CDB provides $1 billion loan -- via pre-export financing (PxF) arrangement -- to BANDES for CVG mining projects in Southern Venezuela

On December 22, 2009, China Development Bank and Banco de Desarrollo Económico y Social de Venezuela (BANDES) signed a $1 billion pre-export financing (loan) agreement. The loan carried a 6-year maturity and an interest rate of LIBOR plus an unspecified margin. The proceeds of the loan were to be used by the borrower improve Venezuela’s iron ore production and the production capacity of CVG Ferrominera Orinoco in the state of Bolívar, in the south of the country. The loan agreement specified that Chinese companies would be contracted to support project implementation, according to documents accessed by Armando.info and processed and analyzed together with the data team of the Latin American Centre for Investigative Journalism (CLIP), with additional reporting by Diálogo Chino. The CDB loan was secured by (collateralized against) the sale of 42.96 million tons of iron ore from CVG Ferrominera Orinoco to Wuhan Iron and Steel Corporation (Wisco) over an 8-year period. CVG Ferrominera Orinoco signed an Iron Ore Sales and Purchase Contract with Wuhan Iron and Steel Corporation (Wisco) on October 22, 2009. Under the terms of the Iron Ore Sales and Purchase Contract, CVG Ferrominera Orinoco was obliged to deliver Wisco a first installment of 160,000 tons of iron ore by the end of October 2009. Two more deliveries were to follow: one of 160,000 tons in November 2009 and another in December 2009 for an additional 140,000 tons. Delivery of the ore was delayed, but the quota for that year was eventually met. In the first half of 2010, CVG Ferrominera Orinoco delivered a further 460,000 tons of iron ore that corresponded to the previous year’s quota. For 2010, the agreed quota was much higher, at 4 million tons, or 29% of CVG Ferrominera Orinoco’s eventual total production that year, just over 14 million tons, according to a 2013 Annual Report published by the Venezuelan Ministry of Basic Industries. The goal was ambitious but looked achievable if the iron ore production capacity improvements identified in the CDB loan were undertaken. However, they were not. By June 30, 2010, CVG Ferrominera Orinoco had delivered just 337,250 tons of iron ore, less than 10% of the total that was committed. To meet its commitment for 2010, it had to deliver on its outstanding balance of 3,461,946 tons, with only six months to go. A joint report by the Venezuelan delegation to the CVG Financing Agreement and China Development Bank (CDB) warned that the Venezuelan company was in dangerous waters and that, if it failed to meet the schedule, it would be obliged to pay China an amount equivalent to the volume not delivered at the agreed price. In other words, almost $70 million, in addition to payments for transport, cargo loading and unloading, among others. Eventually, it became clear that CVG Ferrominera Orinoco would not be able to honor its commitments. "Minister [Rodolfo] Sanz made promises that Corporación Venezolana de Guayana was unable to keep and committed [CVG Ferrominera Orinoco] to supplying iron ore at levels it does not have," complained Tian Yunhai, deputy director of CDB’s international cooperation department, during an urgent meeting in Beijing in December 2010. A report presented by the Venezuelan delegation to the CVG Financing Agreement and China Development Bank (CDB) in June 2010 detailed that the iron ore delivery contract signed with Wisco did not generate income for CVG Ferrominera Orinoco. "Although so far there has been enough ore in inventory to cover commitments, it is necessary to recover and increase CVG Ferrominera Orinoco's production capacity to guarantee the volume of iron ore to China, without detriment to its other commitments (...) It is essential to have other sources of income to meet contractual and operational commitments, and currently this source is exporting to Europe," the document says. The report highlighted the company's operational and logistical inability to meet a commitment of the size agreed upon: "In order to increase transport capacity, the ship Río Caroní, which is currently undergoing major repairs at the Curaçao dock, is required. The cost of these repairs amounts to US$9 million, which CVG Ferrominera [Orinoco] does not have. To date this payment has been delayed for two months and the Curaçao dock states that it will remove the vessel without completing the repairs if the delay in payment persists. This would imply that the vessel would be anchored and out of operations, with the consequent associated costs," the report says. It also acknowledged that the company did not have the funds to cover the costs of materials and spare parts that would allow it to reach operational capacity in the extraction, processing and transport processes. Moreover, the company could not afford to maintain the Boca Grande II transfer station, the largest floating iron ore transfer station in the world, located in the Columbus Channel (otherwise known as the Serpent’s Mouth), which lies opposite the mouth of the Orinoco River between Venezuela and the island of Trinidad and Tobago. Another challenge was identified in the report: the port capacity of the Boca Grande II station did not match that of the vessels hired by the Chinese company Wisco to transport the ore. To make matters worse, those vessels did not have GPS-assisted navigation systems to allow for night navigation, slowing transit through the treacherous waters of the channel. In addition to the fact that the iron committed to the Chinese company came at a significant price discount, there was the prospect of an imminent decrease in CVG Ferrominera Orinoco’s income from sales to its domestic customers in the industrial sector. A plan to cut energy consumption was already in force. It was the year of the electricity emergency decreed by Chávez, which foresaw important limitations for heavy industry. There were also technical problems in the direct reduction plants in the Guayana region (Matesi, Orinoco Iron, FMO Briquette Plant and Comsigua) that are responsible for the second process in the iron production cycle, which consists of reducing pellets so they suitable for making steel, a process which also includes the removal of the oxygen in the iron oxide. The report, drafted at the request of Venezuela's Ministry of Basic Industries and Mining (Mibam), noted that that "CVG Ferrominera [Orinoco] has not benefited from [CDB] funding" and it proposed an investment of $50 million to overcome some of these obstacles and increase CVG Ferrominera Orinoco’s production capabilities. Failure to take immediate action will result in non-compliance with the loan contract as of September 2010 and with the supply contract as of December 2010, which would generate the legal and economic consequences already described. However, "such actions also do not guarantee the due [fulfillment] of all obligations under the various contracts for subsequent years, as their [fulfillment] will depend on structural reforms in the company," the report warns. At the end of 2010, the Chinese partner complained about Venezuela’s non-delivery of its side of the deal. Then, on December 9, 2010, a meeting was held at CDB’s headquarters in Beijing. Edmée Betancourt, President of the Venezuelan Economic and Social Development Bank (Bandes), was supposed to attend. Instead, Richard Miranda, compliance officer of Bandes, and Guadalupe Franco, first secretary of Venezuela’s Beijing embassy, attended. During the meeting, Tian Yunhai, deputy director of CDB's international cooperation department, expressed his frustration. "Both [CDB] and Wisco expected a response from Venezuela vis-a-vis cooperation and sincere dialogue. However, the negotiations led by Ferrominera veered far from that goal, presenting only a purely commercial position and with supply ranges that did not meet Wisco's expectations," said the official, according to documents to which Armando.info had access. Tian recalled that in 2009, when the then minister of Basic Industries and Mining, Rodolfo Sanz, made an emergency request for resources from CDB, "its response was in line with the confidence it maintains in cooperation with Venezuela". The aim of the meeting was to receive CDB’s proposal for the use of the credit line, but Chinese representatives complained about the absence of the recently appointed minister of Basic Industries and Mining, José Khan, and of Edmée Betancourt, president of Bandes, who until then had represented Venezuela during contract negotiations with China. "The situation is affecting the financial relationship with Venezuela and I am sure that this situation would not be to the liking of President Hugo Chávez," Tian said. The day after the meeting, the Venezuelan Diplomatic Commission in China received an urgent communication from Tian. He informed them of an urgent visit to Venezuela in 30 days, accompanied by [CDB] officials and Wisco's technical team, to evaluate the productive capacity and logistical conditions and begin carrying out planned projects by the end of 2011. "The objective is to solve CVG's production and logistics problems as soon as possible," he said. Improving CVG Ferrominera Orinoco’s iron ore production and dispatch capacity justified the $1 billion CDB loan that obliged the CVG Ferrominera Orinoco to commit 42.96 million tonnes of output. But the mine's upgrading projects saw as many setbacks as its attempts to meet the payment schedule. At a meeting on May 30 2011, CVG Ferrominera Orinoco and Wisco signed a new agreement committing the Chinese company to design and implement two projects with the state-owned China Railway Engineering Corporation Group (CREC), including the "expansion of the operational capacity of the Palúa dock", in the small port in the northeast of San Félix, a city in Bolívar state, and the "dredging of the Orinoco River". The agreement also contemplated a third project to be developed by Wisco for the "purchase of machinery and spare parts for the mines", in order to alleviate the operational and infrastructure crisis faced by the company. Three months later, on August 10, 2011, after several meetings between CVG Ferrominera Orinoco and Wisco, the parties concluded that the projects should be executed by companies specialized in these areas. Wisco acknowledged that it did not have sufficient experience to undertake engineering work to expand the operational capacity of the Palúa dock or to dredge the Orinoco. It therefore informed CVG Ferrominera Orinoco that both projects were to be handed over to third parties, awarding the dredging project to China Railway Engineering Corporation Group (CRECG) and China Communications Construction Company (CCCC), which, as Diálogo Chino has shown, has more than 50 projects in Latin America. The expansion of the operational capacity of the Palúa wharf was awarded to China Railway 10th Engineering Group Co., a subsidiary of CREC. Wisco would thus be left with only one of the three projects mooted in the original agreement, for the purchase of machinery and spare parts for the mines. On September 5, 2011, CVG Ferrominera Orinoco signed a contract with China Communications Construction Company (CCCC) for the maintenance, dredging and deepening of the Orinoco River channel, between miles 0 and 42 of its outer channel and miles 42 and 196 of its inner channel. On the same day, the Venezuelan state-owned company gave the go-ahead to China Railway N° 10 Engineering Group Co, Ltd to begin a number of works at the the Palúa wharf. These included the construction, installation and commissioning of receiving hoppers for fine and coarse iron ore, conveyors, a transfer house, a stacker with a capacity of 3,500 tn/h, a reclaimer, a mud loader, a stacking yard, and the construction of 2.5km of closed-circuit railway track for the entry, unloading and exit of trains. Both works were due to start in October 2011 and slated to be completed in December 2012. But while the infrastructure improvement projects did not materialize, CVG Ferrominera Orinoco faced increasing delivery commitments and difficulties in meeting them. In 2011 it had to deliver a quota of six million tonnes, or 35% of total production that year. For 2012, that quota rose to 6.5 million tonnes, some 43% of production which, as it turned out, would barely reach 15 million tons, according to the Ministry of Basic Industries report from that year. In the end, the Palúa wharf was the only project to be completed, some five years behind schedule and after Hugo Chávez had died. Marcial Arenas, the then vice-minister of Industrial Planning and Strategic Investments, and Isaías Suárez Chourio, president of the state mining company inaugurated the work on January 31, 2017 on an episode of the during the TV show “Contacto con Maduro”, along with CREC representatives. The CDB’s was also engulfed in a corruption scandal. On June 12, 2013, President Nicolás Maduro announced the arrest of CVG Ferrominera Orinoco President Radwan Sabbagh, who had earlier complained about the impossibility of paying utility bills. Sabbagh was later sentenced to six years in prison after admitting his responsibility in the diversion of more than $1.8 million during his tenure between 2006 and 2013. Several other CVG Ferrominera Orinoco officials also ended up in prison, including finance manager María Acosta, administrative manager María Rodríguez, legal consultant Noel Ramírez, former technical operations manager Ángel Ramón Campero Franco and a businessman, Yamal Mustafá, who had extensive links to the long-time governor of Bolívar state and prominent ‘chavista’, General Francisco Rangel Gómez. The announcement uncovered several crimes linking CVG Ferrominera Orinoco’s top management to a corruption scheme involving the sale of iron ore at preferential prices to intermediary companies that then placed the product on the international market. It also revealed that those involved had bribed Álvarez Dionisi (‘The Shark’), who was sent to investigate the irregularities, to not report them. The Shark was charged by the 54th national and 2nd assistant national prosecutors, Nelly Sánchez Pantaleón and Maryori Da'Cunhade, respectively, with the crimes of extortion, money laundering and criminal association. Chinese executives, frustrated and faced with the inability of their commercial partner - now also plagued by a corruption scandal - to comply with the agreements, were forced to evaluate and renegotiate the projects, seeking a real recovery in iron ore production. The latest public records on the status of the projects date back to 2015. They explain that the Palúa docks were completed at the end of the previous year, that loading tests were carried out and that provisional acceptance certificates had been signed, despite the fact that the technical assistance to the project was still pending completion. According to Panjiva, a company that records international trade data, between 2017 and 2018, CVG Ferrominera Orinoco still exported about 3 million tons of iron ore per year to China. The last public announcement made by President Maduro on the matter assured that, in October 2019, CVG Ferrominera Orinoco would return to producing 3 million tons of iron ore per year. One year after his prediction, furnaces in the Punta Cuchillo industrial complex, in the industrial area of Matanzas, west of Ciudad Guayana, remained shut down, while the company's production figures continued to fall sharply. Production did not even reach 2 million tons in 2020, one seventh of what CVG Ferrominera Orinoco was producing a decade earlier, when it received the CDB loan for its expansion.

Additional details

1. Corporación Venezolana de Guayana (CVG) is a state-owned mining company in Venezuela. It constitutes Venezuela's largest diversified mining and mineral processing business based on estimated market share and production volume. With operations throughout the Guayana region, which occupies more than 550,000 square kilometers in southern Venezuela, CVG is Venezuela's, and one of Latin America's, largest producers of aluminum (including its principal constituent elements, bauxite and alumina) and steel and iron products. CVG's business also includes an increasing emphasis on significant mining and production of gold. CVG is also engaged in the growing and harvesting of timber and production of lumber. CVG comprises 15 operating subsidiaries and approximately 18,000 employees. 2. CVG Ferrominera Orinoco is a subsidiary of Corporación Venezolana de Guayana (CVG). 3. Multiple sources suggest or imply the BANDES on-lent the proceeds of the CDB loan to Corporación Venezolana de Guayana (CVG) and/or CVG Ferrominera Orinoco. However, this issue requires further investigation. 4. The project description is largely based on a trove of documents obtained by Armando.info, which were processed and analyzed in partnership with the Latin American Centre for Investigative Journalism (CLIP) and with additional reporting by Diálogo Chino. 5. A pre-export finance (PXF) facility is an arrangement in which a commodity (e.g. iron ore) producer gets up-front cash from a customer in return for a promise to repay the customer with that commodity (possibly at a discount) in the future. PXF funds may be advanced by a lender or syndicate of lenders to a commodity producer to assist the company in meeting either its working capital needs (for example, to cover the purchase of raw materials and costs associated with processing, storage and transport) or its capital investment needs (for example, investment in plant and machinery and other elements of infrastructure). PXF facilities are usually secured by (1) an assignment of rights by the producer under an ‘offtake contract’ (i.e., a sale and purchase contract between the producer and a buyer of that producer of goods or commodities), and (2) a collection account charge over a bank account into which proceeds due to the producer from the buyer of the goods or commodities under the offtake contract are credited. There are two key documents in prepayment finance transactions: a contract providing for the advance payment by the offtaker to the producer for the purchase of goods/commodities (the 'Prepayment Contract'), and a loan agreement between a lender and the offtaker (the 'Offtaker Loan Agreement') under which the advance payment is financed. Wuhan Iron & Steel Corporation (Wisco”) is the off taker in the PXF facility agreement that CDB and BANDES signed in December 2009.

Number of official sources

3

Number of total sources

14