Why did the community of Mallku Khota protest so vigorously against the South American Silver Association?

* Bolivian gov’t seeks talks to resolve protest

* Production at Bolivia’s two top silver mines affected

* High world inventories seen compensating lost output

LA PAZ, Aug 12 (Reuters) - Bolivia's government sought on on Thursday to defuse protests disrupting production at three mines, including two of the world's biggest silver deposits owned by Japan's Sumitomo Corp 8053.T and U.S.-based Coeur D'Alene CDE.N.

More than two weeks of protests over infrastructure in the mineral-rich Potosi region have hurt the mainstay mining industry in Bolivia, a major global producer of zinc, silver, tin and lead.

Coeur D’Alene said on Wednesday its San Bartolome mine, the world’s largest pure silver mine, had been shut down for 12 days, while Sumitomo reported its silver-zinc-lead San Cristobal mine was forced to stop processing ore.

The combined output of the two mines accounts for about 83 percent of the nearly 1.1 million tonnes of fine silver Bolivia produced in 2009, according to mining ministry data.

San Cristobal was the top silver mine in Bolivia producing some 620,000 tonnes of fine silver in 2009, according to the government data.

World silver, zinc and lead prices were not affected by protests in Bolivia as investors focus on the U.S. economic recovery, traders said.

Presidential spokesman Ivan Canelas said government officials were willing to meet with protesters on Thursday, lifting the condition that they stop protesting first, in what was seen as a key step to end the protest.

Canelas said the government was concerned about the effect the protest was having on the mining industry and also social unrest in the Potosi region, where protesters have blocked roads and the local airport, stranding foreign tourists.

According to local media reports protest leaders were on their way to the southern city of Sucre on Thursday afternoon to negotiate with government officials there.

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A spokesman for San Cristobal said on Wednesday workers were still mining ore but the processing plant had been shut and they were not transporting mineral to Chile for exports.

“We’re deeply concerned about the continuity of our operations,” San Cristobal said in a statement on Thursday.

Analysts say high world inventories should compensate for a prolonged output loss in Bolivia.

“The loss of production might last for a longer time, since protesters seized a power station and are threatening to cut the mine’s (San Cristobal) power supply,” Commerzbank said in a commodities report on Thursday.

“Yet the still very high inventories should be enough to compensate for a possible longer loss of production of this mine,” the report said.

The San Cristobal mine is the world’s third-largest producer of silver and the sixth-largest producer of zinc, according to Sumitomo.

Meanwhile, U.S.-based Coeur D’Alene said in a statement on Thursday operations at San Bartolome had been temporarily stalled due to the unrest but that it was maintaining its 2010 production guidance for the mine. [ID:nWNAB7183]

Coeur D’Alene’s local Manquiri unit, which operates the San Bartolome mine and buys minerals from other mines, produced some 260,000 tonnes of silver last year, the mining ministry said.

A Glencore official has said the smaller Porco mine, which produces silver and zinc had also shut down because of the protests.

Glencore’s Bolivian subsidiary Sinchi Wayra controls five small and medium-size mines in Bolivia, including Porco.

Meanwhile, the San Vicente silver mine, controlled by Pan American Silver PAA.TO continued operating as normal on Thursday according to local media reports. (Writing by Eduardo Garcia; Editing by Lisa Shumaker)

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Bolivia’s President Evo Morales announced he will consult the indigenous communities of the Altiplano before authorizing the eventual exploitation of the silver and indium deposit of Mallku Khota, currently under exploration by Canadian South American Silver (TSX:SAC).

The authority made the announcement on the third day of the march led by indigenous, who departed from the southern department of Potosi, where South American Silver mine will be located, towards the nation’s capital, La Paz.

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The consultation may also define whether the future mine, which will become the largest in the country, will be operated by the State, by the Canadian company or by a joint venture, said Minister of Mines, Mario Virreira, as Portal Minero reports.

About 3,000 protestors are expected to arrive in La Paz on Monday, concluding a march started on Tuesday, over 400 kilometres south of the capital. The main objective of the demonstration, say community leaders, is to have Morales deny exploitation rights to the Vancouver-based mining company.

However, Virreira was quoted as saying “the real motivation” behind the demonstration is to perpetuate illegal gold mining practices.

“The region residents have said they want [South American Silver] to continue its exploration activities and the only want to be consulted before the company starts operations,” he added.

South American Silver was granted explorations rights in 2006, three years before Morales passed a law that establishes prior consultation with indigenous peoples for any mining project.

Since late 2010, mining concessions in Bolivia have been declared “special temporary licenses” until the approval of a new regulation, currently in the works, that will require all the companies operating in Bolivia to sign a joint venture deal with the State’s mining company Comibol.

Image: Silver and indium deposit of Mallku Khota, courtesy of South American Silver