Country Risk inCountry Risk in
Mining (Myanmar)
October 2012
DISCLAIMER
This presentation is not to be distributed without explicit approval from CLC Asia and APS Ventures (‘CLC Asia’...
CONTENTS
1. Introduction to CLC Asia
2. Country risk defined
3. Key risks examined3. Key risks examined
4. Mitigation
3
CLC Asia provides bespoke industry and political related advisory services to investors in
Asia. Our services cover four k...
Iran
2011 Mining
Russia
2011 Mining
Laos
2011 Mining
2010 Hydropower
2011 Telecoms
2010 Mining
2009 Mining
2009 Constructi...
Exceptional Pan-Asian coverage with AWR Lloyd
OIL
Upstream, midstream,
downstream, trading
GEOGRAPHIC FOCUSINDUSTRY FOCUS ...
Chris Larkin:
FOUNDER
AND
MANAGING
DIRECTOR
Bases: Bangkok
and Melbourne
Chris is the founder of CLC Asia. He has over 13 ...
CONTENTS
1. Introduction to CLC Asia
2. Country risk defined
3. Key risks examined3. Key risks examined
4. Mitigation
8
Country risk – what do we mean?
HIGH LEVEL RISKS
‘Nice to know’ in normal
circumstances.
But in the case of
Myanmar, recen...
CONTENTS
1. Introduction to CLC Asia
2. Country risk defined
3. Key risks examined3. Key risks examined
4. Mitigation
10
Taking the pulse
Myanmar is still ‘early days’ for all investors, let alone those focused on mining. Overall perception is...
POPULATION
Reality check – some recent economic figures (1)
Mid-ranking population size in
the Asian context....
GROSS DOM...
Reality check – some recent economic figures (2)
Power
($12.5bn)
Oil and Gas
($10.7bn)
Mining
($2.3bn)
Other
($0.3bn)
We a...
7.5
5.0
4.4
4.1 3.9
3.2 3.1
2.5
1.9
1.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
(%)
Indicative of budgetary priorities?
PUBLIC...
Implications of economics on country risk?
Decades of
under-
investment in
infrastructure
Constrained
human
capital
Many s...
Dutch disease?
1000
1100
1200
1300
1400
1500
KYAT/USD • Managed float since April 2012
• Kyat has strengthened nearly 80%
...
•One of the most ethnically diverse countries
in the world
•Long history of ethnic conflict. Complex, and
specific to each...
Reputation – and ways to lose it….
• NGO’s and other agencies are increasingly pro-active in
their approach
•Great fear am...
CONTENTS
1. Introduction to CLC Asia
2. Country risk defined
3. Key risks examined3. Key risks examined
4. Mitigation
19
1.50%
2.00%
2.50%
12
14
16
18
20
Indicative breakdown of political risk insurance premiums* (selected countries)
Given the...
Downward pressure on ratings - and ultimately insurance premium?
7
COUNTRY RISK
RATING
20
INSURANCE
PREMIUM*
2.5%
Easing o...
Localisation
• Localise your operations as fast
as possible to avoid being victim
from flare-ups of resource
nationalism d...
CONTACT
Please contact:
Christopher Larkin
Managing Director
c/o AWR Lloyd offices
87/1 All Seasons Place, Capital Tower, 26th Flo...
THAILAND USA CHINA
Alexander Wood: (wood@awrlloyd.com)
Managing Partner
Hal Kaiser (kaiser@awrlloyd.com)
Partner – North A...
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Myanmar - Country Risk in mining

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As Myanmar continues to open its doors, CLC Asia provides readers with an overview of political and country risk as it relates to the mining sector in the country.

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Transcript of "Myanmar - Country Risk in mining"

  1. 1. Country Risk inCountry Risk in Mining (Myanmar) October 2012
  2. 2. DISCLAIMER This presentation is not to be distributed without explicit approval from CLC Asia and APS Ventures (‘CLC Asia’). It is based on publicly available information and interviews with our sources in the industry. All estimates or projections regarding the operational performance or business, in the general meaning of the word, contained in this document include subjective data and analyses which are inherently uncertain. The information contained herein cannot be construed as warranties or representations. Recipients of the document are invited to verify the accuracy of the following information for themselves. Accordingly, CLC Asia does not guarantee, either expressively or implicitly, that this information is exact or complete. CLC Asia and its employees shall not be subject to any direct or indirect liability arising from the information contained in the document. This material may have been used during an oral presentation and is not a complete record of the discussion. October 2012 2
  3. 3. CONTENTS 1. Introduction to CLC Asia 2. Country risk defined 3. Key risks examined3. Key risks examined 4. Mitigation 3
  4. 4. CLC Asia provides bespoke industry and political related advisory services to investors in Asia. Our services cover four key areas: About CLC Asia Market and industry analysis We provide in-depth market studies and initial non-financial due diligence for potential investments in Asia. Our work goes beyond ‘off the shelf’ studies to give clients a clear picture of a target company, as well as relevant market dynamics and structure, key players and companies, industry trends and market outlook. Political risk analysis Utilising our unique network of contacts and key decision makers, we offer clients comprehensive assessments of political risk events which may arise in a market. Thesecomprehensive assessments of political risk events which may arise in a market. These events can include corruption, bureaucratic blockages, poor stakeholder relations, government and policy shifts, terrorism and security, legal and regulatory irregularities, religious and health related concerns. Government relations & communications The principals of CLC Asia have significant experience advising governments and state owned entities in the region. We can help private sector clients refine their message to government clients in a way which best communicates our clients’ business as well as assisting in stakeholder relationship matters. Policy advisory As policy advisors who have worked in the heart of government, we provide our clients with clear and informed background and interpretation on government strategy and policies, helping our clients align their commercial objectives with policy realities and frameworks. 4
  5. 5. Iran 2011 Mining Russia 2011 Mining Laos 2011 Mining 2010 Hydropower 2011 Telecoms 2010 Mining 2009 Mining 2009 Construction Country risk - core focus on Asia Thailand 2012 Infrastructure 2011 Agribusiness, Telecoms 2010-11 Energy 2008-10 Energy 2008 Politics 2009 Hotels Philippines 2010 Mining 2006 Infotech India 2006 Infotech DRC 2011 Mining 2009 Construction 2008 Mining Australia 2011 Mining 2006 Infotech Cambodia 2011 Energy 2011 Mining 2010 Energy 2010 Mining Brunei 2011 Energy 5 Myanmar 2012 Oil & Gs Manufacturing Political risk Indonesia 2012 Oil & Gas 2011 Mining 2007-10 Mining 2009 Hotels 2006 Infotech Vietnam 2012 Aviation 2011 Shipping 2009 Energy 2008 Energy 2006 Infotech
  6. 6. Exceptional Pan-Asian coverage with AWR Lloyd OIL Upstream, midstream, downstream, trading GEOGRAPHIC FOCUSINDUSTRY FOCUS SERVICE FOCUS COAL Mining, logistics, GAS Upstream, midstream, downstream, LNG… FINANCIAL ADVISORY Mergers and acquisitions Equity capital placement IPO and listing strategy Project finance advisory STRATEGY CONSULTING Corporate strategy AWR Lloyd has been active in the Asia-Pacific region for over a decade. The firm’s Partners each have between 15 and 30 years experience in industry strategy consulting, investment banking and investment in the Asia-Pacific region. ASIA-PACIFIC AWR Lloyd is an independent and specialized corporate finance firm with an exclusive focus on the energy, mining and metals industries in the Asia-Pacific region. Our aim is to use modern corporate finance techniques, industry expertise and a good CLC Asia is the political and market intelligence arm of AWR Lloyd. AWR Lloyd representatives and/or administrative offices Mining, logistics, infrastructure, trading POWER SPPs, IPPs, energy storage GREEN Solar, wind, bio-fuels, carbon credits IRON & STEEL Iron ore, ferro-alloys, steelmaking, mills OTHER MINING Non-ferrous, industrial minerals, precious Corporate strategy Growth strategy Financial strategy Fair value analysis Investor relations strategy COMMERCIAL ADVISORY Pre-feasibility studies Feasibility studies Market studies Industry research Commodity and energy procurement advisory Energy storage lease advisory Austin Sydney Seoul Hong Kong Saigon Bangkok Melbourne London Beijing Jakarta expertise and a good dose of creative thinking to help our clients build and maximize shareholder value in a sustainable way. AWR Lloyd’s client base includes a number of dynamic companies listed on stock exchanges in Asia and Australia. We have developed a particular reputation for helping growth-oriented natural resources companies in the region realize their full potential. 6
  7. 7. Chris Larkin: FOUNDER AND MANAGING DIRECTOR Bases: Bangkok and Melbourne Chris is the founder of CLC Asia. He has over 13 years experience working for both government and private sector clients in Asia, Australia and the UK. His previous experience includes working as a privatization and regulatory advisor for the Thai Ministry of Finance. After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on privatisation and economic regulatory policy, working on the privatisations of PTT and Airports of Thailand, as well as working with a variety of State Owned Enterprises. Since moving to the private sector, Chris has advised a number of private sector clients on market entry, policy and political risk issues, focusing on the mining and oil and gas Expertise matrix: Chris Larkin Market analysis Political risk analysis Australia/NZ SEAsia China&N.Asia India&C.Asia ME&Africa Americas Europe&Russia Who we are political risk issues, focusing on the mining and oil and gas sectors. He has also performed both financial and non- financial M&A due diligence on a number of entities across Asia as well as helping leading energy companies on their IR strategy. Chris has an Honours degree in Economics and a Masters of Public Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the University of Melbourne. Chris is fluent in English and Thai and has dual Australian and Thai citizenship. He is married with two children. analysis Government relations Policy Core expertise Some experience Little or no experience 7
  8. 8. CONTENTS 1. Introduction to CLC Asia 2. Country risk defined 3. Key risks examined3. Key risks examined 4. Mitigation 8
  9. 9. Country risk – what do we mean? HIGH LEVEL RISKS ‘Nice to know’ in normal circumstances. But in the case of Myanmar, recent developments make it essential OPERATIONAL Four key areas of risk we generally look at essential PROJECT LEVEL RISKS Critically important – but in the domestic context, somewhat more difficult to discern trends at present given lack of substantive track record POLITICAL REPUTATIONAL SECURITY 9
  10. 10. CONTENTS 1. Introduction to CLC Asia 2. Country risk defined 3. Key risks examined3. Key risks examined 4. Mitigation 10
  11. 11. Taking the pulse Myanmar is still ‘early days’ for all investors, let alone those focused on mining. Overall perception is things are getting better, but still a long way to go +ve •Progress towards new mining regulations •Reforms in other areas – Telecoms, tariffs, export duties, central bank reform •President Thien Sien seen by many as a genuine reformist •Media seen to be much less restrictive •Question mark over the capacity of government to keep up with economic liberalisation and the new responsibilities that come with it. -ve •Ongoing tensions amongst ethnic minorities – how to solve? •Low rankings on transparency and graft indicators Wait and see ? •Political reforms – what next? •Suspension of infrastructure projects by government a sign of things to come? 11
  12. 12. POPULATION Reality check – some recent economic figures (1) Mid-ranking population size in the Asian context.... GROSS DOMESTIC PRODUCT ....but a tiny GDP. On a per capital GDPs on a PPP basis – Myanmar is poor by African standards, and ranks only slightly higher than Afghanistan using this scale Source: Myanmar Statistical office, UBS (April 2012) 12
  13. 13. Reality check – some recent economic figures (2) Power ($12.5bn) Oil and Gas ($10.7bn) Mining ($2.3bn) Other ($0.3bn) We are still talking about an economy (government and society) with a lot of catching up to do TOTAL FDI (2007-11) 15000 20000 25000 USD (m) FDI BY SECTOR (2007-11) Source: Myanmar Statistical office, UBS (April 2012), Credit Suisse (2012). Financial year statistics to year ending March. 0 5000 10000 2007-08 2008-09 2009-10 2010-11 2011 (Apr-Dec) Prior to 1990, almost no FDI into the country. Between 1990 and 2007 FDI averaged $240m per annum Mining investment accounted for 9% of all FDI flows 13
  14. 14. 7.5 5.0 4.4 4.1 3.9 3.2 3.1 2.5 1.9 1.2 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 (%) Indicative of budgetary priorities? PUBLIC EXPENDITURE ON EDUCATION AS A PERCENTAGE OF GDP (2001)* 0.0 MY TH IN KR HK PH SG ID CN Myanmar 66.0 9.5 8.9 5.5 0 10 20 30 40 50 60 70 Myanmar TH MY ID MILITARY SPENDING AS A % NATIONAL BUDGET Historical structural imbalances in fiscal priorities in comparison to other Asian contemporaries.... ....Can military spending be an upside ‘peace dividend’ from reduced ethnic tensions? Source: World Bank and Harvard Ash Centre. *Data for China (1999) and India (2000) 14
  15. 15. Implications of economics on country risk? Decades of under- investment in infrastructure Constrained human capital Many speed- humps ahead in all four areas of country risk Small economic base + + = infrastructure of country risk 15
  16. 16. Dutch disease? 1000 1100 1200 1300 1400 1500 KYAT/USD • Managed float since April 2012 • Kyat has strengthened nearly 80% in the past 5 years • Gas receipts, sales of SOE’s and relatively high local interest rates • Relatively weak export sector • New investment to exacerbate 500 600 700 800 900 • New investment to exacerbate ‘Dutch disease’? • Combined with high inflation (9.9% in 2010) there are concerning implications for socio-economic stability elsewhere if other parts of the economy do not see the windfalls of open markets 16
  17. 17. •One of the most ethnically diverse countries in the world •Long history of ethnic conflict. Complex, and specific to each area •Chin and Kachin in particular at present are hot spots •The overwhelming view was that the issue Security: Mapping of ethnic armies Source: Friedrich Ebert Foundation (2009) •The overwhelming view was that the issue of ethnic insurgencies remains the most difficult and unpredictable matter in Myanmar •Despite the current ceasefire with the Karen rebels, and ongoing ‘peace talks’, there remain conflict areas and areas where there is a legacy of conflict will likely overlap prospective mining areas 17
  18. 18. Reputation – and ways to lose it…. • NGO’s and other agencies are increasingly pro-active in their approach •Great fear amongst those we have spoken to is that new developments will go hand in hand with these issues •NGO’s target those perceived to be associated with breaches of human rights, as well as governments which host those companies • Forced Labour •Land confiscations and displacements •Unfair actions towards minorities •Workers rights and safety Environmental damage Reputational issues •As industry grows, community opposition to mining likely to grow as well. Have we already seen this in Myanmar? •Environmental damage Well known campaign by ‘Mining Watch’ Canada against alleged breaches of human rights and environmental best practices by Ivanhoe Mines. CASE STUDY 18
  19. 19. CONTENTS 1. Introduction to CLC Asia 2. Country risk defined 3. Key risks examined3. Key risks examined 4. Mitigation 19
  20. 20. 1.50% 2.00% 2.50% 12 14 16 18 20 Indicative breakdown of political risk insurance premiums* (selected countries) Given the lack of actuarial foundation, pricing country risk is often more art than science... However, Myanmar risk does rank as high as the DRC at present with implied premiums at the upper end INSURANCE PREMIUM COUNTRY RISK RATING TRANSFER High premium Low premium • Insurable risk ratings (LHS) – 1 = low risk 7 = high risk • Risk premium quotes for Natural Resource projects (RHS)* High implied premium? 0.00% 0.50% 1.00% 0 2 4 6 8 10 Source: Belgian national export credit agency, CLC Asia research WAR EXPROPRIATION/ GOVT ACTION premium • Crude but not reliable correlation between risk ratings and premiums • Markets effectively limited or closed where Expropriation/ Govt action is in the 6 to 7 range *Resources sector (mining, oil and gas) on a 5 year project financing basis. Creditworthy sponsor and project, robust security package (including offshore receipts for lenders’ benefit). 20
  21. 21. Downward pressure on ratings - and ultimately insurance premium? 7 COUNTRY RISK RATING 20 INSURANCE PREMIUM* 2.5% Easing of sanctions A more independent currency float ? Will the new mining law be relatively liberal on transfer and convertibility issues for the mining sector? Lower risk premium justified? But government capacity to facilitate events will determine how fast premiums drop Upper end 6 5 Expropriation/Govt action War Transfer Insurance premium 0 0% • Hard to tell. Recent suspensions of Chinese infrastructure projects need to be better explained – otherwise people will speculate • January 2012 cease fire with Karen • Better relations with other ethnic groups will help lower this, but that remains to be seen Source: Belgian national export credit agency, CLC Asia research 21
  22. 22. Localisation • Localise your operations as fast as possible to avoid being victim from flare-ups of resource nationalism down the track. •Management •Contractors •Corporate Identity Corruption • Corruption begets corruption • Word spreads about easy targets • Business is often just as difficult no matter who your “connections” are, just in different ways • Inappropriate gains easily reversed Second mover advantage • 1st mover – worth it? • Teething problems will always happen. Best let them happen to others first? • Come in and pick up projects with potential, which can no longer be developed under local steam Country risk mitigation - a conceptual framework reversed Corporate Social Responsibility • Take CSR seriously. Tendency in the west to pay lip service to the concept. • In developing countries, it is essential that mining companies are also providing tangible benefits to the local communities whether they be infrastructure, education and health. Government relations • Support government counterparts in regulatory capacity building exercises • Lack of government capacity may provide superior negotiation position in the beginning, but risks government pushing back at later points • Avoid government being overwhelmed and then subsequent backlash 22
  23. 23. CONTACT
  24. 24. Please contact: Christopher Larkin Managing Director c/o AWR Lloyd offices 87/1 All Seasons Place, Capital Tower, 26th Floor, Wireless Rd., Lumpinee, Pathumwan, Bangkok, 10330 Thailand 24 t: +66 81 866 1002 (Thailand) t: +61 402 859 269 (Australia) e: chris@clc-asia.com e: enquiries@clc-asia.com www.clc-asia.com
  25. 25. THAILAND USA CHINA Alexander Wood: (wood@awrlloyd.com) Managing Partner Hal Kaiser (kaiser@awrlloyd.com) Partner – North Asia & North America Joan Xia (joan@awrlloyd.com) Partner - Greater China Please contact: Alexander Wood Managing Partner and CEO Email: wood@awrlloyd.com Mobile: + 66 81 984 7828 Doug Kinsella Partner and COO Email: doug.kinsella@awrlloyd.com Mobile: + 66 81 984 7828 For more information on AWR Lloyd 25 87/1 All Seasons Place, Capital Tower, 26th Floor, Witthayu Rd., Lumpinee, Pathumwan, Bangkok, 10330 Thailand Tel: +66 2 685 3838 Fax: +66 2 654 3511 106 East 6th Street, Austin, Texas 78701 USA. Tel: + 1 512 322 5381 Fax: + 1 512 322 5301 A2-1506, Phoenix Town, Jia 5, Shu Guang Xi Li, Chaoyang District, Beijing, PC 100028, China Tel: +86 10 8440 5244 INDONESIA VIETNAM KOREA Arran Marshall (arran@awrlloyd.com) Head of Country - Indonesia Menara Batavia 14th Floor, Jalan K.H Mas Mansyur, KAV 126 Jakarta 10220, Indonesia Tel: + 62 21 572 2366 Fax: +62 21 572 2358 Van Nguyen (van@awrlloyd.com) Senior Manager Unit 2906, Saigon Trade Center, 37 Ton Duc Thang St., Ben Nghe Ward, Dist. 1, Ho Chi Minh City, Vietnam. Tel: +84 8 3911 7206 Fax: +84 8 3911 7208 Sam Koh (sam.koh@awrlloyd.com) Vice President, Business Development 41st Floor, Gangnam Finance Center 737 Yeoksam 1-dong, Gangnam-gu, Seoul 135-984, Korea Tel: + 82 2 2008 4570 Fax: + 82 2 2008 4555 25

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