Transcript presentation.

Mining Financing
in Frontier
Countries
Dr. Sacha Backes
Oil, Gas, Mining & Chemicals Department
International Finance Corporation
World Bank Group
FINEX 2010
The Geological Society
27/28 October, 2010
Contents
1. Global Market context
• Demand
• Supply
• Access to financing
2. Frontier countries
3. What you can do?
The Crisis and Government responses
Impact
•
Bankruptcies, debt and equity
markets closed/constrained,
demand and trade collapse, supply
constraints, unemployment
Fiscal Stimulus Packages
－ U.S. ~US$ 800 billion
5.5% GDP
－ China ~US$ 600 billion
6.9% GDP
－ Europe ~US$ 200 billion
Global responses
－ Japan ~US$ 100 billion
2.3% GDP
•
－ Mexico ~US$ 32 billion
4.7% GDP
－ India ~US$ 4 billion
0.3% GDP
•
Monetary easing: low interest
rates, liquidity supply through
packages ( Fed., ECB), QE
Fiscal policies to stimulate
domestic demand: govn’t spending;
tax adjustments, etc
－ Australia ~US$ 10 billion 0.9% GDP
－ Argentina ~US$ 13 billion 3.9% GDP
• China and India led and
leading global demand
• Sustainable recovery
dependent on successfully
phasing out of stimulus
packages and resurgence of
underlying real demand – but
OECD austerity budgets
• Fiscal and monetary
interventions rather than
structural reform – risk to long
term OECD potential growth
12%
GDP growth,
constant prices (%)
• Global recovery? GDP growth
of 5.2% in 2007 vs 4.6% in 2015
GDP growth - advanced economies
United States
8%
Japan
4%
Germany
0%
United Kingdom
World
-4%
-8%
2007a 2009a 2011f
2013f
2015f
GDP growth - emerging economies
12%
GDP growth,
constant prices (%)
Global economic
outlook
China
8%
India
4%
Russia
0%
Brazil
-4%
World
-8%
2007a 2009a 2011f
2013f
2015f
Source: IMF, World Economic Outlook, Apr 2010
Labor markets
14%
Unemployment (%)
Newly industrialized
Asian economies
• Dramatic increase in
unemployment in advanced
economies since the crisis,
especially in Europe
• US labor costs down and
structural gaps emerging
• Lower unemployment in
emerging Asian economies
Unemployment (%)
12%
Major advanced
economies (G7)
10%
Euro area
8%
6%
Ireland
4%
United States
2%
2007a 2008a 2009a
2010f
2011f
• Growth potential from
BRICs, esp. China - inland
infrastructure stimulus will
outlive OECD stimuli
• China asset bubbles
concerns and Renminbi
appreciation impact ?
Source: IMF, World Economic Outlook, Apr 2010
• Growth expected across
the board
GDP of developed vs emerging economics (GDP)
20
GDP, 'current' prices
(US$ trillion)
China rapidly
catching up
Russia
12
Brazil
9.4
United Kingdom
7.5
8
4.4
3.4
4.9
5.1
6.0
6.2
5.7
5.4
25%
United States
2009a
2011f
2013f
2015f
GDP of developed vs emerging economics (% of global)
China
25.4%
24.6%
23.7%
20%
23.0%
India
22.3%
Russia
Brazil
15%
10%
Germany
Japan
2007a
30%
China
India
14.3
14.1
0
GDP, 'current' prices
(% of global)
• Declining US global share
of GDB based on
emergence of BRICs,
though mainly China
15.4
16
4
• 1995 developing and
emerging economies
accounted for 35% of
global output (PPP) …
today it is around 47%.
18.2
16.8
7.9%
6.1%
8.5%
8.7%
10.3%
9.2%
11.5%
United Kingdom
Germany
8.3%
7.9%
7.6%
5%
Japan
United States
0%
2007a
2009a
2011f
2013f
2015f
Source: IMF, World Economic Outlook, Apr 2010
Key metal consuming industries
• Autos and construction account for around 50% of global
consumption of four key base metals (also major consumers of
iron and steel)
• Auto industry was a key focus of western stimulus packages, but
these are being / have been phased out.
• ---• Construction continues to be a key element of Chinese stimulus.
• Chinese auto sales continue to increase dramatically. Auto sales
growth of 20% expected in China this year vs 9% global decline.
Consumed a third of global copper, aluminum, lead, zinc, steel.
• Chinese Stimulus boosted Chinese demand through infrastructure
projects focused on inland areas.
Summary
• The deterioration in capital and financial markets since April
reflect an increasing recognition of the contraction to aggregate
demand implied by OECD spending cuts underway in much of
the developed world. BUT true impact on real economy will
only be felt in coming months.
• However, the forecast growth in emerging and developing
economies, especially China, less burdened by fiscal and debt
problems, which today constitute nearly half of global output,
may provide for some global economic respite, though some
short / medium term concerns exist.
• But the extent to which this can be sustained is not clear, but
sustained slow and steady growth generally expected.
Contents
1. Market context
• Demand
• Supply
• Access to financing
2. Frontier countries
3. What you can do?
Exploration
Total exploration budget
US$ billion
12
10
8
6
4
2
0
Global exploration budgets
% of total investment
1. Future supply based on current
exploration efforts
2. Junior companies accounted for
ever increasing share of
exploration activity until 2008
3. Substantial reduction in spending
by juniors during crisis – closed
equity markets, heavily discounted
junior stocks, cash preservation
4. Juniors expected to lead again in
2010/11 on back of strong metal
prices and available equity
financing
5. M&A activity started slowly during
/ after crisis, but now …
14
60%
50%
40%
30%
20%
10%
0%
Majors
Juniors
Intermediaries
Government
Source: Metals Economics Group (MEG)
2010 mining M&A – very busy!
•Gold M&A (not all completed) – 1) Newcrest (Lihir, US$ 8.4 bil), 2) Kinross Gold
(Red Back Mining, US$ 7 bil), 3) Goldcorp (Andean Resources, C$ 3.6 bil), 4)
Eldorado Gold (Sino Gold Mining, C$ 2 bil), 5) Fronteer Gold (AuEx Ventures,
US$ 238 mil), 6) Eldorado Gold (Brazauro Resources, C$122 mil), 7) Apollo Gold
(Linear Gold, C$ 102 mil), 8) Kinross Gold (Underworld Resources, US$98 mil),
9) Serabi Mining (Brazil, Eldorado Gold to take 26.8% stake), 10) Goldstone
Resources (Bendigo Resources to take 20% stake), 11) Central African Gold
(Zimbabwe, taken over by New Dawn Mining),
•Other partnerships: BHP (Potash Corp, US$39 billion, SinoChem?), African
Minerals (Shandong Iron and Steel Grp to take 25% project stake for off-take or
dividends), Toledo Mining (Jinchuan Group, China’s largest Ni producer, to take
29.5% stake), Bellzone Mining (China International Fund re Kalia iron project in
Guinea), Herencia Resources (Nystar to take 10% stake re Paguanta Zn-Ag-PbAu project in Chile), Creat Resources (formerly Zeehan Zinc, takes 20% stake in
eGalaxy Resources, re tantalum / lithium), Jubilee Platinum & Sylvania
Resources (S Africa, PGM processing JV), Sundance (China Harbour and China
Rail re Mbalam Fe Project Cameroon and Congo)
• 2010: Gold 40%, Copper 16%, Iron ore 7%, coal 7%, silver 6%
• 2010: Canadian / American firms 49%, Asian firms 21%
• Chinese strategic partnerships for off-take / resource security
Mine Development
Constraints:
 Resources - Large/high grade/low cost deposits increasingly rare
 Host country – Remaining deposits increasingly located in poorly
governed, unstable and/or frontier countries (DRC, Guinea,
Mongolia)
 Infrastructure - Many deposits in remote areas with major
infrastructure requirements
 Regulation - Increasingly tight host country regulatory constraints
(Zambia, Tanzania, S Africa, Zimbabwe, Russia)
 E&S: More rigorous environmental standards, and local
communities increasingly aware of the impact of mining and
asserting their right for a say in mining development
Metal prices & oil
• Strong metal price
recovery since Jan 2009,
but costs have also risen.
• Fall in oil price reduced
energy cost of production
for producers during crisis.
• Price glitch since
sovereign concerns
surfaced in April / May
• Gold and Silver continue
safe haven trend –
unwinding of hedge books,
low interest rates,
possible further US QE
• Industrial metals following
growth forecasts
Overall impacts
 Likely crisis induced slower pace of new development and metal
supply than in the past, against strong demand recovery
 Creeping increase in capex and opex; costs seem to have been
sticky downwards in 2009, probably in part due to national
stimulus packages.
 Long term supply price curve likely to be pushed up, though
ultimate impact will depend on demand trends / substitutes, etc.
Contents
1. Market context
• Demand
• Supply
• Access to financing
2. Frontier countries
3. What you can do?
Mining equities on AIM and market volatility
Dow Jones
Industrial
Average –
Volatility index
Ernst &
Young –
Mining Eye
Index
• Steady capital markets recovery through to April 2010,
followed by sovereign debt concerns and fear of contagion.
• Austerity packages have helped re-assure markets, but will
dent growth. How many more skeletons in the closet?
Mining equity financing on LSE AIM
• 14 new listings since Q4 2009!
• Lowest level further raisings in Q4
2008 / Q1 2009 … ramp up in Q2, Q3,
Q4 2009 on back of recovering share
prices, and recent lull!
• Dilution concerns (gold, copper, silver
exception) and focus on value adding
projects; Some indications of more
investor appetite on TSX and ASX.
• New: Q1: Scotgold Res. (Scotland),
Stellar Diamonds (Guinea, Sierra
Leone), Edenville Energy (Tanzania),
Pathfinder Min. (CIS, Africa), Q2:
Bellzone Min. (Guinea), Kibo Min.
(Tanzania), Metminco (Peru Chile), Q
Resources (‘Africa’), Ncondezi Coal
(Mozambique). Q3: Horizonte (Brazil),
CAML (Kazakhstan) (frontier focus!!)
Debt Syndications
• Syndications still down
compared to pre-crisis, in
numbers and volume
• Covenants tightened and
spreads widened during
crisis … recently leveled
out; may increase again
with renewed uncertainties
• DFIs often needed for large
financings in difficult
sectors in emerging markets
• Concern re bank exposure to
sovereign debt of concerned
countries, mostly European
• Dramatic increases during
crisis; now come down, but still
above pre-crisis levels
• Spreads not that far away from
China, emerging markets
heavily priced
• Dramatic increases for Greece,
Italy, Ireland, Portugal and
Spain during May 2010.
• China spreads closer to pre2007 levels than OECD
250
200
Spread (bps)
CDS spreads – cost of insuring
against credit default and thus
market risk perception indicator
Credit Default Swap spreads - selected country groups
150
100
50
0
Kaz, Per, Rus, S Africa, Turk, Chile
US, UK, Aus., Jap.
China
Credit Default Swap spreads - selected companies
600
500
400
Spread (bps)
Market Risk
Perception
300
200
100
-
Alcoa
CIA VALE
Teck Cominco
Barrick Gold
Newmont
US Steel
BHP
Phelps Dodge
Average
Possible outlook
•
Equity markets have recovered well, but risk-aversion has
resurfaced; debts markets have still some way to go and may
have changed all together.
•
Sovereign debt concerns have weighed heavily on market risk
perception and investor risk appetite
•
Short term: Demand relatively stable and driven by China, BUT
uncertainty due to transition from Government fiscal stimulus
packages and impact of austerity budgets
•
Medium/Long term: Global supply constraints likely in some
metals and fundamentals analysis fairly robust

Prices - supply constraints and cost pressures likely to underpin
prices in long term
Contents
1. Market context
• Demand
• Supply
• Access to financing
2. Frontier countries
3. What you can do?
Mining and the Frontier
 Global resource scarcity and relative resource
richness in frontier countries have drawn juniors to
countries which many had previously avoided.
 As a commercially driven development institution,
IFC focuses on opportunities in the frontier.
 IFC defines the frontier as both the poorest
emerging countries and poorer, less developed
region in more middle income emerging countries
22
AIM Listed Juniors and Frontier Countries
8%
21%
8.0
6.7
7%
2.3
10%
2.3
19%
64%
3.7
2.8
High income
Upper middle income
Lower middle income
22%
3.7
64% of AIM listed
companies are
active in Africa.
15%
9.0
Low income
%
% AIM-listed companies
working in this region
%
Average TI corruption index
New opportunities, but also challenges and risks:
1) Governance
2) Resource nationalism
Challenges and Opportunities
Challenges
• Uncertain regulatory and fiscal frameworks and challenging business
environments, and increased host country awareness of bargaining power.
• As a result, good geological resource potential may be inadequately explored and
developed.
• A company needs to navigate government, local community and environmental
requirements skillfully and responsively in order to realize resource potential.
Potential Rewards
• These ‘barriers to entry’ against competition can help skilful companies with the
right approach in a particular frontier.
• The generally challenging environment globally for new supply also likely to
support prices for successful producers.
Contents
1. Market context
• Demand
• Supply
• Access to financing
2. Frontier countries
3. What you can do?
Responses
1. Investors can mitigate national/regional governance issues by building a
strong, sustainable relationship with the local community and getting a
‘social license to operate’.
• Three IFC clients who have done this well are:
1. Bema Gold (now acquired by Kinross) in Far East Russia;
2. Lonmin in S Africa;
3. Lydian in Armenia.
2. Other key mitigants: transparency about costs and project economics; and
contract terms which share fairly between host government and company.
3. Since frontier countries are higher risk, raising financing can be tough.
• Project Finance may need to involve DFIs, such as IFC, which require
high operating standards and strong community engagement.
Key Elements in Raising Finance
 Prepare the ground with financiers carefully and start
building relationships early on
 Strong documentation / demonstration of project quality
 Demonstration of project team experience and ability /
commitment to manage risks
 Evidence of high standards and strong community
engagement
 Partner with an established industry player and / or a strong
and reputable investor
Role of value adding partners
•
The combination of tougher market conditions and host country
challenges may make it difficult for a junior company to
succeed without one or more strong partner.
•
This may be a strategic / industry or financial partner – depends
on needs. In both cases can:
1. Raise standards - by strengthening management capacity
(financial, technical, environmental and / or social)
2. Increase credibility / reputation – give comfort to
potential investors and to host government
3. Long term view – stick around even in bad times / deep
pockets
IFC is a Member of the World Bank Group
IBRD
IDA
International Bank
for Reconstruction
and Development
International
Development
Association
Est. 1945
Est. 1960
IFC
MIGA
International
Finance Corporation
Multilateral
Investment and
Guarantee Agency
Est. 1956
Est. 1988
Role:
To promote institutional,
legal and regulatory
reform
To promote institutional,
legal and regulatory
reform
To promote private
sector development
To reduce political
investment risk
Clients:
Governments of member
countries with per capita
income between $1,025
and $6,055.
Governments of poorest
countries with per capita
income of less than
$1,025
Private companies in
member countries
Foreign investors in
member countries
- Technical assistance
- Loans
- Policy Advice
- Technical assistance
- Interest Free Loans
- Policy Advice
- Equity/Quasi-Equity
- Long-term Loans
- Risk Management
- Advisory Services
- Political Risk Insurance
Products:
Shared Mission: To Promote Economic Development and Reduce Poverty
IFC’s Products and Services
Senior
Debt
• On-lending
• Liquidity management
• Acquisition financing
• Warehousing facilities
• Syndicated loans
Structured
Finance
Mezzanine
Finance
• Partial credit
guarantees
• Securitization
Global Trade
Finance Program
• Convertible debt
• Common shares
• Subordinated debt
• Preferred shares
• Convertibles
• Bond underwriting
• Credit
Enhancement
Private
Equity
• Other Tier II
instruments
Advisory
Services
Sustainable
Finance
• $1 billion program
• Corporate governance
• Carbon finance
• Guarantees to issuing banks
• Risk management
• Renewable energy
• 46 issuing banks in 24
countries
• Small and medium business
banking
• Supply chain financing
• 92 confirming banks in 62
countries
• Energy efficiency finance
• $579 million of issued
guarantees in first 12 months
• Local supplier development
• Community development
• Corporate governance
financing
Investments by Region, FY09
•Commitments for IFC’s Account: $10.5 Billion
• Global 2%
• Middle East and North Africa 12%
• Sub-Saharan Africa 17%
• East Asia and Pacific 11%
• Latin America and the Caribbean
26%
• South Asia 12%
• Europe and Central Asia 20%
IFC’s Current Mining Portfolio
US$445 million for IFC’s account as of July 31st, 2010
By Product
By Region
MENA
US$4.8M
Other
Metals
20.9%
Aluminum &
Bauxite
9%
Iron Ore
9%
Diamonds
0.1%
Gold
43%
Copper
18%
Eastern &
C. Europe
US$49.6M
Sub-Saharan
Africa
US$255.5M
Latin America
US$89M
E Asia &
Pacific
US$41.7M
World
US$4.6M
2010 IFC mining investments
1. Argentex
Argentina
pending
~US$18 million eq
2. Petra Diamonds
Tanzania
pending
~US$40 million ln
3. Mindoro Resources
Philippines
July 2010
~CAD10 million eq
4. Tsodilo Resources
Botswana
June 2010
~CAD5 million eq
5. Nyota Minerals
Ethiopia
June 2010
~GBP7.5 million eq
6. Kasbah Resources
Morocco
June 2010
~AS$10 million eq
7. Volta Resources
Burkina Faso
March 2010
~CAD14 million eq
8. Eurasian Mining
Haiti
March 2010
~US$5 million eq
9. Helio Resources
Tanzania
Feb 2010
~CAD7.7 million eq
IFC Financing
• * “Mobilization” for 2006 and 2007 includes structured finance, loan participations, and parallel
loans.
Strong mobilization mandate
The IFC Advantage
1. Access to financing – With its development mandate, IFC takes on
country risk.
2. Seal of Approval - IFC involvement in a project is often seen as a
seal of approval, which can give comfort to potential investors
3. Political Risk Coverage - IFC presence in a transaction reduces the
occurrence of: 1) corruption, 2) expropriation of funds, 3)
mismanagement of revenues, and 4) extraneous regulations
4. Structuring Capability - ‘Honest Broker’ reputation facilitates
negotiations amongst diverse groups: 1) foreign investors, 2) local
partners, 3) local communities, and 4) government representatives
5. Environmental and social risk – IFC’s Performance Standards help
ensure good risk mitigation
Many strong international financiers adhere to IFC’s principles
on E&S responsibility  risk management
Equator Principles” adopted by 50+ of the world’s leading
“
investment banks and based on IFC’s Performance Standards
Apply to 85% of project financing worldwide
IFC’s Global Reach
London
IFC Contacts
William Bulmer
Head of
Phone:
Email:
Fax:
Global Mining Division, Washington DC
+1 202 473 8750
[email protected]
+1 202 974 4323
Sacha Backes
Investment Officer, Business Development, London
Oil, Gas, Mining and Chemicals Department
Phone: +44 (0)20 7592 8413
Mobile: +44 (0)79 1710 0720
Email: [email protected]
Fax:
+44 207 592 8430
Thank you for
your attention!!