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World Mines Ministries Forum

Managing 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 Projects

Political Risk

Risk from a Geo-Political actions that can impact a project’s 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 Projects

Mitigating Political Risk

There are six broad risk mitigation categories for Political Risks:

1. Joint Ventures

2. Good Corporate Citizenship and High Environmental Standards.

3. Portfolio (Geographic) Diversification

4. International Investment Agreements

5. Security Management

6. 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 Projects

Mitigating Political Risk – Joint Ventures

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

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

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

PROS

– In-house solution

– Positive community relationship minimizes the risk of local sentiments against project

– Attracts local pool of talent

CONS

– Presupposes rational host government

– Presupposes rational NGO’s

– Potential high cost of implementation and management

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Managing Risk in Mining ProjectsMitigating Political Risk – Portfolio Diversification

PROS

– In house solution

– Geographic diversification diminishes impact of a single loss

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

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Managing Risk in Mining ProjectsMitigating Political Risk – International Investment Agreements

PROS

– Bilateral or Multilateral agreements avoid political wrangling over a disputed project

CONS

– Only few countries participate (Canada has 22 FIPA’s 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

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Managing Risk in Mining ProjectsMitigating Political Risk – Security Management

PROS

– Sometimes an in house solution

CONS

– Only respond to small, less catastrophic losses (short disruptions)

– If outsourced, high degree of trust and due diligence is needed

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Managing Risk in Mining ProjectsMitigating Political Risk – Insurance (PRI)

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)

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

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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

RANK COUNTRY

1 AUSTRALIA

2 CANADA

9 ARGENTINA / BOTSWANA

11 CHINA

12 NAMIBIA

18 SOUTH AFRICA / ZAMBIA / KAZAKHSTAN

21 PAPUA NEW GUINEA

22 RUSSIA

23 BOLIVIA

24 INDONESIA

25 DEMOCRATIC REPUBLIC OF CONGO

OBS: VENEZUELA AND ZIMBABWE EXCLUDED DUE TO EXTREME RISK

SOURCE: BEHRE DOLBEAR 2008 RANKING

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Questions ?

Thank You

Daniel Galvao

Sr. Vice President – Marsh Inc.

(416) 868.7988

Daniel.Galvao@marsh.com