IFC - Mining Investment in Asia


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IFC - Mining Investment in Asia

  1. 1. Investment and Risk Climate Impact on Mining Investment in Asia Karsten Fuelster - IFC Global Mining Division IFC is a Member of the World Bank Group MIGA IBRD IDA IFC Multilateral International Bank International International Investment and for Reconstruction Development Finance Corporation and Development Association Guarantee Agency Est. 1945 Est. 1960 Est. 1956 Est. 1988 Role: To promote private To promote institutional, To promote institutional, To reduce political sector development legal and regulatory legal and regulatory investment risk reform reform Clients: Private companies in Governments of member Governments of poorest Foreign investors in member countries countries with per capita countries with per capita member countries income between $1,025 income of less than and $6,055. $1,025 Products: - Equity/Quasi-Equity - Technical assistance - Political Risk Insurance - Technical assistance - Long-term Loans - Loans - Interest Free Loans - Risk Management - Policy Advice - Policy Advice - Advisory Services Shared Mission: To Promote Economic Development and Reduce Poverty 2 1
  2. 2. IFC – over $73 billion Invested in Emerging Markets since 1956 • Largest multilateral source of loan/equity IFC FY07 Highlights financing for the emerging markets private sector Portfolio $25.4 billion • Founded in 1956 with 179 member countries Committed $10 billion • AAA rated by S&P and Moody’s Syndicated $1.8 billion # of companies 1,400+ • Equity, quasi-equity, loans, risk management # of countries 69+ and local currency products • Takes market risk with no sovereign Middle East & guarantees N.Africa Sub-Saharan Global 15% Africa 1% • Promoter of environmental, social, and South Asia 17% corporate governance standards 13% • Resources and know-how of a global development bank + flexibility of a merchant bank Latin America East Asia and Europe & • Holds equity in over 800 companies worldwide 21% the Pacific Central Asia 11% 22% 3 Presentation Title IFC in Asia and Pacific Ulaanbaatar Bishkek Tashkent Almaty Beijing Khodjand Dushanbe Tokyo Kabul Islamabad Chengdu New Delhi Guwahati Karachi Dhaka Hong Kong Hanoi Mumbai Vientiane Chennai Bangkok Manila Phnom Penh Ho Chi Minh City PACIFIC Davao City Colombo Banda Aceh OCEAN Makassar Jakarta Port Moresby Dili Denpasar INDIAN OCEAN Sydney IFC Hubs IFC Country Offices 4 2
  3. 3. The IBRD (‘World Bank’) and IFC Work Together to Promote Sustainable Mining in Developing Countries Global Mining Group World Bank Mining Policy Division IFC Mining Investment Division Works with Governments to facilitate - Works with Private Companies to ensure- • Investor-friendly policies • Sound Economic fundamentals • Reform and modernization of Mining • Sufficient Financial Strength Sector • Environmental Rigor • Privatization of State-owned Assets • Sensitivity to the Community • Community Relations & Equitable Rent Sharing 5 IFC’s Current Mining Portfolio By Product By Region Silver Latin America 8% Nickel Zinc Eastern and 1% 1% Central Europe 1% World 1% 11% Other 2% Gold Chrome Africa Asia 36% 5% 51.4% 1% Copper 7% Africa Platinum Iron Ore 79% 25% Aluminum 8% 13% US$825 million for IFC’s account (31.12.08) 6 3
  4. 4. Key Dimensions of Political Risk Expropriation, including: • nationalization and confiscation • creeping expropriation, partial expropriation (limited coverage) e.g. changes in licensing or royalty agreements • Government actions discriminatory Currency transfer restriction and inconvertibility, such as: inability to convert local currency into forex for transfer outside the host country inability to transfer/excessive delays in acquiring forex (currency depreciation not covered) MIGA have benefited from exclusion of moratoria imposed by Governments War and civil disturbance arising from: damage/disappearance of tangible assets due to war or civil disturbance (including revolution, insurrection, coups d'état, sabotage, and terrorism) can extend to situations when an investor is forced to abandon a project and assets are not damaged Breach of Contract/Arbitration Award Default coverage protects against government actions resulting in: breach or repudiation of an agreement with the investor non-enforcement of an arbitration award revocation of leases or concessions, certificates of stabilization etc. Mining Projects Are Often Seen As “Controversial”… • Increased pressure by governments and communities for a larger share of profits • Social benefits often underestimated • Environmental degradation often more feared than real • Unrelenting civil society attention • Amplified brand and reputational risk …and yet no sector is more important to development than ours. 8 Industry context 4
  5. 5. IFC Value Addition in Mining Environmental Long-term Sustainability Regional Global Mining Country Risk & Social Risk Competitive Toolkit Knowledge Expertise Mitigation Management Financing Extensive 40+ Years of Government Advice on Local Supplier Equity Local Office Sector Relations Environmental Development Equity Network Expertise and Social Best Neutral broker Environmental Participation Practices Local Greenfield Role / Social Advice Fixed/Floating Transaction Equator Expansion/ Reduced Risk of Corporate Rates, Local Experience Principles Modernization Expropriation, Governance Currencies Modeled after World Bank Breach of Corporate IFC Standards Local Up to 15 year Synergies Contract, Strategy Economic Loan Maturity Convertibility Local Development Access to Consultation Flexible World Bank International and Disclosure HIV/AIDS Amortization Synergies Investors Prevention Profile Witholding Tax Technical Community Catalyst for Benefit Advice Development other Investors Funding and Lenders Capital Mobilization 9 Environmental and Social Risk Mitigation In-house environmental and social specialists to assist clients with: •Community Development •Polution prevention & Consultation •Cleaner production •Cultural property •Socioeconomic/workplace/ •Impact assessment labor issues •E&S management systems •Land acquisition/resettlement/ compensation •Health & Safety •Indigenous peoples •Gender empowerment •Biodiversity 10 5
  6. 6. Sustainable Approach to Mining No Longer an Altruistic Endeavour: It is a Business Imperative Mining companies are guests in remote, impoverished areas, often for 20-40 years Increased NGO activism and reputational risk Uninterrupted Government A “Social License to Operate” does affect the operations (local, provincial, bottom-line national) A condition of finance/investment – Equator Investors Principles, World Bank Standards Community Mining Company To ensure long-term success, mining operations must be strategic, Non- governmental Local business transparent & equipped with qualified organizations human resources Effective local stakeholder management happens by design “Legacy” & redlohekatS ynaM gninnalP dooG htiw elbadiovA era seussI Impact Common “Symptoms” • Costly legal proceedings • Land claims • Local vendor pressures • Inefficient local contracting • Lack of alternative employment • Security/SHE violations • Encroachment onto mining area • Artisanal mining • Unbalanced benefit sharing • Interrupted operations • Mine closure anxiety • Reputational risk • Road blocks Systematic planning, Best Practice can pre-empt these issues 12 6
  7. 7. Local Stakeholder Planning Should Occur Early Key Measures Benefit Downstream • Baseline analyses / documentation • Evidence in face of (NGO) critics • Needs assessments / mapping by • Addresses root causes of needs professionals • Secures community consent & • Community consultation, fosters local ownership of participatory processes activities • Land acquisition per Best Practice • Avoids costly land claims • Priming the Prime Contractor re: • Mitigates negative social impact social impact mitigation & local of construction & local vendor vendor engagement pressures Managing Expectations is Key 13 Local Economic Development Programs – Business Rationale Supporting Local Economic Development: • Spreads projects’ positive impacts among members of host communities • Helps to provide alternative livelihoods to local populations • Increases effectiveness of compensation packages Leads to: • Stronger local support for projects • Social license to operate and mitigation of social risks • Management of reputational risks • Minimized disruptions for project effected people IFC advice and assistance includes: • Supporting small and medium size businesses outside the supply chain of IFC clients • Creating and identifying financing solutions for local businesses • Strengthening the capacity of development foundations to identify needs and priorities of communities 14 Presentation Title 7
  8. 8. Reducing Social Risk - Example: Supplier Development Issue •Physical and economic dislocation of people •Low level business skills of local entrepreneurs, mostly former farmers Linkages Solution •Supplier Development, Local Economic Development, Institutional Capacity Building, HIV/AIDS and Gender •International partnership -Transferring lessons and good prqctices from other projects 15 Thank you! IFC Contact Information IFC HQ (Washington DC): IFC East Asia Region: Bill Bulmer Karsten Fuelster Global Head Mining Investment Senior Investment Officer Oil, Gas, Mining and Chemicals Department Oil, Gas, Mining and Chemicals Department Phone: +1 202 473 8750 Phone: +62 21 5299 3001 Fax: +1 202 958 5323 Email: kfuelster@ifc.org E-mail: wbulmer@ifc.org Fax: +62 21 5299 3002 8
  9. 9. IFC’s Performance Standards on Social and Environmental Sustainability: Best Practice Tools in Risk Management Implementing the Performance Standards Guards Against Unforeseen Interruptions in Project Execution: • Strikes or protests • Costly environmental clean ups • Loss of investor confidence due to unfavorable media attention Meeting the Performance Standards Helps to Improve the Bottom Line: • Helps ensure smooth and continuous operations • Maximizing local development benefits fosters good neighborly relations • Good corporate citizenship raises project’s acceptance locally and with governments • Optimization of resource management (water, energy, etc) • Helps to create reliable and cost effective supply chains • Helps attract top talent both locally and internationally • Enhances company brand value to investors Meeting the Standards = Stamp of Approval 17 Local Supplier Linkages – Business Rationale Using local suppliers allows clients to: • Reduce delivery times • Control inventories • Increase number of local jobs created by project • Spreads projects’ positive impacts among members of host communities Leads to: • Lower operating costs • Mutually beneficial business relationships between IFC clients and local suppliers • Social license to operate and mitigation of social risks • Stronger local support for project Our advice and assistance includes: • On the ground support for local businesses inside the supply chain of IFC clients • Creating and identifying financing solutions for local entrepreneurs • Establishing and operating local “enterprise centers” to train local businesses 18 Presentation Title 9
  10. 10. Social Advising: Stakeholder Capacity Building Client need Empower local mine stakeholders to participate in public consultation and disclosure processes Solution • Capacity building workshop • Capacity building and stakeholder forum • Capacity building program delivered in several locations Outcome • Improved information flow • Broadened participation Local stakeholders discuss mining project • Extended opportunity for dialogue • Improved ability to respond to questions • Improved capacity in the company 19 Presentation Title Additional Slides 10
  11. 11. IFC’s Products and Services Senior Structured Mezzanine Private Debt Finance Finance Equity • Convertible debt • Partial credit • On-lending • Common shares guarantees • Subordinated debt • Liquidity management • Preferred shares • Securitization • Other Tier II • Acquisition financing instruments • Bond underwriting • Warehousing facilities • Credit • Syndicated loans Enhancement Global Trade Advisory Sustainable Finance Program Services Finance • $1 billion program • Carbon finance • Corporate governance • Guarantees to issuing banks • Renewable energy • Risk management • 46 issuing banks in 24 • Supply chain financing • Small and medium business countries banking • Corporate governance • 92 confirming banks in 62 financing • Energy efficiency finance countries • Local supplier development • $579 million of issued • Community development guarantees in first 12 months 21 Presentation Title Financial Products - From Equity to Debt Corporate/UJV • Equity Typically 5-15% shareholding • Long-term investor, typically 6-8 year holding period • Not just financial investor, adding to shareholder value • Usually no seat on board • Subordinated loans • Mezzanine / Income participating loans • Quasi Equity Convertibles • Other hybrid instruments • Senior Debt (reserve, base lending. corporate finance, project finance) • Fixed/floating rates, US$, Euro and local currencies available • Commercial rates, repayment tailored to project/company needs • Long maturities: 7-12 years, appropriate grace periods • Senior Debt Range of security packages suited to project/country • & Equivalents Mobilization of funds from other lenders and investors, through • financings, syndications, underwritings and guarantees 22 11
  12. 12. How We Finance Mining Projects IFC Investment Project Type Up to 35% of project cost Greenfield, total cost for IFC’s account less than $50 million Up to 25% of project cost Greenfield, total cost for IFC’s account more than $50 million Up to 50% of project cost Expansion or rehabilitation 100% project cost for IFC Greenfield, expansion, and participating banks’ rehabilitation accounts •Umbrella for participants in IFC’s syndication program: IFC lender of record, immunity from taxation and provisioning requirements. •IFC’s total financing (for its own account) must be less than 25% of total company capitalization, and IFC does not manage or have largest stake. 23 Presentation Title IFC’s Project Cycle Internal Early Review Due Diligence Negotiation Disclosure Disbursement Approvals and Commitment • Client needs • Loan disbursed • Assessment of • Conditions of • Environmental • Board determined on agreed business disbursement and social consideration schedule, potential, and covenants, information • Contribution • Board approval according to risks, performance disclosed of project to negotiated opportunities and monitoring • Legal review development • Opportunity terms and requirements, assessed • Evaluation of for public • Signing of legal conditions and action plan financial and comment documents • Project agreed economic screened for soundness potential problems • Compliance with IFC’s • Site visit social and • Mandate environmental letter performance standards reviewed We Agree on a Specific Timeline to Meet Client’s Needs 24 Presentation Title 12
  13. 13. Equity Investment: Approaching IFC Start by submitting brief project description, incl. technical feasibility, information on company, and environmental studies MONTH 1 MONTH 2 MONTH 3 MONTH 4 Early Review Mandate Due diligence Environmental and social disclosure (60 days – Assuming a Category A Investment) Internal Credit Committee Approvals Documentation Negotiations IFC Board Meeting Equity Disbursement 25 Presentation Title Structured Finance IFC has developed products that provide clients with forms of cost-effective financing not otherwise available to them. Products include credit enhancement structures for bonds and loans through partial credit guarantees, risk-sharing facilities, and participations in securitizations: • Partial credit guaranteees allow IFC to use its triple-A credit rating to help clients diversify their funding sources, extend maturities, and obtain financing in their currency of choice, including local currency. • Risk-sharing facilities allow clients to transfer credit risk to IFC from their own portfolio or from a new portfolio they originate. The assests typically remain on the clients’ balance sheet, and the risk transfer comes from a partial guarantee provided by IFC. • Securitizations help IFC’s clients obtain financing that would otherwise be unavailable or unsuitable to them because of perceived credit risk. This form of financing involves the pooling and actual sale of financial assets and issuance of securities that are repaid from the cash flows generated. Securitizations are commonly done for mortgages, credit cards, auto and consumer loans, corporate debt, and other assets with relatively predictable cash flows. 26 Presentation Title 13
  14. 14. Local Currency Financing •To avoid risks from exchange-rate volatility, companies with revenues in local currency should generally borrow in the same currency. IFC loans are provided in major currencies and in an increasing number of emerging market currencies. •IFC can provide direct local currency financing through direct loans or swaps in over 30 countries. •IFC provides local currency debt financing in three ways: Loans from IFC denominated in local currency Risk management swaps that allow clients to hedge foreign currency−denominated liabilities back into local currency Credit enhancement structures that allow clients to borrow in local currency from other sources 27 Presentation Title Equity and Quasi-Equity IFC takes equity stakes in private sector companies, including financial institutions and investment funds in developing and transition countries. IFC is a long-term investor. When the time comes to sell, IFC prefers to exit by selling its shares through the domestic stock market in a way that will benefit the enterprise, often in a public offering. • IFC operates on a commercial basis. It invests exclusively in for-profit projects and charges market rates for its products and services. • To ensure the participation of other private investors, IFC generally subscribes to between 5 percent and 15 percent of the equity in a project. It is never the largest shareholder and will normally not hold more than a 35 percent stake. • Through a long-term relationship as a shareholder, IFC brings its market and sector knowledge to the client and works with government entities to maximize development impact and the client’s corporate value. • IFC’s presence as a shareholder contributes to raising the client’s international reputation and reassures the stakeholders. • IFC risks its own capital and does not accept government guarantees. However, to meet national ownership requirements, IFC shareholdings can be treated as domestic capital or local shares. 28 Presentation Title 14