The Special Report

5th September 1999

Eppawela: If you don’t mine

By Frederica Jansz

Massive demonstra tions by Sri Lankans; foreign investors reportedly fed-up with a government stalling for time; and allegations of a huge sell-out. These are some of the intrigue and controversy surrounding a proposal to mine rock phosphate at Eppawela.

It is also reported a document on the project has been initialled abroad recently.

Our interview with Garry Pigg, Business Development Director of IMC Global USA, was sought on the basis that Mr. Pigg has officially represented the foreign investors in talks with the Sri Lankan Government on the Eppawela project. (See box)

The political dimensions which surround the proposed deal cannot be ignored and The Sunday Times learns that in view of the present public outcry the agreement may not be signed until the general elections are over.

A lack of transparency with regard to this proposal on the part of the Government and the Industrial Development Ministry was evident when Industries Ministry officials failed to respond to our queries. However, we managed to speak to Minister C. V. Gooneratne after several attempts to contact him over two days failed. (See box for his comments.)

Backed by a damning report by local scientists, Eppawela residents also have the support of trade union activists, academics, journalists and environmentalists who say the project will cause, social disturbances, damage national heritage sites, seriously hinder the environment and will not economically benefit Sri Lanka.

The Eppawela phosphate deposit close to Anuradhapura was first detected in the early 1970s. It is located near Jaya Ganga which is identified as a cultural treasure.

At present Lanka Phosphate Ltd. mines around 30,000 tonnes of rock annually, crushes it and sells for direct application in the plantation sector.

Eppawela has a massive deposit of Igneous type phosphate which in its original form is shaped resembling petrified forms of volcanic eruptions.

On June 20 this year, leaders of nine top trade unions sent a letter to President Chandrika Kumaratunga, calling on the Government to abandon further dealings with Freeport McMoran, IMC- Agrico and the Tomen Corporation of Japan and warning that it would be held responsible if the any harm is caused to the people of Eppawela or Ven. Piyarathana Thera who was spearheading a campaign against the project.

More than 12,000 residents of Eppawela have already pledged themselves in a signed declaration, to oppose any attempt of Freeport McMoran through a joint venture with the above mentioned companies to carry out mine excavations at Eppawela. The objections have been raised citing economic, social and environmental harm to Sri Lanka and its people.

Local scientists have recommended that the Eppawela Phosphate deposits could be utilized in an economically and sustainable manner on a long term basis, without causing harm to the reisidents or damaging the environment.

The LSSP and the CP threatened to break away from the government if the project was not abandoned while the international human rights watchdog Amnesty International voiced concern over the track record of some of the foreign investors.

Approved by the Board of Investment of Sri Lanka, the project is based on a proposal submitted by Freeport McMoran Resource Partners of USA (FMRP), IMC-Agrico, and Tomen Corporation of Japan to establish a joint venture company along with Lanka Phosphate Ltd.

This proposal was submitted in response to a world- wide notice published by the government in December 1992. Six proposals were received from which FMRP was considered to be the most suitable. In June 1993 the then Industries Minister submitted a cabinet memorandum recommending the selection.

The PA government decided to continue with the project and after several rounds of negotiations with FRMP throughout 1996 and 1997 it was decided to finalize the transaction. However the details of this agreement have not been made public.

The controversy was aggravated when it was reported that the agreement was to be signed with FreePort McMoran and its resource partners. FreePort McMoran cannot boast of a clean track record because it is alleged to be showing scant regard to environmental and human rights.

Our investigation found that the Government would enter into an agreement with ‘Sarabumi Resources (Private) Ltd.,’ a joint venture company incorporated on April 1, 1998. Shareholders of this company are IMC-Agrico Company, USA, Tomen Corporation, Japan and Lanka Phosphate Ltd. The nominal share capital of this company is Rs. 348,068,000. IMC Agrico holds 65% of the shares, Tomen Corporation 25% and Lanka Phosphate 10%.

The Sunday Times also spoke to Udaya Borelessa, local representative for IMC-Agrico. No environmental damage would take place at Eppawela as a result of mining, he said while countering charges that the project would pose social hazards.

When asked to substantiate these claims, Mr. Borelessa admitted he could not do so until an Environmental Impact Assessment Report was done.

Mr. Borelessa when confronted with the recent report compiled by the National Science Foundation, dismissed its contents saying: “I do not know how they have arrived at those conclusions and figures.”

Asked why this agreement had not been signed yet, he said “a whole heap of laws in Sri Lanka need to be amended in order to accommodate this project.”

Mr. Borelessa said Sarabumi had agreed to pay corporate tax, advance company tax etc. He said that even the GST would have to be reconsidered in view of the fact that some of the phosphate would be sold to local farmers.

In the approval granted by the BOI for the Eppawela Phosphate Project on February 19, 1998, BOI Chairman Thilan Wijesinghe wrote that “necessary action will be taken by the BOI to introduce required amendments to the existing BOI regulations where applicable to grant the concessions……”

He also said that “with regard to the concessions falling outside the purview of the BOI, the Board will cause the other authorities concerned to make the amendments to the related legislation consonant with Cabinet approval.”

Mr. Wijesinghe said once approval had been granted for these concessions, a date could be arranged for the signing of the agreement.

Mr. Borelessa said he was confident that the government would sign the agreement as it was already making the necessary legal amendments. The Sunday Times learns that foreign investors in this project are getting increasingly tired of the delay in signing this agreement and have conveyed their displeasure to the Government.

Science and Technology Minister Batty Weerakoon told The Sunday Times that “Eppawela is a matter that involves people and as such their voices must be heard.”

He said the controversial agreement to mine rock phosphate at Eppawela would not be signed by December this year, but Mr. Pigg said it would take place before the end of the year.

Pigg to our reporter

If no transparency, ask ministry, says investor

In an exclusive interview with The Sunday Times, Garry Pigg, Business Development Director of IMC Global Operations Inc., a company involved in the Eppawala phosphate project, says foreign investors in this joint venture have nothing to hide and if there has been a lack of transparency then it was a matter for the Industries Ministry to address.

IMC Global has been accused of not having any concern for the people of Eppawela and social and environmental hazards the project might cause. The Sunday Times contacted Mr. Pigg’s office at Illinois, USA, through e-mail to find out answers to various allegations on the project. Excerpts:

Q: Do you believe that the phosphate-mining project at Eppawela will benefit the country?

A: This project will bring both direct and indirect benefits to Sri Lanka. Direct in terms of significant revenues from dividends, taxes, royalties, rents, port fees, jobs, cheap phosphate fertilizer to the local market, foreign exchange savings, etc.

Indirect benefits include indirect jobs, new or improved infrastructure such as the Trincomalee port and the railroad between Eppawela and Trin-comalee. This project is the first to come under the new Mines and Minerals Act and is by far the largest “flag ship” project to come under the Board of Investment Act.

Q: It is alleged that the project been shrouded in secrecy?

A: The lack of transparency on the project since the negotiations were concluded and the draft agreements initialed are a question that must be asked from the Ministry. Neither the project company, Sarabumi Resources (Pvt.) Ltd., nor its shareholders have ever been asked, until now, to comment on the project or on allegations.

Q: When will be the formal agreement be signed? What are the reasons for the delay?

A: We understand that signing of the agreements is to take place before the end of the year. The only issue outstanding is Cabinet approval regarding a tax indemnity letter which is required to ensure that any significant future tax law changes would not seriously impact the economic viability of the project.

Q: Is it true that IMC Global is resource partners of the controversial Mining group, Freeport McMoran?

A: There were two Freeport-McMoran companies, Freeport-McMoran Inc. (FTX) and Freeport-McMoran Copper & Gold Company (FCX). Their only link was via a common board head.

FTX was the majority owner of Freeport-McMoran Resource Partners, Limited Partnership (FMRP) which was the fertilizer business of FTX. FMRP consisted of Agrico Chemical Company, Freeport Sulphur Company as well as some oil and gas business associated with the sulphur operations.

In December 1997, IMC Global Inc. (IGL) acquired all the assets of FTX excluding the sulphur business. At this time FTX ceased to exist and FMRP’s name was then changed to Phosphate Resource Partners, Limited Partnership (PLP) with IGL being the majority owner and managing partner.

IGL and PLP jointly own IMC Agrico Company (IMC-A) which is the phosphate business of IGL.

IMC-Agrico, the largest consumer of sulphur in the US, has a long term sulphur supply contract with Freeport Sulphur Company and this is the only association between IGL and any of the Freeport-McMoRan Companies.

Q: It is said that the final agreement will be entered into with the Freeport McMoran which is keeping a low profile given its alleged dubious track record?

A: IGL has been in business since 1909, and today is a Fortune 500 company with $2.7 billion in revenue. It is hardly a “paper company front” for Freeport-McMoran or any one else. And, by its acquisition of FTX, it also acquired the Eppawala Phosphate Project and all the Agrico developed technology.

Q: Eppawala residents fear that this project will see large-scale evacuation of people in the area and pose serious environmental and health problems. Also the area is said to be archeologically and geologically important. What steps you have taken to allay these fears?

A: The Mines and Minerals Act (Article 31) and its Regulations are quite clear on the restrictions on exploration or mining in or near any ancient monument as prescribed under section 24 of the Antiquities Ordinance (Chapter 188) and any land declared by the Archeological Commissioner to be an archeological reserve under section 33 of this same Ordinance.

Furthermore, the Exploration Licences specifically restrict exploring for or mining any mineral near such locations without first obtaining permission from authorities responsible for the protection of such locations.

There are a few villages within the proposed 56 square Kilometre exploration area, but they won’t be affected by the project. The initial exploratory drilling will be done within the area where Geological Survey Department did drilling in 1975 – all within the “area reserved for apatite” and where there are no homesteads.

The rest of the area will be studied using non-destructive testing methods such as magnetic surveys. Eppawela is an igneous deposit that always appears in columns or pipes, which are small in land area with thick ore beds.

At Eppawela the proven 25-30 million tons of reserves are within a two square Kilometre area (all within the “area reserved for apatite”) and the mine itself is expected to occupy less than one fourth of this area. Furthermore, the additional potential 35-40 million tons are expected to be contained in nearby similar pipes with small surface areas.

Q: It is said that after exploitation mining companies quit the site, leaving behind huge pits and gullies which will pose health and environmental problems if filled up with water. Your comments?

A: The feasibility study and the environmental impact assessment will determine the best restoration/reclamation plan, which must be approved by the government, Sarabumi shareholders and the financial institutions. The agreements to be signed with the government obligates Sarabumi to not only complete the restoration at the end of mining but to also have a completely funded escrow account established long before the requirement for restoration to assure the funds are in place for the work.

Q: Will the mining affect the ‘Jaya Ganga’ national heritage area near the exploration site?

A: The Mineral Investment Agreement (MIA) and the BOI agreement prohibit the project company from damaging any irrigation system. This includes the Jaya Ganga (or Yoda Ela) which was modified in the mid 1980s to cross the “area reserved for apatite” under the Mahaweli Project. The original Jaya Ganga channel circumvented the “reserved area.” The Feasibility Study will determine the best way to not only keep the irrigation system undisturbed but also to prevent water intrusion into the mine. This will most likely require a “set-back” area from the channel leaving a zone where no mining can occur.

Q: Will the mine dust adversely affect the people, wild life and plants of the area?

A: The mine will be designed to minimize dust with watering of the roadways and in the crushing plant via state-of-the-art dust collectors. Here again the EIA will determine the impact of anticipated dust on the plant life and wild life and the necessary precautions built into the mine design.

Q: Local scientists allege that Sri Lanka will sell one metric ton of Rock Phosphate for USD 5 when the world market price is USD 75? Is this true?

A: India’s Oswal Project has contracted to buy two million tonnes a year of phosphate from China (for two years) at $US39 — not $75. What the scientists fail to take into account is the cost of installing the port, the mine and the railroad system for large size vessel shipments. This can be as high as $75 million.

What is more typical in the industry, is the payment of a royalty to the owners as the rock is mined. In the case of Sri Lanka the Mines and Mineral Act provides for a 4.5% royalty where Sarabumi has agreed to pay 5.5% royalty based on an internationally accepted fob rock price rather than any cost the company might want to apply.

Adding in all the revenue streams from the above listed benefits, the payment the government is getting for the rock is 8-10 times the royalty alone. And, this is with no investment on the part of the government, other than the un-mined rock.

Q: What are the economic benefits for IMC and your joint venture partners with regard to this deal?

A: The actual benefits will not be fully known until the feasibility study is completed. It should be understood that the private partner’s $300 million plus investment (which is 100% of the required investment) — installed and anchored to the ground in Sri Lanka — cannot be picked up and moved. This compounds the risk factors applied by the international financial institutions and the foreign investors in their evaluation of projects.

Therefore, the returns on the invested capital must be sufficient to compete with many other project opportunities that exist in the world today.

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