London Global Mining In estment ConferenceLondon Global Mining Investment Conference

11.55 Mining Finance Through the Cycle in Frontier Countries

Dr Sascha BackesNew Business Development - Oil, Gas, Mining & Chemicalsp gIFC – World Bank

Stationers Hall LondonStationers Hall, LondonWednesday 30th September 2009

www.ObjectiveCapitalConferences.com

Mining financing thro gh the c cle in through the cycle in frontier countries

Sacha BackesD t t f Oil G Mi i d Ch i l

Global Mining Investment ConferenceDepartment for Oil, Gas, Mining and ChemicalsInternational Finance CorporationWorld Bank Group

Wednesday, 30 September 2009Stationers’ Hall, City of London

Contents

1. Market context and challenges

Demand and Supply

Frontier Countries

2. Access to financing

3 What can you do?3. What can you do?

Th Gl b l Fi i l C i iThe Global Financial Crisis

Global impactGlobal impact

• 2007: Sub-prime loan / securitizations in 2007, Bear Sterns acquired by JP Morgan in March 2008 Freddie Mac /

Stimulus Packages

－ U.S. ~US$ 800 billion 5.5% GDP

Chi US$ 600 billi 6 9% GDPMorgan in March 2008, Freddie Mac / Fannie Mae under Government control and Lehman Brothers bankruptcy Sept 2008; GM bankruptcy in June 2009.

－ China ~US$ 600 billion 6.9% GDP

－ Europe ~US$ 200 billion

－ Japan ~US$ 100 billion 2.3% GDP

－ Mexico ~US$ 32 billion 4.7 GDP; p y

• Bankruptcies, debt and equity markets closed, demand collapse, supply constrained, unemployment

－ India ~US$ 4 billion 0.3% GDP

－ Australia ~US$ 10 billion 0.9% GDP

－ Argentina ~US$ 13 billion 3.9% GDP

Global responses• Fiscal stimuli, low interest rates, increased money supply, other ..

Recovery? Global demand?Recovery? Global demand?There are signs of recovery, but what are the drivers?

Source: World Bank, World Economic Outlook Update, July 2009

A sustainable recovery will depend ony pcontinuation of and gradual phasing out ofstimulus packages and resurgence of realdemand.

China / India have led global demand.

There is still plenty of uncertainty.Source: World Bank, World Economic Outlook Update, July 2009

Demand for metals and Demand for metals and Economic recovery ?

• Metal price recovery since Feb 2009, but not to 2007 / 2008 highs.

• Gold / Silver special case

• Chinese infrastructure • Chinese infrastructure intensive stimulus package / strategic buying propped up industrial metals

• Stockpiling and inventories?

• Has investor confidence run ahead of fundamentals?ahead of fundamentals?

Global SupplyGlobal Supply1. Future supply based on current exploration pp y p

efforts. Global exploration budgets hit historical high in 2008.

2. CRISIS – Strong reduction in exploration dit d t i k iexpenditure due to risk aversion.

3. Juniors have been leading the way on exploration, but have taken a serious hit and could not / did not want to raise financing at could not / did not want to raise financing at depressed prices.

4. Strong recovery in recent months, but still uncertain. What will 2009 look like and what will be actuals spent?

5. Implications for future pipeline and hence prices? Uncertainty where future supply will come fromcome from.

Source: Metals Economics Group (MEG)

Share price performance Share price performance of AIM-listed miners – Oct 2008

AIM-listed mining companies trading

within:

Number of companies

T t l E l P dwithin: Total Explorers Producers

25% of 52 week high 8 5% 4 50% 4 50%

between 25 15% 14 56% 11 44%

5% 50% 50%

between 25 15% 14 56% 11 44%

25% of 52 week low 133 80% 96 72% 37 28%Total 166 114 52

80% 72% 28%

69% 31%

80% of companies trading within 25% of their 52 –week lows

69% 31%

The majority are explorers.

What has happened to miners since then?What has happened to miners since then?• Cash was KING. Is cash still KING? – ongoing cash conservatism.• Leveraged firms suffered ongoing deleveraging• Leveraged firms suffered – ongoing deleveraging.• Consolidation through mergers /partnerships (synergies and /or cost savings)

P ibl l kPossible outlook

Global supply likely to be more constrained than demand, and prices are likely to stay , p y y

relatively strong, but still volatile.

Contents

1. Market context and challenges

Demand and Supply

Frontier Countries

2. Access to financing

3 What can you do?3. What can you do?

Frontier Countries

Global resource scarcity and relative resource richness in frontier countries has drawn juniors to countries

which many previously avoided.

A i d i d i C iAIM Listed Juniors and Frontier Countries

7%8%

10%

21%8.0

2.36.7

64%

10%

19%

22%

3 7 2 8

3.72.3

15%High income

Upper middle income

3.7 2.8

9 0

64% of AIM listed companies are active in Africa.

New opportunities, but also challenges and risks: 1) G

Lower middle incomeLow income

% % AIM-listed companies working in this region

9.0

1) Governance 2) Resource nationalism

% Average TI corruption index (2008)

R N ti liResource NationalismInvestors / sponsors face uncertain legal and regulatory frameworks, and challenging and uncertain business environmentschallenging and uncertain business environments

‘Resource curse’ - Correlation between fiscal stability and resource curse -common link is good governance, eg. Botswana, Chile, Ghana, S Africa vsGuinea and DRC.Guinea and DRC.

Results from:• Increased resource scarcity / rising commodity prices,

• Increased host country awareness of bargaining power and

• Competition – BRICs and qualified local mining companies.

May manifest itself as:1. Change in fiscal terms / review of contracts/ insecurity of tenure (eg.

Chile, Peru, DRC, Ecuador, Guinea, Kazakhstan).2. Seeking greater/majority local ownership (eg. DRC, China (for gold), g g j y p ( g , ( g ),

Russia (for strategic minerals), Mongolia, Ecuador).

RResponsesCrisis has had devastating impact on many developing countries butCrisis has had devastating impact on many developing countries, butwe have not seen a widespread softening of fiscal terms etc.

Since frontier countries are higher risk, raising financing can be eventougher.

Investors can in part mitigate national / regional governance issues bybuilding a strong sustainable relationship with the local community /building a strong, sustainable relationship with the local community /‘social licence to operate’ (eg. Guinea Alumina in Guinea, Bema Gold(now acquired by Kinross) in Far East Russia, Lonmin in S Africa)

Best defence is transparency about costs, project economics and initialterms which share fairly between host government and company.

Contents

1. Market context and challenges

Demand and Supply

Frontier Countries

2. Access to financing

3 What can you do?3. What can you do?

Debt SyndicationsS di ti ti t b d• Syndications continue to be down compared to pre-crisis, in numbers and volume

Co enants tightening and spreads• Covenants tightening and spreads widening.

• Recently banks are more reluctant to work with other banks given financialwork with other banks given financial sector uncertainty – focus on relationships

• For large financing in emerging• For large financing in emerging markets need groups of DFIs

Flight to quality continuesFlight to quality continues

M k t Ri k Market Risk Perception

• CDS spreads are a good indication of the market risk perception “pulse”.

D ti i d i• Dramatic increases during crisis.

• Spreads have come and are i d b t till bcoming down, but still above

pre-crisis levels.

S f h llSummary of challenges

1 U i h d di d d d l 1. Uncertain short and medium term demand and metals prices.

2 Stock markets still volatile currently on strong 2. Stock markets still volatile, currently on strong upswing, but sustainability is questionable.

3. Debt markets are only very slowly opening.3. Debt markets are only very slowly opening.

4. More difficult and expensive access to financing, continued greater focus on project quality

5. Frontier country issues: resource nationalism and country governance issues

Contents

1. Market context and challenges

Demand and Supply

Frontier Countries

2. Access to financing

3 What can you do?3. What can you do?

Possible responses

Prepare the ground with financiers more carefully and start building relationships early on

Stronger documentation / demonstration of project quality

Demonstration of project team experience and ability / commitment to manage risks

Partner with an established industry player and / or a strong and reputable investor

R l f l ddi tRole of value adding partners

• The combination of tougher market conditions and host country challenges make it difficult for a junior company to succeed without one or more strong partner.

• 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 to2. Increase credibility / reputation give comfort topotential investors

3. Long term view – stick around even in bad times / deeppocketsp

IFC is a Member of the World Bank Group

IBRDInternational Bank

IDAInternational IFC

International

MIGAMultilateral

IFC is a Member of the World Bank Group

for Reconstruction and Development

Development Association

International Finance

Corporation

Investment and Guarantee Agency

Est. 1945 Est. 1960 Est. 1956 Est. 1988

To promote institutional, legal and regulatory reform

Governments of poorest

To promote private sector development

Private companies in

To reduce political investment risk

Foreign investors in

Role:

Clients:

To promote institutional, legal and regulatory reform

Governments of member Governments of poorest countries with per capita income of less than $1,025

- Technical assistance

Private companies in member countries

- Equity/Quasi-Equity

Foreign investors in member countries

- Political Risk Insurance

Clients:

Products:

Governments of member countries with per capita income between $1,025 and $6,055.

- Technical assistance Technical assistance- Interest Free Loans- Policy Advice

Equity/Quasi Equity- Long-term Loans- Risk Management- Advisory Services

Political Risk InsuranceProducts: Technical assistance- Loans- Policy Advice

Shared Mission: To Promote Economic Development and Reduce Poverty

IFC’s Products and ServicesIFC s Products and ServicesSeniorDebt

StructuredFinance

MezzanineFinance

PrivateEquity

O l di P ti l dit C tibl d bt C h• On-lending

• Liquidity management

• Acquisition financing

• Warehousing facilities

• Partial credit guarantees

• Securitization

• Bond underwriting

• Convertible debt

• Subordinated debt

• Convertibles

• Other Tier II

• Common shares

• Preferred shares

Global TradeFi P

• Syndicated loans • Credit Enhancement instruments

AdvisoryS i

SustainableFiFinance Program

• $1 billion program

• Guarantees to issuing banks

• 46 issuing banks in 24 countries

Services

• Corporate governance

• Risk management

• Small and medium business

Finance

• Carbon finance

• Renewable energy

• Supply chain financing

• 92 confirming banks in 62 countries

• $579 million of issued guarantees in first 12 months

banking

• Energy efficiency finance

• Local supplier development

• Community development

pp y g

• Corporate governance financing

Community development

Investments by Region, FY09

•Commitments for IFC’s Account: $10.5 Billion

• Sub-Saharan Africa 17%• Global

Sub Saharan Africa 17%• Middle East and North Africa 12%

2%• East Asia and

Pacific 11%

Latin America and the

• Europe and Central Asia 20%

• Latin America and the Caribbean 26%

• South Asia 12%

•25

IFC’ C Mi i P f liIFC’s Current Mining PortfolioUS$495 million for IFC’s account as of August 31st, 2009

•By Product •By Region

•Iron Ore

•Nickel

•2%

•Zinc

•1%

•Eq. Fund

•1%

•Latin America 17% •Asia

•2%

•Gold

•39%

•Chrome•Bauxite

•Africa

•68%

•Kaolin

•4%

Iron Ore

•4%

•Eastern and Central Europe

•8%•Copper

•10%

•Aluminium

•27%

•4%

Central Europe

•17.6%

IFC Financing

• * “Mobilization” for 2006 and 2007 includes structured finance, loan participations, and parallel loans.

Th IFC Ad tThe 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 Many strong international financiers adhere to IFC s principles on E&S responsibility risk management

“Equator Principles” adopted by 50+ of the world’s leadingEquator Principles adopted by 50+ of the world s leadinginvestment banks and based on IFC’s Performance Standards

Apply to 85% of project financing worldwide

CAbout IFC Linkages Programs IFC Advisory Services to enhance local economic and social

benefitsbenefits Advisory Services delivered through Linkages Programs that

are typically 2 to 4 years in duration 77 Programs in implementation, development or completed in

45 countries

Linkages Programs

Benefits

45 countries

g

•DEVELOP SMEs IN IFC CLIENTS’ SUPPLY CHAINS

•Lower cost local sourcing, higher quality local suppliers

and associated economic growth + risk mitigation

•DEVELOP SMEs IN THE

COMMUNITY

•Risk mitigation: Social license to operate through

income/employment generating activities forCOMMUNITY generating activities for

impacted local communities

IFC has streamlined its decision-making:

ExamplesIFC has streamlined its decision making:

IFC committed on the Kupol mine financing four months after beingmandated.

IFC were shareholders in Peter Hambro four months after visitingIFC were shareholders in Peter Hambro four months after visitingthe project.

Exploration Stage – 2007 - Lydian Resourcesp g y IFC came in as equity partner (US$ 2M) pre-listing in Aug 2007 Lydian also has partnership with Newmont, strengthening its

technical and managerial capacity

Project Development Stage – 2007 - Aricom IFC became a shareholder (US$ 20 M) in Aricom in mid-2007

IFC l t l l i bili i b k fi i f i d IFC plans to play a role in mobilising bank financing for mines and and associated infrastucture in Amur region, Russia

IFC’s Global ReachIFC’s Global Reach

Paris

MoscowLondon

Hong Kong

IstanbulNew Delhi

Washington

Cairo

Rio de Janeiro Johannesburg

IFCHubsIFCOffices

IFC ContactsIFC ContactsWilliam BulmerAssociate Director and HeadGlobal Mining Division, Washington DCPhone: +1 202 473 0725Email: WBulmer@ifc.orgFax: +1 202 974 4323

Christopher GossChristopher GossChief Investment Officer, Head of Business Development, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8414Mobile: +44 (0)79 2006 0514Email: CGoss@ifc.orgFax: +44 207 592 8430

Sacha BackesInvestment Officer Business Development LondonTh E d Investment Officer, Business Development, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8413Mobile: +44 (0)79 1710 0720Email: SBackes@ifc.org

The EndThank

Fax: +44 207 592 8430

you

London Global Mining In estment ConferenceLondon Global Mining Investment Conference

Dr Sascha BackesNew Business Development – Oil, Gas & MiningIFC-World Bank Groupp

Dr Sascha Backes works for the International Finance Corporation, which is the private sector arm of the World Bank Group, mandated to provide financing and support to companies investing in emerging markets. Based in its London office, Dr Backes is responsible for new business origination for the Department of Oil, Gas, Mining and Chemicals. He is also

ibl f d l i d i t i i i d t t k i l di b k i t itresponsible for developing and maintaining industry networks, including banks, private equity groups and hedge funds. Prior to joining IFC, Dr Backes worked in the international development field where he launched and managed two large rural infrastructure development projects in remote areas of the Lao PDR from 1999–2006. Dr Backes has a PhD in laser physics from the University of Cambridge and an MBA from INSEAD.

Stationers Hall LondonStationers Hall, LondonWednesday 30th September 2009

www.ObjectiveCapitalConferences.com