Outlook for Mining Projects

John R. Craynon, PhD, PESenior Mining Engineer

VMA Market Outlook WorkshopAugust 3-4, 2017

Disclaimer

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This presentation, particularly the comments about the domestic mining outlook, is outside the scope of Dr. Craynon’s position at EXIM.  Thus, the opinions, positions, and comments in this presentation represent his views alone and should not be taken as the official position of EXIM or the U.S. Government.

History of the Export-Import Bank of the United States

o Founded in 1934, the Export-Import Bank was organized by Franklin D. Roosevelt under the name Export-Import Bank of Washington. The stated goal was "to aid in financing and to facilitate exports and importsand the exchange of commodities between the United States and other Nations or the agencies or nationalsthereof." The Bank's first transaction was a $3.8 million loan to Cuba in 1935 for the purchase of U.S. silveringots.

o The Export-Import Bank became an independent agency in 1945. The Bank’s name was changed to "Export-Import Bank of the United States" in 1968.

o Over the years, the Export-Import Bank helped finance several historic projects including the Pan-AmericanHighway, the Burma Road, and post-WWII reconstruction.

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Export-Import Bank of the United States

o The Export-Import Bank of the United States (EXIM) is the official export credit agency of the United States.EXIM is an independent, self-sustaining Executive Branch agency with a mission of supporting American jobsby facilitating the export of U.S. goods and services.

o When private sector lenders are unable or unwilling to provide financing, EXIM fills in the gap for Americanbusinesses by equipping them with the financing tools necessary to compete for global sales. In doing so,the Bank levels the playing field for U.S. goods and services going up against foreign competition in overseasmarkets, so that American companies can create more good-paying American jobs.

o Because it is backed by the full faith and credit of the United States, EXIM assumes credit and country risksthat the private sector is unable or unwilling to accept. The Bank’s charter requires that all transactions itauthorizes demonstrate a reasonable assurance of repayment; the Bank consistently maintains a low defaultrate, and closely monitors credit and other risks in its portfolio.

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The Role of Export Credit Agencies

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Promote trade and other national interests

Important in infrastructure development

Key in emerging markets

Lower cost financing option

Cover political risks and enhance relationships

• Project “validation”

• Disincentive for default or expropriation

Pueblo Viejo Dominicana Corp. – Dominican RepublicEx-Im Support - $375 million – Limited recourse project finance for an open-pit gold mineproject which also produces silver and copper.Downer EDI - AustraliaEx-Im Support - $58 million - Loan guarantee for Downer EDI Mining Pty. Ltd. to supportRoyal Equipment’s remanufacture of off-highway mining trucks. Royal Equipment was asmall business exporter that was new to EXIM at the time.

Oyu Tolgoi - MongoliaEx-Im Support - $367 million - Limited recourse project finance for an open-pit and underground copper mine that will produce concentrate containing copper, gold, and silver. Once developed, the mine will rank as one of the largest copper mines in theworld. Roy Hill – Australia Ex-Im Support - $694 million - Limited recourse project finance for an open-pit iron ore mine which included the construction and operation of an integrated supply chain spanning exploration and mining extraction activities, processing and beneficiation, rail transport and port operations.

EXIM SECTOR EXPERTISE – Mining

Oyu Tolgoi - Mongolia

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EXIM SECTOR EXPERTISE – Mining

Mining - over $2.6 billion of EXIM Bank financing in past 20 years

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Project Mineral Country EXIM F inancing($mi l l i ons)

2013 Oyu Tolgoi LLC Copper/Gold Mongolia $3672013 Roy Hill Holdings Pty. Ltd. Iron Australia $6942011 Downer Edi Mining Pty Ltd. Iron Australia $582010 Pueblo Viejo Dominicana Corp. Gold Dominican Republic $3752010 Minera y Metalurgica del Boleo Copper-Cobalt-Zinc Mexico $4202010 ANZ/Leighton Holdings Ltd. Coal Australia $152004 Minera Argentina SA/Veladero Gold Argentina $771997 PT Newmont Nusa Tengarra/Batu Hijau Copper/Gold Indonesia $4251996 Minera Alumbrera Ltd. Copper/Gold Argentina $228

TOTAL: $2,658

Project Mineral Country EXIM F inancing($mi l l i ons)

2013 Oyu Tolgoi LLC Copper/Gold Mongolia $3672013 Roy Hill Holdings Pty. Ltd. Iron Australia $6942011 Downer Edi Mining Pty Ltd. Iron Australia $582010 Pueblo Viejo Dominicana Corp. Gold Dominican Republic $3752010 Minera y Metalurgica del Boleo Copper-Cobalt-Zinc Mexico $4202010 ANZ/Leighton Holdings Ltd. Coal Australia $152004 Minera Argentina SA/Veladero Gold Argentina $771997 PT Newmont Nusa Tengarra/Batu Hijau Copper/Gold Indonesia $4251996 Minera Alumbrera Ltd. Copper/Gold Argentina $228

TOTAL: $2,658

Economic Impact Analysis• Global capacity, demand, trade• US capacity, demand, trade• Pricing, market forecasts, historic trends

Engineering and Environment Analysis• Information on deposit• Information on commodity

- Global trade- Country and world production and demand

• Technical review of the operation and impacts

Due Diligence and Risk Reduction at EXIM

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Economic Impact Analysis• Global capacity, demand, trade• US capacity, demand, trade• Pricing, market forecasts, historic trends

Engineering and Environment Analysis• Information on deposit• Information on commodity

- Global trade- Country and world production and demand

• Technical review of the operation and impacts

Due Diligence and Risk Reduction at EXIM

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Main Messages

o Mining executives and industry analysts have predicted an industry upturn in the next 1 to 2 yearso Commodity prices have not been strongo A number of large projects and expansions will be coming online before 2020o Exploration is growing, particularly in emerging economieso Availability of capital for expansion may be limitedo Models for mine financing may be evolving

o Changes in government view of mining is seen as generally positiveo Some issues in cost of production and other factors in the USo View of US on global market is cloudy due to uncertainty about tradeo Participation of capital providers in US mining projects may be difficult to arrange

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Domestic mining outlook is mixed

Global mining outlook is generally optimistic

Outline of Presentation

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Global mining outlookCommodity price trendsNew projects and increased supplyCapital availability and financing issuesDomestic mining outlook

Global Mining Outlook in 2017

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Many presenters at PDAC in March gave optimistic views for the next 5 years Commodity price trends may be less important than longer term supply curves, according to someSME Keynote presentation in February was upbeat and positive about domestic and international miningLots of optimism at May SME Mine Finance conference in NYC

Commodity Price Trends

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Increases in early 2017 then steady erosionTrends projected to continueProjects affecting supplyMarket manipulationDemand side issues

New Projects and Increased Supply (Copper)

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Underground mining at Oyu Tolgoi (Mongolia), Chilean operations (e.g., Chuquicamata) and othersIncreased production in Africa, South America and AsiaCobre Panama and other new minesEnd of labor issues at some operationsImproved processing and recoveries

Capital Availability and Financing Issues

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Perceived high risksLow IRRs and long timeframesUncertainties in market, demand, etc.Lack of capability to do mining due diligence“Cycle” shockLack of enthusiasm by private investors

Financing and Risks – Impacts to Mining

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Several categories of risks

• Entity

— Sponsor, lenders, contractors, governments, suppliers, investors, offtakers/purchasers, multilateral financial institutions

— Transactional

— Preliminary (feasibility studies, due diligence)

— Engineering and construction

— Startup

— Operation

Financing and Risks (cont.)

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• Financial

• Country/political

• Labor/civil

• Legal

• Environmental, regulatory

• Refinancing

• Force Majeure

• Liability

Mining-specific Credit Attributes Considered

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Certain areas receive additional scrutiny: Sponsor history of building and operating similar scale projects Completion and cost overrun support Sponsor credit quality Proposed completion regime (technical, environmental, financial, operating) Mine life vs. loan life – Adequate reserve tail after final repayment Mine plan impact on cash flow volatility – Less volatility is good Project break-even costs including debt repayment relative to long-term historical commodity price Resource assessment quality – Proven preferred over Inferred and Indicated Off-take contractual arrangements similar to loan life or mitigants. Off-taker credit quality Environmental and Social Impact Assessment and management Commodity price risk management – Hedging/mandatory prepayments/sponsor support

Risk Mitigation through Financing

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Terms of financing can provide for risk mitigation

• Ensuring completion

• Monitoring and oversight of operations

• Readjustment for financial changes

• Implicit and explicit address of political and country risk

• Guarantees

• Security interests and insurance

Site-specific concerns impact capital availability

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There are no “one size fits all” solutions

• Detailed and complete due diligence required

• Completion tests tailored to the operation (can be contentious)

• Appropriate and direct requirements for the technical, environmental, compliance, political and other risks of each operation

• Built on experience, but may favor new opportunities

US Domestic Mining Outlook 2017

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Administration more favorable to miningLow grade deposits in US make mining more susceptible to commodity pricingHigher labor and compliance costs and no currency advantage Capital availability and financing issues specific to USPublic distaste for mining in USTrade issue uncertainties

Summary and Observations

o Industry leaders and pundits have declared that good times are here

o Optimism offset by commodity price issues and capital availabilityo Prices may be “controlled” by one countryo New models for mine financing may be emerging

o While the political leadership is more positive towards mining, other factors may make the US adifficult place to mine

o Several uncertainties also impact how much growth in domestic mining will occur

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Domestic mining looks to be more questionable

Mining may be growing internationally

Acknowledgements

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References and sources for all presented information available upon request

John R. Craynon, PhD, PE

Senior Mining Engineer811 Vermont Ave NWWashington, DC 20571Phone: +1 202-565-3578Email: john.craynon@exim.gov

1-800-565-3946 | exim.gov

Engineering & Environment Division