections appear reasonable over the longer term. Asproceeds from silver will amount to only about 6% of Cobriza's gross salesvalue, minor price variations of that metal are not very critical to theoverall picture.

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Financial Rate of Return

22. The SAR estimated the incremental before-tax returns in realterms for the Cobriza project at 15.2% and for the Cerro de Pasco MineWater Treatment Plant at 18.1%. On the basis of the project capital costsestimated as of September 1983 and estimates for (i) future operating costsas predicted by CENTROMIN and (ii) net revenues based on the range of WorldBank copper price projections, new cost and benefit streams have beenprepared for both projects.

23. On the basis of the range of the Bank's price projections therecalculation of the Cobriza project yields an incremental rate of returnbefore income taxes of between -10.5% and -8.5%, i.e., the anticipatedbenefits over the life of the mine and the plant are insufficient torecapture the initial capital costs, future asset replacement plus actualand future operating costs of the project. This very significant reductionin the financial outlook of the project stems primarily from thesubstantial capital cost overrun (about 62% over SAR estimate) and theconsiderably lower than expected copper price combined with markedly lowerthan expected copper grade (1.3% versus 1.8% assumed in the SAR resultingin only 170,000 tons of concentrate rather than the originally expected223,000 tons).

24. In order to offset the actual, lower ore grade and improve thefinancial performance of the Cobrixa project, CENTROMIN contemplates thepossibility of increasing ore produ,Lion by 20% to 12,000 tons per day (seeparas. 11 and 12). Assuming that the exploration program, which iscurrently underway, will prove sufficient reserves within a long-term timeframe, the increased production would generate about US$5.5 million inadditional net revenues per year and improve the incremental financial rateof return to +1.2%.

25. In view of these rate of returns, the question becomes relevantas to whether CENTROMIN would not be better off financially to close downCOBRIZA. To assess this option, the net cash flow after debt servicing ofkeeping COBRIZA operational have to be compared with the option ofabandoning the operation. All historic capital costs are considered sunkfor this purpose but interest and principal repayments of all relevantloans would be maintained as scheduled. The estimated effects on the restof CENTROMIN's operation is considered to be negligible since it is assumedthat it can expand its contract smelt'ng business to the extent ofCOBRIZA's production. It is very difficult to estimate the cost ofshutting the plant and to determine the exact write-off benefits.Nevertheless, our analysis indicates that keeping the operation going wouldover the period 1983-92 result in a rate of return of about 16%.

26. A similar conclusion can be reached using a differentmethodological approach as follows. Despite closing down Cobriza, loanservicing would have to be continued. On a per pound of produced copperbasis this amounts to 39t in 1983 terms. Since total cash costs for onepound of copper amounts to 115t (para. 28), a copper price of 76e/lb. in

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1983 terms would equal the options of abandoning versus continuedoperation. This price is very close to the Bank's price projections.

27. While scope changes of the Cerro de Pasco Mine Water TreatmentPlant allowed it to be completed at the original cost estimate (para. 18),the copper output of the plant is expected to be roughly the same as couldhave been expected if the old cement plant would have been retained.Deviating from CENTROHIN's PCR, for our analysis it was assumed that onlysufficient copper bearing solution for the annual production of 5,200 tonsof copper would be available compared to CENTROMIN's estimate of 6,000tpa. Contrary to the SAR assumption, the new plant did not succeed inlowering operating costs but is expected to require in 1983 termsapproximately US$1.0 million more per year primarily resulting from higherelectricity and reagent demand. Consequently, in addition to the totalcapital costs of US$15.3 million, higher operating costs and equalrevenues, the new plant cannot be expected to generate a positiveincremental cash flow in any of the 22 years of construction (7) andoperation (15).

Cobriza Production Costs

28. On a per pound basis direct operating costs for mining andconcentration8/ at full production (10,000 tpd) are estimated in 1983terms to amount to 46t/lb. Depreciation expenses add about 194/lb. andfinancial charges an average of about 21¢/lb. Assuming headquarteroverhead expenses applicable to Cobriza at about lOt/lb., the totalproduction cost of one pound contained copper ex La Oroya amount toapproximately US$0.96/lb. Taking account of sales commission,transportation, insurance, freight, smelting charges, export taxes, etc.,and of a by-product credit of 8¢/lb. a LME price of about US$1.16/lb. isnecessary to break-even. On a cash basis (including principal repayment),the break-even price amounts to approximately US$1.15/lb.

29. Despite this dismal picture, the new, large-scale Cobriza projecthas been successful in reducing direct operating costs by 40% compared tothe old installation. Thus, per short ton of ore mined, direct operatingcosts of the new facilities presently amount to US$9.64 (US$6.35 for miningand US$3.29 for concentration) in contrast to the US$16.30 (US$10.27 formining and US$6.03 for concentration) of the old installation. On thebasis of direct operating costs only, Cobriza ranks as the least costproducer of CENTROMIN's six mining centers.

Cobriza - Projected Income and Cash Generation

30. Cobriza is projected on the basis of the Bank's copper priceassumptions to incur an accumulated loss for tne period 1983-88 of aboutUS$20.4 million in current terms. During the same period Cobriza will havea cash deficit of USS40.1 million. Details are given in Table III. It

8/ Include direct mining costs and direct concentration costs but excluderefining costs, other charges (e.g., transportation, insurance,marketing, handling) and overhead expenses.

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should be noted that these projections do not include the cost foradditional financing required to cover the cash shortfalls. In addition,CENTROMIN does not include headquarter overhead expenses attributable toCobriza in the operating expenses. Consequently, only direct mining andconcentrating costs are covered.

31. The projections indicate that over the next few years Cobrizawill unfortunately not be in a position to alleviate CENTROMIN's alreadystrained financial position but rather will further burden the company'ssituation. Only from 1989 on, will Cobriza produce overall positive netincome and net cash surpluses. By then, copper prices are predicted togenerate net revenues in excess of operating and capital expenses. The newCerro de Pasco operation is too small to have any significant influence onCENTROMIN's total financial picture.

Table IIIPERU - CENTROMIN EXPANSION PROJECTNet Income/Cash Generation - Cobriza

(in current US$ million)

1983 1984 1985 1986 1987 1988 1983-88Cu Price (US$/lb.) b/ 0.72 0.80 0.88 0.96 1.04 1.07Ag Price (US$/oz.) 11.17 10.50 10.30 10.09 9.89 9.69

Net Income

COBRIZANet Revenues 32.1 52.7 58.7 60.3 62.9 67.3 333.9Operating Costs a/ 29.3 32.1 34.5 36.9 39.5 42.3 214.5

2.8 20.6 24.2 23.4 23.4 25.0 119.4Interest Expense - 14.6 13.1 11.6 10.0 8.5 57.8Depreciation - 16.4 16.4 16.4 16.4 16.4 82.0Net Profit/Loss before 2.8 (10.4) (5.3) (4.6) (3.0) (0.1) (20.4)

Taxes

Cash Generation

Cash Generation 2.8 6.0 11.1 11.8 13.4 16.5 61.6Loan Repayment 7.7 15.3 15.3 15.4 15.3 15.3 84.3Asset Replacement - -- - 17.4 17.4Net Cash Surplus/ (4.9) (9.3) (4.2) (3.6) (1.9) (16.2) (40.1)

Deficit

a/ Includes mining and concentration operating costs but excludesheadquarter overhead expense allocation.

b/ Bank projections: SAR Zambia Export Rehabilitation and DiversificationProject.

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CENTROMIN - Historical Financial Performance

32. Summary financial statements and their financial ratios for theperiod 1979-82 are presented in Table IV. The accounts reflect thecompany's deterioration of its financial position in 1981 and 1982, whichwas mainly due to the depressed international metal markets, a sharpincrease in borrowings to finance the company's heavy investment programand cash deficits and large foreign exchange losses resulting from soldevaluations.

PERU - CENTROMIN EXPANSION PROJECTSummary of Financial Position(Billion soles, current terms)

1979 1980 1981 1982 1983

Net Revenues 121.7 198.9 252.7 312.0 867.3Operating Expenses 70.0 125.5 186.2 242.7 482.4Net Income 18.2 20.0 0.7 (78.3) 89.0Internal Cash Generation 23.2 30.7 19.8 (31.7) 232.5

Investments n.a. n.a. 8.6 9.0 13.4Fixed Assets n.a. n.a. 164.9 392.8 752.1

Long Term Debt 15.5 32.5 72.2 255.3 427.5Net Equity 53.9 82.5 118.4 141.5 337.1

Gross Margin, Z 42.5 36.9 26.3 22.2 44.4Operating Hargin, % 38.4 31.6 18.8 7.3 26.1

Net Income/Revenues, % 15.0 10.1 0.3 (25.1) 10.3

Current Ratio 1.64 1.27 1.16 0.90 0.37Long Term Debt/Equity Ratio 22:78 28:72 38:62 64:36 63:37

Financial Covenants

33. As a consequence of the worsening of CENTROMIN's financialposition from 1980 on, the company was unable to meet the financialcovenants relating to the financial ratios stipulated in the Loan Agreement(Sections 5.4, 5.5 and 5.6 of Loan 1281-PE). On December 1, 1982,CENTROMIN requested a waiver of these clauses for 1981 and 1982. However,in its latest long-term projections covering the period 1984-1987,CENTROMIN shows that it cannot meet the current ratio covenant (1.5 to 1)before the year 1986 and the debt/equity ratio (50:50) during any of theprojected years. If the accounts are expressed in US dollars, in whichCENTROMIN's products are primarily traded, the financial ratios wouldimprove markably. 9/ A summary of CENTROMIN's financial projections isgiven in Table V.

9/ See also Borrower's Comments in the Attachment.

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Table VPERU - CENTROMIN EXPANSION PROJECT

Summary of Financial Projections for Centromin(including Cobriza and Mine Water Treatment Plant)

(April 1983)(Billion soles, 1983 terms)

1984 1985 1986 1987

Net Revenues 1,187.9 2,175.6 2,844.0 3,700.3Operating Expenses 720.5 1,153.5 1.610.S 2,090.1Net Income (Loss) 72.8 280.8 329.0 450.9

Internal Cash Generation 201.8 493.8 664.9 922.0

Long Term Debt 842.9 1,349.8 2,007.7 2,790.0Capital Stock 125.9 125.9 125.9 125.9Accumulated Profit (Loss) 45.4 326.2 655.2 1,106.2Assets Revaluation 316.5 518.1 750.3 1,000.9

Net Equity a/ 487.8 970.2 1,531.4 2,233.0

Gross Margin, x b/ 39.4 47.0 43.4 43.5Operating Margin, Z 28.5 37.2 31.6 30.8Net Income/Revenues, Z 6.2 13.2 11.6 12.2

Current Ratio 1.12 1.49 1.86 2.46Long Term Debt/Equity Ratio 58:42 58:42 57:43 56:44

of After revaluation of assets.D/ Gross margin, % - (Net Revenues less Operating Expenses)

Net Revenues * 100

It must be emphasized that an even dimmer picture would emerge if thelatest World Bank copper price projections are applied (see Table II).

Economic Reevaluation

34. On the basis of the Bank's metal price projections the netforeign exchange surplus generated by Cobriza and Cerro de Pasco isestimated to gradually build .p to about US$45 million in 1982 real terms.No income tax and no dividends for the projects would accrue to thePeruvian Government before 1990. Fiscal revenues will result neverthelessfrom increased export and sales taxes, import duties and indirect benefits.

35. The necessary adjustments to the financial benefits are notsufficient to make the incremental economic rate of return for the projectspositive. The employment benefits from the projects are described indetail in CENTROMIN's PCR.

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V. CONCLUSIONS AND LESSONS TO BE LEARNED

36. After an over three year delay caused primarily by the economiccrisis in Peru beginning in 1977, both projects, the Cobriza Mine Expansionand the Agua de Mina plant in Cerro de Pasco, are now physically completeand in operation. Primarily due to the unresolved ore reserve question inCobriza and the less than expected volume of copper bearing mine water tobe treated in Cerro de Pasco, it is still very doubtful whether theprojects will achieve their full technical objectives over the originallyexpected project period. Because of the very high cost overruns of theCobriza mine expansion10 / together with the lower than antiripated oregrade, the project's economic objectives cannot be achieved unlessproduction is increased substantially, a much more attractive mineralizedarea is found in the near future, and/or the Bank assumptions as to futuremetal price development turn out to be too conservative, i.e. copper and/orsilver prices show a drastic upward swing.

37. The degree of uncertainty affecting the future of the projects isfurther heightened by the fact that Cobriza is located within an area ofpolitical instability. So far only limited terrorist activity occurredwith an outlying communication station having been destroyed.

38. Timely and proper project implementation and avoidance ofsignificant cost overruns can normally be controlled by the projectimplementing agency and its overseeing bodies. With respect to Cobriza,the country's economic crisis in the late Seventies played a dominantfactor in the almost two year project suspension. Furthermore, the successof all mining projects is greatly dependent on the exogeneous factor ofworld market prices for their products. Thus, the accurate estimation offuture metal prices for a mining project can reduce or altogether eliminatethe financial and economic success of a project as to the same or evenhigher extent as capital cost overruns or delays in project completion.When applying the original SAR copper price projections (see Table II) tothe actual capital expenditures and the latest projected sales andoperating cost estimates over the life of the Cobriza project, theincremental rate of return increases from negative 8.5-10.5 (see para. 23)to positive 5.4%. Thus, the price forecasting error between the appraisaland the current assumptions amounts to about 15 percentage points in thefinancial rate of return of the project.

39. At the time work resumed on the projects in May 1979, the Bankreviewed CENTROMIN's revised implementation schedule and capital costestimates. Although no formal reappraisal of the projects took place atthat time, tbe economic rate of return was reestimated for Cobriza at closeto 20% using the then latest Bank projections for copper prices. Moreover,CENTROMIN advised the Bank on February 26, 1979 that although its

10/ The borrower points out (see Borrower's Comments in the Attachment)that the final costs of the project should not be compared with theappraisal estimate but rather with the estimate arrived at as result ofthe revised basic engineering. On this basis, Cobriza was completedconsiderably under budget.

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exploration work in the Pumagayoc area could not prove out the expectedreserves, the size of the proven and potential ore reserves in th'- Corisarea would guarantee ample ore supply for the project. CENTROMIN's ProjectManagement endorsed the company's contention and also concluded that thechange in the area of the ore reserve did not justify a change in projectscope nor an increase in 'he overall project costs. The average ,radeestimate at that time was given at 1.77% copper and 0.5 ozs. silver per tonof ore, almost exactly what the SAR had indicated. The downward revisionof the copper grade took place much later. Consequently, on the basis ofthe then available information it was not warranted that the project bestopped and the incurred expenditures of US$13.8 million be written off.

40. Similarly, it could now be argued that it would be morebeneficial to shut down Cobriza rather than continuing its operation whileincurring large financial losses. CENTROMIN's management points out,however, that Cobriza is its lowest direct cost mining center and that itwould have to serve its debts in any case. With 81.3% of total projectcosts borrowed from external sources, continued operation enables thecompany to generate at least the foreign exchange portion of the projectedUS$124 million debt service over the next five years. If Cobriza were toclose today, its technical impact on the remaining CENTROMIN operationcould be reduced by increasing its custom smelting operation. As in thepast, the La Oroya smelter would then be available for an increased shareof custom concentrates produced by Peru's large number of small and medium-sized mines. These concentrates are presently shipped primarily to Japan.Consequently, in addition to its financial implications for the company theclosing of Cobriza would primarily eliminate most of the 650 direct jobs atthe mine and impact adversely on the transport and general services sectorsof the region.

41. CENTROMIN discusses in its PCR's the shortfalls of the projectsand provides suggestions as to improvements in several areas. They neednot be repeated here. There are a number of conclusions, however, whichcan be drawn by the Bank for consideration in future projects in the miningsector. In fact, most of these conclusions have been incorporated to avarious degree in the selection/appraisal and supervision process of theMiuing Division.

42. The main lesson to be learned affecting project identificationand appraisal is that feasibility studies have to be reviewed and assessedin depth with a more critical eye as to whether the goals of the projecthave been set realistically on the basis of the underlying assumptions.Specifically, in mining projects this would require a high level ofscrutiny of (i) the presented ore reserve data and its respectivegeological interpretation; (ii) the sizing of the proposed projects inlight of given ore reserves and technical, financial or other constraints;and (iii) the actual detail design proposals in order to avoid unwantedover-design or under-design of the various project components.

M12

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Annex 1

PROJECT COMPLETION REPORT

LOAN 1281/PE

COBRIZA PROJECT

(PREPARED BY THE BORROWER)

AUGUST 1983

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1. MDENTIFICATION OF TIE PRtJECr, FEASIBILTTY AND PREFEASIBILIIY STUDIESLtteuS ra)j *.--TcT-an:7W -)At the end of 1974, the Cobriza mine produced 1833 tons of grade 2.2%

copper ore, and plans were laid at that time to expand the output to 7,&0k tonsof grade 1.6% copper on the assumption that reducing the grade of the ore to beextracted would make the mining operation more efficient and less selective thanat present.

The ore produced would be treated in the existing concentrator plant (2,0a0TPD) and in a new plant with an initial capacity of 5,000 TPD to be built in theCoris valley some 3 kmu from the present plant. The new concentrator would beconstructed in modules of 2,50O TPD each so that it could easily be expanded to7,500 or 10,000 TPD. The possibility of eventually closing the existing plantand centralizing concentration operations in Coris was considered. However,there was no discussion at that time about working the Cerro Pumagayoc or Level10 of the Cerro de Coris (Cobriza Mine), alternatives that have been discussedonly since 1975 and 1978, respectively, after the findings from studies on thoseoperations '4ere in.

The expansion project included a tailings dump in the Coris valley (toserve both plants) and the construction of the housing and services required.The electric power needed would be obtained from the Mantaro Hydroelectric PowerPlant.

The investment required was estimated at that time to be aboutUS$42 million, to be disbursed between 1975 and 1978, when the expansion wouldbe placed in operation.

The feasibility study made by consultants at the beginning of 1975 defined

the following parameters:

- Operation at an average of 7,000 TPD.

- Construction of the new 7,000 TPD concentrator in la Pampa de Corts,using sone of the equiptent and materials from the existingconcentrator.

- Construction of an access tunnel to the Pampa de Coris, crossing theCerro Pumagayoc, which would help to evaluate the potential reservesin the area.

- Alluvial material taken from the slopes of the adjacent area wouldcontinue to be used for mine fill, leaving for later the analysis ofthe a'lternative of using part of the tailings as hydraulic filL

- Irstallation of a tailings thickener to recover industrial water inthe annual periods of fresh water shortage.

- The tailinqs would be dumped directly in Mantaro, with plans for latertimiting that activity by setting up a tailings dump in tile area ofBanos de Coris.

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The auxiliary services, management, housing and welfare facilities

would remain at their present location, and would be expanded asneeded.

- The project would begin in mid-1975 and would end in mid-1978. The

amount of investment required would be USS67.6 million, and theinternal rate of return on the investment, considering the costs andincome differentials over the existing operation, would be about 5.6%,including tax deductions.

Later, negotiations began with the World Bank and the Inter-American Bankto finance the project, and in order to improve its profitability, it wasexpanded to lk,woo TPD, based on the potential reserves of the deposit locatedboth in cerro Coris and in Cerro Pumagayoc. With the aid of World Bankspecialists, a new investment estimate was prepared, which increased it toUS$160.9 million, including preoperation financing charges and a substantialescalation and contingencies reserve.

The Bank's aid made it possible for the loan contract to be signed on

December 6, 1976, that is, the negotiations lasted only a little over a year,and the basic engineering studies began imzuediately since the managementcontract for the project was signed on March 11, 1 7.

II. PROJECT IMPLEMENTATION AND MANaGEMENT

a). Scop of the Project

(1) Based on the need for selective mining if the 2,600 TPD ratewas continued, the proven-probable reserves, the greatpotential of the mine, and the economic feasibility of theexpansion, Centromin decided to expand the mine, concentratorand auxiliary facilities in order to operate it at the optimallevel of production, which at the time of the evaluations wasfound to be 10,000 TPD. That expansion would make it possibleboth to make better use of the Cobriza mining resources withoutlowering costs and to produce concentrates at a rate consistentwith the mine's reserves and potenti.z10

To that end, a consulting firm was hired to conductthe feasibility study for the project. The studyfindings led to the adoption of the most appropriate

alternative for implementing the project, which primarilyconsisted of:

Mine Development and Preparation: Improve the mine system byconstructing galleries, cross cuts, sublevels, chimneys, andramps at the various levels of opreration to expedite oreextraction and hauling.

To that end, the project called for the purchase of largecapacity LHD mining equipment such as Scooptrams, hydraulicdrllls, low profile trucks, raise borers, etc.

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The proposed mining system is a modification of the currentsystem, with the major change being the almost vertical boringsystem, which will take it possible to have the entire lengthof the stope bored, imaprove the cycles within the stope andeliminate lost tirte owing to transfer of equipment. The oreextracted fro. the mine will be hauled to the concentratorplant by electric locomotives or waine cars.

Ore will be transported from the levels below level 28 throughlevel 10 and from there will be hoisted to the nain extractionlevel (level 10) by a 220 m shaft.

Concentrator Plant: The ore processing plant consists of: aprimary stone crushing plant, a 5,X00 tons storage area forcoarse stone, a fine crushed stone plant and closed circuitclassification, and a 5,g00 tons capacity storage area forfines; The grinding plant, consisting of two grinding circuits(primary and secondary), the flotation plant withconventional rougher scavenger and cleaning circuits. A twoline giratory circuit, with thickener and filtering sections,Is included.

The concentrator plant will have a capacity of 10,000 tons/pd.

Urban Area: The project has built an urban complex of 450multifanmily buildings. The complex includes such communityfacilities as a civic center, schools, medical posts, shoppingcenter and recreational areas. It occupies about 11 ha locatedadjacent to the concentrator plant in the esplanade of Pawupa deCoris.

- Mantaro-Cobriza Transmission Line: The present thermal energyplant in Cobriza has been replaced by the Mantaro HydroelectricPlant of Electro Peru. The power will be transmitted by a 69K' high-voltage line approxirately 55 km long.

- Auxiliary Services: The project has installed auxiliaryservices like: water supply, warehouses, repair andmaintenance shops, internal comlaunications system, electricalsubstations and the transmission line from Pampa de Coris tothe mine. It has also built a concentrate transfer station inthe town of Huayucachi 10 km from Huancayo.

(ii) After the project was suspended in January 1978, it wasreactivated in May 1979, at which time the location of the oreextraction was changed. The project originally called forextracting ore from Pumagayoc and Cobriza. The change meantthat ore would be extracted only from Cobriza, which at thattime was in production, although on a reduced scale. Thischange resultea from the discovery of additional ore reservesin the Cobriza area, while studies of the Punmagayoc area hadfound lower grade ore. Reactivating the mine was mutuallyagreed upon by the top level management of Centrorin Peru andthe project managers.

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b) Project anagement

(i) To manage the project, Centromin Peru hired a foreign Soumpanvassociated with a national consulting firm. Under thiscontract, the managers were responsible for implementing theproject plan, organize, direct, coordinate and control allact vities involved in the mine expansion and in theconstruction process, and install and operate auxiliaryfacilities and the concentrator plant until reaching standardoperations.

For all project business, Centromin Peru is represented by theproject administration, working in coordination with themanagers and supervising all aspects of compliance with theproject management contract. In addition to representing theowner, the administration was in charge of planning,development and construction of the following areas: the urbanhousing complex, the Mantaro-Cobriza high-voltage transmissionline, and the hydraulic fill plant, as well as mine planning.

(ii) During the project, the project administration worked closelywith the managers and third parties. Under the direction o3fdhe managers, Centromin Peru hired specialized companies toperform the detailed engineering, arranged for purchase ofequipa.ent and material through international calls for bids,,and contracted for earth movement, and civil, electromechanicaland mine development works, all supervised by the managers. Itwas also necessary to hire specialized firms to solve problemsthat occurred during the project. Aid was also obtained fromtechnical representatives of the equipment suppliers. Ingeneral, they all provided aid as required.

(iii) Management services were not satisfactory throughout theproject, because a number of problems occurred in variousstages of implementation. This was particularly true of basicengineering and as a result detailed engineering, becauseneither an adequate mine development plan nor a suitableproject control system were prepared. Consequently, thetechnology employed was inappropriate for the characteristicsof the project, and this situation was made worse bycontinually having to replace key personnel assigned to theproject.

Because of the terms of the contract with the managers, the CMP-had to rely aluost entirely on their managerial ability andtheir responsibility for the work perfor.iied, which preventedthe ChP fronm taking over sufficiently in advance the managers'corntractual functions, which the financing agencies wereinformed about in the coordination and evaluation meetings heldwith IDa and ISWD officials. The pragmatic solution to theseproblems would have been to rescind the contract, and hire anoutside consultant.

1/ CMP: CentromIn Peru

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(Iv) In its original conception, the project was reported to theWorld Bank through a prefeasibility study drawn up bya consulting firm, in cooperation with the CMP.

Based on the prefeasibility study and the contract with theproject managers, the US$40 million IBRD loan was extended forprojects to expand thse Cobriza mine and concentrator and themine water treatment plant. That amount was maintained duringimplementation of both projects.

After reactivating the Cobriza project, the World Bank requiredfrom the managers and the CmP periodic information on thestatus of the project. This was provided in a monthly progressreport by the managers and a quarterly report by the CMPProjects Execution Division, which reported to the l1RD and tothe IDB on the most important agreements, progress,modifications or variations in the original plan and in thefinancing structure, among others.

The CtP maintained close relationship with the managers,consultants, technicians and contractors that took part in theproject, in order to achieve satisfactory solutions to theproblems of conceptual changes in the design, technicalspecifications, programming system and progress control, thecontrol system for costs and commitments, the disbursementschedule, and changes in the financial structure, which werereported to the financial institutions at the proper time.

In light of the difficulties that occurred because of themanagers' unsatisfactory performance, which resulted in delaysand consequently higher implementation costs for the project,in addition to nonperformance of the contract for thedevelopment program anc preparation of the mine, which had tobe taken over by the CMP, it is of crucial importance for theCMP to be informed, in order to evaluate the project, of theresults of the IBRD and IDB evaluation of the services providedby the project managers.

C) Performance of the Consulting Foreign Firms

(i) Through the managers, Centromin Peru hired several consultingfirms. The detailed design engineering for the productionshaft was performed by engineering consultants, whose workwas regarded as satisfactory by Cantromin Peru.

The detailed engineering throughout the project was performedby local engineering consultants, under the directsupervision of the managers. It was necessary to hire soilspecialists to prevent cave-in of the thickener wastes. Ingeneral, the consultants. satisfactorily met Centromin Peru'srequirements.

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In the construction stage, technical aid for Installation

and/or assembly of the main equipment was provided at planttestiny and start-up by consulting firm experts, who gaveinstruction and training to the operating staff

d) Perforr-ance of the Suppliers

{i) In general, the quality of service of most suppliers was abovethe acceptable average. While some of them did not meetdelivery schedules, these delays were mainly due toconsultations by the managers. In other cases, delays werecaused by transportation strikes and tie-ups, and in a fewinstances, they were the fault of the manufacturers, in whichcase the penalties stipulated in the purchase orders were

The project administration assistants visited the suppliers andfound that manufacture and quality of the equipment purchasedwas satisfactory. In addition, it was determined that mostfirms maintain an adequate stock of repair parts.

In summary, the suppliers, with some exceptions, met ourrequirements. Delays in equipment delivery did not in generalresult in significant delays in the project execution program.

;ii) Problems or limitations in the suppliers' meeting our orderswere mostly due to administrative and organization problems, asin the case of one supplier, where changes in the personnelinitially assigned to fill our purchase order caused technicaldelays affected delivery times.

Another reason was that some suppliers offered a project forworking c,nditions different from our requirements. Thissituation could have been avoided by more effective andintensive follow-up by the managers.

(ii3) Examples are the following: Some suppliers did not provideantislipping controls and turbo-charger on the engines;other suppliers provided wrong shaft tubing; locomotivesreceived were unsuitable for the installed unloading system;spare parts were not provided by some firms and there weredefects in the pulley desigas of others.

(iv) Perfornance of the Contractors

In evaluating the contractors' proposals, it was noted that,despite doubts about the capabilities and/or performance of thelow bid company, quantifying the comipany's perforr.mance comparedto other proposals was difficult and subjective. So somecompanies that won the bid did not satisfactorily carry outtheir contracts, and this delayed the implementation ot theproject.

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e) Loqistics

(1) Purchases had to comply with the lending institutions! biddingrules on the purchase order amounts.

The managers handled purchases abroad, while purchases in Limawere handled by Centromin Peru. The managers' responsibilityfor local purchiases endea with delivery of the approvedrequisition. The following logistics management stages werehandled by the CMP, except for the receipt of materials in thefield, and later disti-ibtion to the contractors, which washandled efficiently at the warehouse.

Similarly, materials and equipment purchased abroad werecleared through customs and hauled to the field under CMPsupervision. Here the uanagers merely coordinated the follow-UP.S

(ii) The Bank's regulations only caused difficulties wben suppliersthat won the bid were from countries not eligible under thelending institution's rules. In addition, the rigidity andstrictness of general purchase terms and conditions caused somesuppliers to refrain from making bids. moreover, the 15%preference margin for local suppliers did not enable localfirms to win the bid, so most bids were won by foreign firms.

In general, the regulations followed made it possible forpurchases to be entirely flexible.

(iii) There were really no reasons for blaming suppliers for delaysduring the project.

(iv) Although the company has undoubtedly standardized certainequipment, international bids made it possible to expand ourlist of suppliers and obtain the specified equipment andmaterials of the proper quality, on time and at the lowestprice.

f) Implementation of the Program

(i) Before and during construction of the works, Centromin Peruimposed strict controls over the work programs in each area tominiaize possible defects in implementation. (Table 1).

In the construction projects, bonuses and penalties werestilulated to encourage better performance and progress of theworks.

(ii) Table A summarizes the project of the Cobriza Expansion Projectin May 1983.

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(ili-jY)

The main reasons for progress and/or delay are as follows:

Progress:

Civil works and electromechanical assembly (EC-8 and EC-13):

The- mechanical works of the concentrator plant were completedone and a half months early because of implementing the

accelerated construction program submitted in 198L

Delays:

Extraction shaft (EC-23): The delay in starting this work was

due to management negligence, and underestimating the period ofexecution, in addition to excavation problems caused by water

and terrain difficulties. Problems with the contractorowing to both his internal problems and work difficulties,have caused the mechanical completion of the shaft to berescheduled for August 1983. Because of this, severalagreements were concluded to solve the field problemsexisting at the start of the work.

Mine services (EC-37): This contract Was terminated andis being liquidated. Because of the late start,technical-financial deficiencies, and the inexperiencedemonstrated by the contractor, this contract was cancelled andthe work was taken over directly by Centromin Peru.

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STRETC OUT OF CO8RIZA PRCJIECr ACTrVITIES FROM THE ORIGINAL IBRD SCHEDULE

- The actual date of signature of the contract with the project managersis May 26, 1977, which is two years after the date originally programmed bythe Bank.

- The se-vices of the project managers were suspended from February 10, 1978, toMay. 22, 1979, because of lack of sources of ftinancIng.

- For the above reasons, detailed engineering services began on November 1,1979, and were completed on December 30, 1981L

- Because of the above delays, the plant's mechanical work was notcoapleted until May 29, 1982, despite the CmP's development andimplemention of a crash program.

- Procurement and civil works began in 1980 and were completed in May 1982.

- 1Mine development and services began in 1980. Work has continued to dateand is expectea to be completed by late-Septer-aber 1983. The delay inthe mine preparation and development activities scheduled by the managersis due to the inefficiency of the project managers, and its failure to meetits work schedule, particularly the minr development works (this work wastaken over directly by CENTROMIN.

- The Mantaro-Cobriza electric power line was completed in May 1981, with aslight delay because of slippage in the supply of substation equipment.

- Mine development continues under way, and design capacity is expected to bereached when the production shaft is completedL

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TABLE A

SUtM1Y PROGRESS CHART

MAY 1983

THIS REPORT

TARGET

Project Procure- Construc- Mine Urban 69 RV MCEng.&Adm. ment tion Devel Center Trans.Line Total

70 -

107

Percent.of TotalProject 16 32 24 17 6 5 100

Project Engineering and Administration continues to be under the CMPAdministration.

Procurement: Some purchase orders, mainly for mine equipment, are perIng.

Construction: Awaiting only the tailings thickener.

Mine Development: Will be completed in October 1983, according to the CMPP-Cobriza operations time schedule.

Urban Center: Completed in June 1983.

Mantaro Cobriza 69 KV Transmission Line: W.iork completed.

-26-

Nine Planning: Because of deficiencies and delays in the mine planningsublmitted by the amanagers, the cortapany had to intervene in preparing Itwhen this activity was already in a critical phase. This caused delaysin start-up of the development work and preparation of the mine, so thatthese works had to be taken over by Centromin Peru. In aodition, thecontractor, did not meet contract deadlines.

Tailings thickener: The design and supervision of the thickener workswere entirely the responsibility of the managers. Because of groundfaults, bad compacting and design errors, the structure collapsed twice.For that reason, the CMP decided on another system for water supply, andabandoned the thickener system. The new system involves pumping waterfrom the mantaro river and is fully under way. Legal action has beentaken against the firuas responsible for the problems.

Table B lists the contractors and shows the contractual and actualcompletion date, comments on progress, delays, penalties and incentives.

TABLE BCOBRIZA EXPANSION PROJECT

STATUS OF MAIN CONTRACTSAs of Hay 31, 1983

Actual Contract Extension ActjalCONTRACT start-up completion of delivery cnmpletion AMOUNTNo. Date DESCRIPTION date date deadllne date Bonus Penalt) COMMENTSEC-1 12/19/79 Fxcavations and 01/09/80 05/28/80 07/27/80 10/14/80 No penalty forexplorations

transactionarrangement

EC-2 03/26/80 Mine Development 04/15/80 01/31/82 02/28/82 Under vay, to becompleted in Juce1983

EC-3 06/26/80 Production of aggregate 07/18/80 12/31/81 --- 11/30/81 Completedand cement blocks

EC-5 01/02/80 Development of detailed 02/04/80 08/04/82 07/31/82engineering

EC-7 09/26/80 69 KV Mantaro-Cobriza Lines 11/03/82 09/03/81 01/03/82 02/04/82 4,412,870 32-day delayEC-8 07122/80 CIvil construction 08/01/80 05/10/82 --- 11/30/81 123,704,098 130 days early01/15/82 --- 12/02/81 15 days early05/07/82 --- 12/31/81 127 days early05/30/82 --- 12/31/81 50 days earlyEC-1O 04/18/80 Construction of 8 type 04/18/80 09/15/80 10/30/80 12/22/80 --- 1,466,438 52 days delay,2/3 buildings, uncompleted 01/17/80 --- 2,932,877 receipt 3 bldga.

78 days delay,receipt 4 bldgs.

EC-IOA 09/15/80 Completion of one type 2/3 09116/80 11/15/80 - - 01/31/81 509,295 76 days delayC-23 building

EC-13 01/01/80 Electromechanical 01/15/81 07/31/82 --- 06/14/82 272,945,732 --- 47 days earlyinstallation

Table B - continued

Actual Contract Extension ActualCONTRACT start-up completion of delivery completion AMOUNT

NO. Date DESCRIPTION date date deadline date Bonus Penalty COHMENTS

EC-14 09/05/80 Urban hou8ing 10/02/80 03/01,81 03/26/81 9115/81 --- 8,UI8,779 61 days delay

06/26/8107/15/81

EC-17 10/10/80 Structural steel fabrication 11/10/80 06/25/81 --- 06/10/81

EC-23 04/20/81 Raise between levels 10 and 04/20/81 06/30/82 04/20/83 Freezing of28, lncluding Installations 06/18/83 indices from

07/09/83 06-19 to 07(09(83.Scheduled dateof deliveryAugust 198?

EC-29 05/24/82 Construction of Colipa- 06/01/82 09/30/82 10/25/82 10/25/82 For longer lengthlluancayo transfer station of excavation and

late deliveryof terrain

EC-33 03/11/81 Structural steel fabrlcation 03/21/81 10/21/81 01/20/82 01/20/82

EC-34 33/l8/81 Construction 31 buildinRs 03/28/81 11/22/81 02/03/82 01/11/8210 type 3/4 D-23 bldga. 01/21/82and 21 type 2/3 C-23 bldgs. 02/08/82 1,939,992 4-day delay

02/16/82 3,243,960 12-day delay

EC-37 07/09/81 Complete assembly and under- 08/03/81 05/09/81 Scope of work wesground services reduced, balance

was turned over toCMP Operations tocomplete the work,which was deliveredJune 1983.

EC-39 05/25/81 Structural steel fabrication 07/10/81 11/30/81 08/28/82 08/28/82 7.221,420 Delivery extended

according to(illeg.) 10/03/82

2,413,680 Penalties ImposedEC-46 04/30/81 Urban equipment 05/01/81 01/25/82 03/02/82 U3/ot/82 2,858,960 for not meeting

assigned quota.EC-50 12/07/81 Construction housing and 12/07/81 08/04/82 Taken over by the

annexes CMiP, will be

delivered InJune 1983.

-29-

g) Cost of Capital, Financing and Disbursement

(i) Table 2 shows, by investment category, the original, actual andforecast cost, in both local and foreign currency.

(ii) The cost of the projects, partially finance by the World Bankin 1976, was US$176.2 million, of which US$160.9 million wentto the Cobriza Project and US$15.3 million went to the mineWater Project.

After a suspension of about 16 months because of financiproblems in the project for expanding the Cobriza mine aconcentrator, the Peruvian government, the internationalfinancing agencies and the company itself took a number ofactions and decisions to enable the project to be resumed.

In fact, after exhaustive studies to determine the amount ofinvestment, taking into consideration among other factors

1) cost increases because of the time elapsed,2) addition of required project items that had been omitted

in the original study,3) and complete maintenance of the concentrator plant in Pampa

de Coris,

in April 1979, the investment was adjusted, since the projectwas to resume by July 1, 1979. The project estimate at thattime was US$181.3 million, a figure used for the economicanalyses. The breakdown for this amount is shown in a table.

In December 1979, the managers prepared and submitted toCentromin a new investment budget of USS240,661,000. This newestimate was substantially increased over the one drawn up inApril 1979, mainly because of:

-- Revision of the mining plan.-- Escalation during the months the project was suspended, which

was reflected in a considerable increase in the equipment,materials and spare parts to be purchased abroad.

- Variation in the exchange rate of national currency againstforeign currency, because of the high local inflationforecasted for the project execution period.

AS is usual in investAment projects of this size, the kanagersreadjusted the estimate monthly according to the direct costtren2s, but without substantial variations, except for theestimate submlitted in November 1980 to the CMP, which wasexhaustively reviewed by the GEP and cut from US$277,U53,00W toUS$261,242,000 in March 1981. Later, at the suggestion of theC-EP, closer participation in u-pdating the estimated-costs forproject completion was established, which made it possible tocut the budget submitted by tne managers to US$240 million.This forecast was estimated based on the CMP commitments as ofmay 31, 1983, which amounted to US$222.98 million.

-30-

TABLA No. 2

COBRIZA MINE EXPANSION PROJECT

PROJECT COMPLETION REPORT

EXPENDITURES & COMMITMENT

OUM$ Milrlons)

Appraial Estimate Actual *LOC211 Foreign Total Local. Foreign TToal Local |rig Tatal

Mi= Developmt & Sit_Preparaton 7.5 1.9 9.4 37.721 0.051 3772M 42479 0209 4Z688

Plat & Equipment (iuncudinspare pub) 6.9 26.5 33A4 22.019 31.317 53.336 22359 3335 60.694

CWil Comtrucon & Erection 10.4 5.7 16.1 43.210 6.805 50.015 46200 10438 56.638

Freigh & Trnport 1.0 3.5 4.5 1.292 5.691 6.983 1310 6190 7.500

Engineering, Project Manage-flmen t& Supemision 2.0 6S 8.5 16A05 16.963 33368 17.959 7211 35.170

Totl Bs Cost Estimate 27j8 44.1 7 . 120.647 6.827 181.474 129.957 12.233 202.190

Physical Contingencis 4.2 5.9 10.1 _ - - - -_

Price Escalation 21.1 18. 39.9 _- - -

Toatl Fied Assets 53.1 68.8 121.9 - - - 130.30 .383 202.690

Working Capital 12.2 - 12.2 0.030 1.376. 1.406 0.03 4 376 IA10

Projea Cost 63 68Xr 134.1 120.677 62.203 182.880 130.341 73.759 204.10W

Inteet During Construction 15.8 11.0 26.8 8.000 21.538 29.538 8.90 27.000 35.900

Undistributed SuspenseAccounts 4.077 6.486 10.563

Total Financing Required 81.1 79.8 160.9 132.754 .227 222.981 139.24- 180.759 240.000

* As of May 30.1983

-31-

(iiL) To cut the cost increases resulting from the programmingprepared by the managers, which scheduled the mechanicalcompletion of the plant in Novenmber 1982, the CentrominDepartment of Project Execution prepared and implemented acrash program and offered financial incentives to thecontractors to advance the completion dates of civilconstruction and electrozaechanical assembly. This made itpossible to complete those works before the date set in thecrash prograu (June 1983).

The congruence of these factors and the establishment of properbudget control by the GEP, through analysis, review and directparticipation in the periodic updating of tbe forecast finalcost for completion of the project, made it possible to cutproject costs substantially. As mentioned in the aboveparagraph, this reduced the budget submitted by the managers inNovember 1980 from US$277 million to US$259 million in thefirst revision, a figure that was succe,sively adjusted throughthe cost control procedures pre-established by the GEP.

In addition, Centronin Peru used its own resources to designand execute the hydraulic fill system, redesigned the miningplan, and constructed the railways throughout the mine. Inaddition, it hired local engineering services for the detaileddesign of several industrial buildings, such as surface andunderground workshops, locomotive workshops, painting and tiresshop, and so on, which made it possible to begin constructionof them before the scheduled time.

moreover, when it was found that the project management was notentirely satisfactory because of the characteristics of theproject and because qualified personnel was not available,especially for rine discipline, and taking into considerationthat a cost plus contract had been concluded with them, whichbecause of its characteristics would increase the expectedfinal cost, the demobilization of the management staff wasrescheduled so that it would take place as soon as possible.

(iv) Comparismn between the original and actual financing plans

The original financing plan estiraated the total investment ofUS$176.2 million, of which US$160.9 million was for the CobrizaMine Project and US$15.3 million went to the Mine Water PlantProject. These amounts are covered with funds from the IBRD,IDB and COFIDE loans, and the project's own funds (See Table3.3).

In implementing both projects, it was found necessary to makesubstantial chanyes in the financing plan, mainly because ofcost overruns, especially for Cobriza, and the sizeablereduction in the COFIDE loan from US$99.8 million to US$5.4million. The resulting financing gap brought the Cobrizaproject to a halt early in 1978.

-32-

Because of the increased fund requirements, Centromin Peru,after gettlng the authorization required, arranged foradditional loans in foreign and local currency and forcontributions from the federal government through directsuRport and support for capitalization of taxes and through IDBloans (48/XC-PE) and (352/OC-PE). The latter loans became partof the company's capitaL In addition, the disbursementdeadlines for the IBRD and the IDB loans were expanded fromfour to six years for horld Bank loans and from four and a halfto six and a half years for the IDB loan.

Table 3.3 shows the current financing plan for both projects.Table 3.4 shows the characteristics of the loans extended forparticipation in financing both projects.

(v) System for management of financial resources

The system used to manage the financial resources provided bythe World Bank takes into consideration the two opposingcurrents represented by the agencies providing and using thosefunds. In this connection, the project management negotiatedthe form of payment with suppliers, and the procedure adopt.edwas to make payrient for goods and/or services againstsubmission of documents, letters of credit, etc. Havingdefined these conditions, they were reported to the financingagency concerned to request payuent through disbursements(direct andor reimbursement) or to request guarantees ofreimbursement for letters of credit.

In most commitments, bridge loans have been used for timelydisbursement of the arount due the supplier, and these amountshave been paid with the reimXbursement from the financial agencyof the project. While this system raised the project's costs,the increases were justified by the discounts received, and forthat reason, incurred costs were lower. In addition, this madeearly delivery of the equipment purchased possible, which wasof great importance in implementing the project.

Letters of credit were used when required, and commitments weremade from the time credit was opened with the financing agency,as established.

In handling financing from the IDB, the above-mentioned systemwas employed, and advance payment for future expenditures weremade, which substantially lowered the aaount of the bridgeloans required.

-33-

Freely available credits were used as required (expenditures inlocal currency), and the same was true for buyers credits(Swiss loans in the Cobriza project), in which the u&ode ofpayment was defined when the loan was extenled.

In addition Peruvian Government funds were used to cover localcosts, particularly customs duties and income taxes onflfidomiciled firms, for which notes were employed as the formof contribution.

(vi) The disbursement programs of the World Bank loans were alteredsubstantially because of changes in the execution program ofboth projects. For the Cobriza project, this shift becamesubstantial, because of the approximately one and a half yearsuspension of this project from early 1978.

Based on the foregoing, extension of the loan disbursementperiod to 31 December 1982 was negotiated (the original datewas 31 December 1980).

The loan disbursement program coincided with the progress ofthe projects, and the largest disbursement for Cobriza was inthe second half of 1980 up to the end of 1981 and in the MineWater Project from the start of 1979 to the second half of 1980(see Table 3.1).

The amounts budgeted by category varied with the actual fundrequirements for specific categories, due mainly to highercosts for the project!s goods and/or services, and the terms ofthe additional loans extended, particularly regarding thenationality of goods purchased. The latter compronmised theamounts of certain equipment with some financial resources.

The pari-passu percentage financed was maintained throughoutthe project, as originally established (see Table 3.2).

-34-

TABLE 3.1

PERU: CENTROMIN EXPANSION PROJECT

PROJECT COMPLETION REPORT

DISBURSEMENTS OF BANK LOAN

(USS Milliors)

BANK FISCAL APPRAISAL ESTIMATE ACTUALYEAR AND QUARTER DISBURSEMENT CUMULATIVE DISBURSEMENT CUMULATIVE

1976 III 2.5 2.5 - -IV 2.5 5.0 - -

1977 I 2.5 7.5 - -II 2.5 10.0 0.3 0.3

III 3.0 13.0 0.6 0.9IV 3.0 16.0 0.7 1.6

1978 I 3.0 19.0 0.4 2.0II 4.0 23.0 0.4 2.4

III 4.0 27.0 - 2.4IV 3.0 30.0 0.3 2.7

1979 I 3.0 33.0 0.1 2.8II 3.0 36.0 0.6 3.4III 2.0 38.0 0.5 3.9IV 1.0 39.0 1.4 5.3

1980 I 0.5 39.5 0.6 5.9II 0.3 39.8 2.0 7.9III 0.2 40.0 3.0 1a.9IV - 40.0 3.6 14.5

1981 I - 2.7 17.2II - - 7.1 24.3III - - 1.9 26.1IV - - 4.2 30.3

1982 I - - 1.5 3i.8II - - 3.3 35.1

III - - 0.8 35.9IY - - 3.2 39.1

:983 a 0.6 39.7

I/crp.

-35-TABLE 3.2

PERU: CQIJ4IN EXPANSICN PROJECr

PROJECT CPLElTN REPORT

ALLOCATION OF THE BANK LOAN

X of Foreign X of ForeignAmount of Expenditures Amount of Expendituresthe loan to be financed the loan to be financed

1. Solvent ExtractionElectro-Winning PlantCerro de Pasco 1/ 3.0 55S 1.9 55X

Z.. Mining Equipment-Cobriza(load-haul - dump units,raise borers, drilling equipment) ]./ 6.0 55X 2.9 55X

3. Concentrator Plant(Crushing and grindingequipment, flotationand settling tanks,associated utilitiesand buildings) 1/ 15.0 55X 17.8 55X

I. Engineering, ProjectManagement, TechnicalAssistance 4.0 55X 5.8 551

3. Miscellaneous Equipmentand Services 2.0 100l 5.3 1001

;. Interest and OtherCharges Accrued onIBRD Loan 7.0 Amounts due 6.0 Amounts due

7. Unallocated 3.0 -

40.0 .39.7

I/ Including spare parts and foreign freight.

-36-

Table 3.3.a

PRW: CQP EXPANSION PROJEC!r

eFROJECT ooWpTEI0N RElORT

FINANCDL

(In Millions of UES)

A) ORGIA PLAN

SOURCE __ ME

Cobriza Mine

IBID 36.447 36.447DB - 30.446 30.446

COFIDE 79.800 11.707 91.507CMP 1.800 1.200 2.500

SUBTOT~AL 81.100 79.800 160.900

Mine Water Plant

IBRD 3.553 3.553.B - 2.954 2.954COFIDr 6.500 1.793 8.293CuP 0.200 0.300 0.500

SJBI'OTAL 6.700 8.600 15.300

hTOML (A) 87.800 88.400 176.200

-37-

Table 3.3.b

PERW: C4P EXPANSICN PRICIr

PROJET COMPLETION REPORT

(In Millions of US$)

B) CURENr PLAN

SOURCE ME T

Cobriza Mine

IBMD - 36.318 36.318IDB Z/IC-PE - 31.069 31.069IDB 48/IC-PE 18.600 11.400 30.000IDB 352/OC-PE 3.000 - 3.000COFIDE I 4.792 - 4.792 (1)COFIDE II 14.500 - 14.500 (2)Pertwian Government 25.110 - 25.110 (3)£XIBAt4NK - 3.102 3.102SEB - 1.573 1.573WELLS FAARGO 35.088 6.852 41.940CMP -38.151 10.445 48.596

Subtotal 139.241 100.759 240.000

Mine Water Plant

IBD - 3.413 3.413IDB - 2.331 2.331COEIDE 0.655 - 0.655 (1)Peruvian Governmuent 1.280 - 1.280 (3)CMP 6.765 0.856 7.621

Subtotal8.700 6.600 15.300TOtAL 167.041 88.259 255.300

NME

(1) The contribution of the credit for the originally agreed upon amountof US$99.8 millior.

(2) Loan extended in national currency for S/. 9.46 billion(US$14.5 million equivalent).

(3) The Peruvian Government's contribution of SI. 9 billion, of whichS/. 3.1 billion was a direct contribution and SI. 5.9 billion was usedfor capitalization of taxes.

.oANS FINANCING TERHS Table 3.4

Grace UsefulAmotint Interest Additional Commitment Guarantee Period Life Contract

LENDER ('000 1tI Rate Rate Commission Commieion (Year) (Year) Date

IBRD 40,000 8.5 biannually - 0.75 1.50 4 15 12/06/76*

Inter-AmericanDevelopment Bank 33,400 8.6 biannually - 1.25 0.25 7 15 12/06/76 (1)

Fximhank (2) 3,102 8.75 - (3) " - 0.5 0.75 5 8-1/2 06/02/81

Wells Fargo Bank (4) 64,500 Libor-quarterly 1.125-1.25 (5) 0.375-0.5 (6) 0.25 3 8 08/25/80

SkandivaniskaEnukilda Banken (7) 15,000 7.75 biannually 0.25 0.1 (8) (9) (10) (10) 11/21/80

Cofide 11- Oper. "A" ,/.4,730.0 MM 54 -quarterly 1.5 1.0 - 4 (11) 8 (11) 03/01/82Oper. "B" S/.4,730.0 HM 54 -bimonthly 2.0 (12) - - 1 2/3 4 (11) 03/01/82

advanced (11)

Cofide I - S/.1,263.8 NH 54 -biannually - 0.75 - 6 12 04/20/77

(*) The contractual disbusement deadline was amended on 21 Sept. 79.(1) Deadlines were changed on 31 Hay 79.(2) Participants in financing 42.52 of capital goods and/or services of the Cobriza project. G(3) Was changed to 10.75Z as of 15 Dec. 82.(4) Financing of the Cobriza project and others.(5) 1.125% for the first 36 months.(6) .3752 for the first 18 months on 802 of the balance of the unutilized loan.(7) Financing of 852 of capital goods and services of Swedish origin (includes other projects).(8) For unutilized balances from acceptance of the SEB of delivery contracts.(9) Flat comnission - 0.52 management coumission and 2.5% credit insurance comLassion.(10) Repayment in ten biannual quotas, beginning with the equipment delivery date.(11) Starting with the effective date of the first disbursement.(12) Was changed to 32 starting December 1982.

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(vii) Problems in the world Bank's Disbursement Procedures

Several problems have been found in the IIRDs loandisbursement procedures regarding the timing of disbursements.

Specifically, some disbursement requests were only partiallymet, apparently because purchase orders an