World Mines Ministries Forum Managing Risk in Mining Projects

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World Mines Ministries ForumManaging Risk in
Mining Projects

• March 1, 2008
• Daniel Galvao
• Marsh Inc.

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Managing Risk in Mining ProjectsAgenda

• Different Stakeholders, Different Interests
• Key Aspects for Success
• Host Government Attractiveness
• Political Risk

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Managing Risk in Mining ProjectsDifferent
Stakeholders, Different Interests

• Equity investor perspective
• Lenders perspective
• Host government perspective
• Local community / local government perspective
• Insurers perspective

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Managing Risk in Mining ProjectsDifferent
Stakeholders, Different Interests

• Equity investor perspective
• ROE / ROI
• How much can this project return vis-à-vis
  alternatives ?
• What is the experience of other in the industry ?
• Stability
• How stable is the political regime ?
• How stable is operational environment ?
  (disruptions)
• How stable is the tax treaty ?
• Corporate Governance
• Have we disclosed fully the risks of this
  jurisdiction ?
• Have we disclosed initiatives to mitigate
  transfer those risks ?

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Managing Risk in Mining ProjectsDifferent
Stakeholders, Different Interests

• Lenders perspective
• Payback capability
• Do the operators/sponsors have the cash-flow
  capacity to repay ?
• What is our experience in that jurisdiction ?
• Guarantees
• Do we have a collateral guarantee ?
• Is insurance available / in place ?
• Reputation
• Difference between Multilateral/ECA lender and
  private lender
• Equator Principles

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Managing Risk in Mining ProjectsDifferent
Stakeholders, Different Interests

• Host government perspective
• Local development
• How to we secure development (direct and
  secondary) and attract further investment?
• What is our financial gain in the project?
• ROE / ROI
• Present and future tax revenue?
• Public governance
• Is the project sustainable?
• Is the project supportable (even w/ opposition)?

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Managing Risk in Mining ProjectsDifferent
Stakeholders, Different Interests

• Local community / local government perspective
• Job gains
• Can we secure fairly paid jobs in the project?
• If takeover of an existing project, can we
  maintain same job base?
• Local development
• Will local secondary industries / jobs derive
  from the project?
• Will there be social developments (education,
  basic infrastructure) investments made by the
  project?
• Sustainability
• Is the project environmentally sustainable?

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Managing Risk in Mining ProjectsDifferent
Stakeholders, Different Interests

• Insurers Perspective
• Macro-economical and Social variables
• What is the overall macro stability of the
  country/region ?
• Level of poverty, incidence of terrorism/guerrilla
  activity ?
• Political regime democracy, dictatorship,
  theocracy ?
• What is their liquidity position government has
  money or are in deep need of funds ?
• Stakeholders Due diligence
• Who else is involved in the project ?
• Is the project supported locally ?
• Probability of Loss
• Severity and Frequency analysis

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Managing Risk in Mining ProjectsKey Aspects for
Success

• Cross Gains
• Profitability
• Stability
• Sustainability

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Managing Risk in Mining ProjectsHost Government
Attractiveness

• Clear Definition of Indigenous Rights
• Self government
• Use of land and resources (water, timber, fauna
  and flora)
• Title ownership
• Access to rent and/or royalties revenue
• Relationship with other government bodies and
  opposition
• Mining code clarity and stability
• Tax regime clarity and stability

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Managing Risk in Mining ProjectsPolitical Risk

• Risk from a Geo-Political actions that can impact
  a projects ability to conduct business or turn
  a profit.
• Political Risk not the same but correlated to
  Country Risk, not the same but correlated to
  Security Risk
• Some examples of Political Risks
• Expropriation/Nationalization Russia (Yukos),
  Venezuela (ConocoPhillips, Exxon), Bolivia
  (Petrobras)
• Political Violence Sabotage (Colombia/Mexico),
  Terrorism (Israel, Indonesia), Civil War (Sierra
  Leone, DRC)
• Breach of Contract/Contract Frustration
  Dominican Republic, Ecuador
• Currency Inconvertibility/Transfer Argentina
  (2001), Venezuela (2003)

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Managing Risk in Mining ProjectsMitigating
Political Risk

• There are six broad risk mitigation categories
  for Political Risks
• Joint Ventures
• Good Corporate Citizenship and High Environmental
  Standards.
• Portfolio (Geographic) Diversification
• International Investment Agreements
• Security Management
• Insurance
• These are not mutually exclusive and should be
  combined to the
• maximum possible/economically viable extent.

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Managing Risk in Mining ProjectsMitigating
Political Risk Joint Ventures

• CONS
• Local partner can become liability with change of
  government
• Local partner might want to use its local
  political leverage to pressure foreign partner
  out of the project (or secure better terms)
• With a multilateral or ECA partner interest might
  not align in the settlement of a loss and payouts
  are not necessary pari passu

• PROS
• Having a local partner potentially diminishes the
  risk of local intervention due to local
  connections
• Share risk mitigation and loss impact in case of
  a loss
• If partnering with a multilateral institution or
  ECA, local gvt. Is less likely to intervene

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Managing Risk in Mining ProjectsMitigating
Political Risk Good Corporate Citizenship and
High Environmental Standards

• CONS
• Presupposes rational host government
• Presupposes rational NGOs
• Potential high cost of implementation and
  management

• PROS
• In-house solution
• Positive community relationship minimizes the
  risk of local sentiments against project
• Attracts local pool of talent

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Managing Risk in Mining ProjectsMitigating
Political Risk Portfolio Diversification

• CONS
• Only viable with 3 projects in different
  jurisdictions
• Large individual losses still might have
  catastrophic impact on balance sheet
• Need to recalibrate portfolio risk every time an
  acquisition or divestiture is made

• PROS
• In house solution
• Geographic diversification diminishes impact of a
  single loss

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Managing Risk in Mining ProjectsMitigating
Political Risk International Investment
Agreements

• CONS
• Only few countries participate (Canada has 22
  FIPAs in place currently)
• Long and costly legal determinations in the event
  of a loss, through remedies and arbitration
• No guarantees you win the award but is not able
  to collect

• PROS
• Bilateral or Multilateral agreements avoid
  political wrangling over a disputed project

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Managing Risk in Mining ProjectsMitigating
Political Risk Security Management

• CONS
• Only respond to small, less catastrophic losses
  (short disruptions)
• If outsourced, high degree of trust and due
  diligence is needed

• PROS
• Sometimes an in house solution

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Managing Risk in Mining ProjectsMitigating
Political Risk Insurance (PRI)

• CONS
• Not designed to respond to small losses (although
  some forms now tailored to small disruptions)
• Need remedies and arbitration procedures to be
  exhausted
• If not properly structured can be expensive

• PROS
• Clear definition of risk transfer
• Can be assignable and with provision to deal with
  corporate governance
• Well structured policy provides indemnity within
  a specific time-frame (ie. AAD)

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Managing Risk in Mining ProjectsMitigating
Political Risks Best Practices

• Assess the exposure
• Which perils are we exposed to ?
• What is the Maximum Foreseeable Loss and Maximum
  Probable Loss in regards to Political Risks ?
• Determine Mitigating Solutions
• Do we need/can we afford all six categories of
  mitigation ?
• Which ones provide us with the best return for
  our investment ?
• Implement, Document and Publicize Mitigation
  Solutions
• Investors and Stakeholders Perception
• Corporate Governance

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Managing Risk in Mining ProjectsPolitical Risks
Selected Jurisdictions
SOURCE BEHRE DOLBEAR 2008 RANKING
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Questions ?

• Thank You

Daniel Galvao Sr. Vice President Marsh
Inc. [phone] Daniel.Galvao_at_marsh.com