Sacha Akira Backes - International Finance Corporation - International Finance Corporation

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Investing in Africa Mining, Risk and Reward Sacha Backes Senior Investment Officer, Mining Investment Division International Finance Corporation 4th Annual Africa Iron Ore Conference Sandton, Johannesburg 3 & 4 June 2014

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Sacha Akira Backes delivered the presentation at 2014 Africa Iron Ore conference. The Africa Iron Ore conference is the annual gathering for iron ore and stainless steel executives engaged in the African Region. For more information about the event, please visit: http://www.informa.com.au/africaironoreconference14

Transcript of Sacha Akira Backes - International Finance Corporation - International Finance Corporation

Page 1: Sacha Akira Backes - International Finance Corporation - International Finance Corporation

Investing in Africa – Mining, Risk and Reward

Sacha Backes

Senior Investment Officer, Mining Investment Division

International Finance Corporation

4th Annual Africa Iron Ore Conference

Sandton, Johannesburg

3 & 4 June 2014

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IFC: Part of the World Bank Group

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Conciliation

and arbitration

of investment

disputes

Guarantees of

private sector

investment’s

non-

commercial

risks

Interest-free

loans and

grants to

governments

of poorest

countries

Loans to

middle-income

and credit-

worthy low-

income country

governments

Solutions

in

private

sector

development

IBRD

International

Bank for

Reconstructio

n and

Development

IDA

International

Development

Association

IFC

International

Finance

Corporation

MIGA

Multilateral

Investment

and

Guarantee

Agency

ICSID

International

Center for

Settlement of

Investment

Disputes

Est. 1945 Est. 1960 Est. 1956 Est. 1998 Est. 1965

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IFC’s Global Reach

Paris

El Cairo

Tblisi

Moscow

Almaty

Istanbul

New Delhi

Hong Kong

Mexico City

Santo Domingo

Buenos Aires

Sao PauloJohannesburg

Nairobi

Dakar

Washington

HQ/Hub Offices

Country Offices

• 109 country and regional offices worldwide

• 4,015 staff (57% are based outside Washington DC)

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Snapshot of the industry

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Metal prices and oil

• Dramatic

recovery

• Reversal of

fortunes

• China growth

moderating

… or not?

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Snap-shot of the mining industry

Miners on London AIM:

• Financings

• IPOs

• Delistings

• General investor sentiment

• Mining investor sentiment

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2013 M&A activity – risk aversion

Africa was largely absent! Why?

Reference: Ernst & Young

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But ... Africa’s global mining role and potential

• Largest reserves in and

largest producer of

several metals globally;

• Africa has ~30% of global

reserves, but output?

• World Bank estimates

US$90b for African

mining in five years;

• Mining generates >20%

of gov’t revenues.

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Summary

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Demand: constrained in short term, expected to grow in medium/long term:

» Population growth in EM and rising EM incomes;

» Urbanization and need for infrastructure;

» Continued, commodity-intensive growth in EM.

Supply: will be more expensive and difficult going forward:

» Upward pressure on costs of production: declining resource quality

outrunning technological and economy of scale off-sets;

» New sources of supply – long lead times, more complex deposits,

further from market, difficult local environments;

» Increased focus on African resources.

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The challenges

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“Hardware” challenges:

• Lack of core infrastructure:

• Power

• Rail

• Roads

• Ports

Summary of Challenges for the Mining Sector in Africa

“Software” Challenges:

• Political risk

• Bureaucracy / government capacity

• Underdeveloped legal / regulatory

environment

• Corruption

• Lack of skilled labor force

• Social / community issues

While not unique to Africa, both “Hardware” and “Software”

challenges are hampering the sector’s growth

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Iron ore in Mauritania,

Guinea, Liberia , Senegal,

Cote d’Ivoire

Iron ore in R. of Congo,

Gabon, CAR, Cameroon

Coal in Mozambique,

Zimbabwe, South Africa,

Botswana, Namibia

Infrastructure – The Nature of the Challenge

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Vast bulk commodity resources locked in by lack of transport infrastructure

Lack of power also key issue for sector competitiveness across Africa

What is needed?

• Deep water ports

• Rail

• Reliable power

• Roads

What are the issues?

• Scale of projects

• Regulatory framework

• Government capacity

• Lack of coordination

• E&S issues

• Cross-border

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Infrastructure for iron ore – the Scale of the Challenge

Country# of Iron ore

mines

# of

Railways

Required

# New

Ports

required

Est. Cost of

Infra $bn% GDP

% National

Budget

Guinea 2 2 1 10.4 to13.6 91-118% 850-1,100%

Cameroon 2 2 1 6.6 to 8.5 14-18% 120-160%

Mauritania 3 2 0 3.8 to 4.9 53-69% 260-340%

Senegal 1 1 0 3.8 to 4.9 15-19% 90-120%

R. of Congo 3 3 0 3.3 to 4.2 18-23% 90-110%

Gabon 2 2 0 2.9 to 3.8 12-15% 65-85%

Liberia 2 2 0 1.9 to 2.5 80-103% 440-570%

Sierra Leone 3 3 0 1.6 to 2.1 24-31% 250-330%

Source: IFC, RBC Capital Markets, CIA World Factbook

Many of these high-potential projects require greenfield infrastructure, and

billions of dollars of investments, representing sizeable portions of host country

GDP and national budget, in countries that are not credit rated.

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Infrastructure – Maximizing efficiency and impacts

In most of these countries, greenfield multi-user infrastructure for mining can’t be

financed by the public sector, but requires a private sector lead: a major mining

company; or third party vehicle (ideally with a strong private sector lead) under a

PPP, whereby the public sector role is limited to the award and regulation.

Single-user

mining

infrastructure

Multi-user mining infrastructure

Users known at

Financial Close

Users unknown at

Financial Close

Multi–user multi-purpose infrastructure

Users known at

Financial Close

Users unknown at

Financial Close

Low complexity High complexity

Complexities of Multi-user/purpose Infra Advantages of Multi-user/purpose

• Complex contractual set up (tariffs, access, etc)

• Need agreement among many players

• Govt capacity to plan/agree framework

• Limited pool of investors

• Reduced predictability of cash flows

• Unlock significant resources in smaller mines

• Significantly increase development multipliers

• Reduce political risk

• Enhance long term sustainability of the

infrastructure

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Access to the mining infrastructure

Considering the various risks and challenges in Africa, it may be that a haulage

regime under a PPP reduces risks and simplifies structuring more than an access

regime, and thereby maximizes the opportunities for success.

Two access options:

• Access regime – Concessionaire provides access to (eg. tracks) other users

who use own equipment to transport goods (UK, Russia, Australia, Brazil); or

• Haulage regime – A principal operator acts as the sole transport service

provider for other mines or clients (no relevant examples to date);

• Balance: (i) protect debt and equity providers; whilst (ii) encouraging shared

use. Weakly drafted contractual language has often caused failure of shared-

use agreements, especially when infrastructure assets have high capacity

constraints (eg. single-track rail). Several African countries have shared use of

mining infrastructure in their mining codes, but in insufficient detail to be a basis

for structuring an agreement.

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Closing thoughts on mining infrastructure

1. High commodity prices unlocking new opportunities, but

major greenfield infrastructure needed to exploit them;

2. Government financing not an option in most SSA;

PPP schemes seem to be the only credible solution to

unlocking Africa’s untapped mineral resources;

3. But mining companies’ ability to build such greenfield

infrastructure unproven in Africa;

4. Bankability difficult to achieve, especially for multi-user

multi-user/purpose projects: (i) asymmetry of risk profile

between mine and infrastructure; and (ii) political

economy challenges given political instability, regulatory

risk and inexperience of Governments.

5. Greenfield shared-use PPP will have to rely on a large

anchor mine (>25mtpa) and strong sponsor; major

mining companies probably best equipped for this.

6. Will it work? … the jury is out!

Anchor client / sponsor

Tariff setting flexibility

Long-term take-or-pay

Independent regulator

Defined arbitration forum

Expansions through cost sharing

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“Software” Challenge – Political Risk/Govt Capacity

Resource Nationalism is #1 Perceived Risk for

Miners in 2012/2013

Example of Recent

Changes or

Proposed

Changes to Tax /

Mining Codes in

Africa

• Ghana: New mining tax regime with increased rates and windfall tax

• Guinea: New mining code with broader free carry for government

• South Africa: ANC panel of experts tax proposals (incl windfall tax)

• Zimbabwe: Indigenization policy for mining sector

Governments revisiting old, or establishing new, mining agreements / terms

– even with the best will it is difficult to assess what a “fair” deal is …

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“Software” Challenge - Social License to Operate

“South Africa wildcat strikes spread to

more mines”

“Mining communities ‘not benefiting‘ from the profits”

Bench Marks Foundation (South Africa)

Across the world, communities/stakeholders are more vocal about their

demands and more willing to push their claims

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“Software” Challenge – Mitigating the Risks

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Build strong and

sustainable relationships

with local communities

Effective local stakeholder engagement (including

public disclosure of ESIA, etc) will reduce likelihood of

undue local expectations and mutual suspicion

Incorporate key

sustainability principles in

operations

Sound sustainability practices will reduce risk of

unexpected incidents and externalities

Transparency / frequent

dialogue with government on

project economics, timing,

etc

Establish fair/transparent partnership with government

(public disclosure of terms, scenario analysis for

revenue sharing, etc) to reduce political risk

Develop partnerships with

reputable groups / strategic

partners (majors, DFIs, etc)

Provides “stamp of approval” and support when things

go wrong

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IFC’s Recommendations to Mitigate the “Software” Risks

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African mining and IFC

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IFC’s team includes financial professionals, mining engineers, environmental specialists,

development experts, and communications specialists.

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Investment Services Advisory Services AMC Parallel Equity Funding

• Equity

• Quasi-equity

• Loans

• Capital markets access and

mobilization

• Risk management

• Political risk cover

• Supplier development (linkages)

• Community Development

• Municipal Capacity Building

• World-class environmental and social

advice

• Resettlement & Indigenous Peoples

• Access to Community Development

Funding

• Large Equity Tickets

• Shorter Timeframe

• Similar or Same Terms

• Invests third-party capital alongside IFC

• No Additional Due Diligence

IFC Mining

Integrated Solutions Combining Capital and Expertise

Financing & Sustainability Expertise Under One

Roof

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IFC Performance Standards:

Helping Clients Manage E&S Risks

PS1: Assessment and

Management of Social and

Environmental Risks and

Impacts

PS2: Labor and Working

Conditions

PS3: Resource Efficiency

and Pollution PreventionPS4: Community Health,

Safety and Security

PS5: Land Acquisition

and Involuntary

Resettlement

PS6: Biodiversity

Conservation and

Sustainable Management of

Living Natural Resources

PS7: Indigenous Peoples PS8: Cultural Heritage

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IFC in Africa Mining Infrastructure

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IFC leverages off its unique capabilities as well as the broader World Bank to

support “transformational” mining projects in Africa

World Bank Group

IFC Advisory Services

IFC Mobilisation

IFC

Mining

• Global portfolio of $8.4 bn

• $1.3 bn committed and

mobilized in FY13 in Africa

• Examples of recent IFC

Africa power deals:

• Azito (Ivory Coast),

• Thiko (Kenya)

• Kribi (Cameroon),

• Bujagali (Uganda)

• Examples of recent IFC

Africa transport deals:

• Lome Port Terminal (Togo)

• Kenya-Uganda Rail

• Dakar Toll Road (Senegal)

• TRL (Tanzania)

• Advise on PPP frameworks

• Help find strategic

infrastructure investors

• Assist on community

development/linkages

• IFC manages $6 billion in

private equity funds

• Ability to mobilize significant

debt pools (incl new $3 bn

debt fund from SAFE)

• Provide capacity building /

advice to governments

• Fund public sector projects

• Assist governments on

revenue management

IFC Power and Transport

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…. by Commodity … Region

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IFC Mining Portfolio (44% equity)

31 Projects in 20 CountriesBook value as of March, 2014

Iron, 42%

Gold, 18%

Diamonds,18%

Industrial Ores, 12%

Other Metals, 8%

Copper, 2%

Sub-Saharan Africa,

78%

LAC,16%

Eastern Europe & Central Asia, 4%

Middle East & North

Africa, 1% World, 1%

Total Portfolio: $409 Million

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The End - Thank You

Sacha Backes

Senior Investment Officer

IFC Mining Investment Division

[email protected]

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