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Investment and Risk Climate Impact on Mining Investment in Asia Karsten Fuelster - IFC Global Mining Division

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IBRDInternational Bank for Reconstruction and Development

IDAInternational Development Association

IFCInternational

Finance Corporation

MIGAMultilateral

Investment and

Guarantee Agency

To promote institutional,

legal and regulatory

reform

Governments of poorest

countries with per capita

income of less than

$1,025

- Technical assistance

- Interest Free Loans

- Policy Advice

To promote private

sector development

Private companies in

member countries

- Equity/Quasi-Equity

- Long-term Loans

- Risk Management

- Advisory Services

To reduce political

investment risk

Foreign investors in

member countries

- Political Risk Insurance

Est. 1945 Est. 1960 Est. 1956 Est. 1988

Role:

Clients:

Products:

To promote institutional,

legal and regulatory

reform

Governments of member

countries with per capita

income between $1,025

and $6,055.

- Technical assistance

- Loans

- Policy Advice

IFC is a Member of the World Bank Group

Shared Mission: To Promote Economic Development and Reduce Poverty

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Presentation Title 3

IFC – over $73 billion Invested in Emerging Markets since 1956

• Largest multilateral source of loan/equity financing for the emerging markets private sector

• Founded in 1956 with 179 member countries

• AAA rated by S&P and Moody’s

• Equity, quasi-equity, loans, risk management and local currency products

• Takes market risk with no sovereign guarantees

• Promoter of environmental, social, and corporate governance standards

• Resources and know-how of a global development bank + flexibility of a merchant bank

• Holds equity in over 800 companies worldwide

IFC FY07 Highlights

Portfolio $25.4 billionCommitted $10 billionSyndicated $1.8 billion# of companies 1,400+# of countries 69+

South Asia

13%

Global

1%

Sub-Saharan

Africa

17%

Europe &

Central Asia

22%

Latin

America

21%

Middle East &

N.Africa

15%

East Asia and

the Pacific

11%

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IFC in Asia and Pacific

IFC Hubs

IFC Country Offices

PACIFIC

OCEAN

INDIAN

OCEAN

Ulaanbaatar

AlmatyBishkek

Tashkent

Khodjand

DushanbeKabul

Islamabad

KarachiNew Delhi

Mumbai

Colombo

Chennai

Beijing

Tokyo

Chengdu

GuwahatiDhaka

HanoiVientiane

Ho Chi Minh CityPhnom Penh

Bangkok

Hong Kong

Manila

Davao CityBanda Aceh

JakartaMakassar

Dili Port Moresby

Sydney

Denpasar

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The IBRD (‘World Bank’) and IFC Work Togetherto Promote Sustainable Mining in Developing Countries

World Bank Mining Policy Division

Works with Governments to facilitate -

• Investor-friendly policies

• Reform and modernization of Mining Sector

• Privatization of State-owned Assets

• Community Relations & Equitable Rent Sharing

IFC Mining Investment Division

Works with Private Companies to ensure-

• Sound Economic fundamentals

• Sufficient Financial Strength

• Environmental Rigor

• Sensitivity to the Community

Global Mining Group

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IFC’s Current Mining Portfolio

US$825 million for IFC’s account (31.12.08)

Gold36%

Iron Ore8% Aluminum

13%

Platinum25%

Copper7%

Africa51.4%

By Product By Region

Chrome5%

Other2%

Nickel1%

Zinc1%

Silver1%

Latin America 8%

Asia1%

Eastern and Central Europe

11%

Africa79%

World 1%

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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.

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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 fearedthan real

•Unrelenting civil society attention

•Amplified brand and reputational risk

Industry context

…and yet no sector is more important to development than ours.

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IFC Value Addition in Mining

� Equity

� Equity Participation

� Fixed/Floating Rates, Local Currencies

� Up to 15 year Loan Maturity

� Flexible Amortization Profile

� Catalyst for other Investors and Lenders

� Capital Mobilization

� Extensive Local Office Network

� Local Transaction Experience

� World Bank Synergies

� 40+ Years of Sector Expertise

� Greenfield

� Expansion/Modernization

� Corporate Strategy

� Access to International Investors

� Technical Advice

� Government Relations

� Neutral broker Role

� Reduced Risk of Expropriation, Breach of Contract, Convertibility

� World Bank Synergies

� Witholding Tax Benefit

� Advice on Environmental and Social Best Practices

� Equator Principles Modeled after IFC Standards

� Local Consultation and Disclosure

� Local Supplier Development

� Environmental/ Social Advice

� Corporate Governance

� Local Economic Development

� HIV/AIDS Prevention

� Community Development Funding

Sustainability Toolkit

Environmental & Social Risk Management

Country Risk Mitigation

Global Mining Expertise

Regional Knowledge

Long-term Competitive Financing

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Environmental and Social Risk Mitigation

•Polution prevention

•Cleaner production

•Socioeconomic/workplace/

labor issues

•Land acquisition/resettlement/

compensation

•Indigenous peoples

•Biodiversity

•Community Development

& Consultation

•Cultural property

•Impact assessment

•E&S management systems

•Health & Safety

•Gender empowerment

In-house environmental and social specialists to assist clients with:

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Sustainable Approach to Mining No Longer anAltruistic 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

A “Social License to Operate” does affect the bottom-line

A condition of finance/investment – Equator Principles, World Bank Standards

To ensure long-term success, mining operations must be strategic, transparent & equipped with qualified human resources

Government

(local, provincial,

national)

Investors Community

Non-

governmental

organizations

Local business

Mining

Company

Uninterruptedoperations

Effective local stakeholder management happens by design

Many Stakeholder & “Legacy” Issues are Avoidable with Good Planning• Land claims

• Local vendor pressures

• Lack of alternative employment

• Encroachment onto mining area

• Unbalanced benefit sharing

• Mine closure anxiety

• Road blocks

• Costly legal proceedings

• Inefficient local contracting

• Security/SHE violations

• Artisanal mining

• Interrupted operations

• Reputational risk

Common “Symptoms” Impact

Systematic planning, Best Practice can pre-empt these issues

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Local Stakeholder Planning Should Occur EarlyLocal Stakeholder Planning Should Occur EarlyLocal Stakeholder Planning Should Occur EarlyLocal Stakeholder Planning Should Occur EarlyKey Measures

• Baseline analyses / documentation

• Needs assessments / mapping by

professionals

• Community consultation,

participatory processes

• Land acquisition per Best Practice

• Priming the Prime Contractor re:

social impact mitigation & local

vendor engagement

Benefit Downstream

• Evidence in face of (NGO) critics

• Addresses root causes of needs

• Secures community consent &

fosters local ownership of

activities

• Avoids costly land claims

• Mitigates negative social impact

of construction & local vendor

pressures

Managing Expectations is Key 13

Presentation Title 14

IFC advice and assistance includes:

• Stronger local support for projects

• Social license to operate and mitigation of social risks

• Management of reputational risks

• Minimized disruptions for project effected people

Local Economic Development Programs – Business Rationale

• Spreads projects’ positive impacts among members of host communities

• Helps to provide alternative livelihoods to local populations

• Increases effectiveness of compensation packages

Supporting Local Economic Development:

Leads to:

• 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

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Issue

Linkages Solution

•Physical and economic dislocation of people

•Low level business skills of local entrepreneurs, mostly former farmers

•Supplier Development, Local Economic Development, Institutional Capacity Building, HIV/AIDS and Gender

•International partnership -Transferring lessons and good prqctices from other projects

Reducing Social Risk - Example: Supplier Development

IFC Contact InformationIFC Contact Information

Karsten FuelsterSenior Investment OfficerOil, Gas, Mining and Chemicals DepartmentPhone: +62 21 5299 3001Email: kfuelster@ifc.orgFax: +62 21 5299 3002

IFC East Asia Region:IFC HQ (Washington DC):

Bill BulmerGlobal Head Mining InvestmentOil, Gas, Mining and Chemicals DepartmentPhone: +1 202 473 8750Fax: +1 202 958 5323 E-mail: wbulmer@ifc.org

Thank you!

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IFC’s Performance Standards on Social and Environmental Sustainability: Best Practice Tools in Risk Management

Implementing the Performance Standards GuardsAgainst 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

Presentation Title 18

•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

Our advice and assistance includes:

• 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

Local Supplier Linkages – Business Rationale

• Reduce delivery times

• Control inventories

• Increase number of local jobs created by project

• Spreads projects’ positive impacts among members of host communities

Using local suppliers allows clients to:

Leads to:

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Presentation Title 19

Social Advising: Stakeholder Capacity Building

Client need

Solution

Outcome

Empower local mine stakeholders to participate in public consultation and disclosure

processes

•Capacity building workshop

•Capacity building and stakeholder forum

•Capacity building program delivered in several locations

• Improved information flow

• Broadened participation

• Extended opportunity for dialogue

• Improved ability to respond to questions

• Improved capacity in the company

Local stakeholders discuss mining project

Additional Slides

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Presentation Title 21

IFC’s Products and ServicesSeniorDebt

Global TradeFinance Program

StructuredFinance

MezzanineFinance

PrivateEquity

•On-lending

• Liquidity management

• Acquisition financing

•Warehousing facilities

• Syndicated loans

• Partial credit guarantees

• Securitization

• Bond underwriting

• Credit Enhancement

• Convertible debt

• Subordinated debt

• Other Tier II instruments

• Common shares

• Preferred shares

• $1 billion program

•Guarantees to issuing banks

• 46 issuing banks in 24 countries

• 92 confirming banks in 62 countries

• $579 million of issued guarantees in first 12 months

AdvisoryServices

• Corporate governance

• Risk management

• Small and medium business banking

• Energy efficiency finance

• Local supplier development

• Community development

SustainableFinance

• Carbon finance

• Renewable energy

• Supply chain financing

• Corporate governance financing

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Senior Debt & Equivalents

Equity

Mezzanine / Quasi Equity

• 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• Range of security packages suited to project/country• Mobilization of funds from other lenders and investors, through

financings, syndications, underwritings and guarantees

• Subordinated loans• Income participating loans• Convertibles • Other hybrid instruments

• Corporate/UJV •• 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

Financial Products - From Equity to Debt

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Presentation Title 23

How We Finance Mining Projects

•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.

Project Type IFC Investment

Greenfield, total cost

less than $50 million

Greenfield, total cost

more than $50 million

Expansion or rehabilitation

Greenfield, expansion,

rehabilitation

Up to 35% of project cost

for IFC’s account

Up to 25% of project cost

for IFC’s account

Up to 50% of project cost

100% project cost for IFC

and participating banks’

accounts

Presentation Title 24

IFC’s Project Cycle

Early Review

• Client needs determined

• Contribution of project to development assessed

• Project screened for potential problems

• Site visit

• Mandate letter

Due Diligence Negotiation DisclosureInternal

Approvals and Commitment

Disbursement

• Assessment of business potential, risks, opportunities

• Evaluation of financial and economic soundness

• Compliance with IFC’s social and environmental performance standards reviewed

• Conditions of disbursement and covenants, performance and monitoring requirements, and action plan agreed

• Environmental and social information disclosed

•Opportunity for public comment

• Board consideration

• Board approval

• Legal review

• Signing of legal documents

• Loan disbursed on agreed schedule, according to negotiated terms and conditions

We Agree on a Specific Timeline to Meet Client’s Needs

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Presentation Title 25

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

Presentation Title 26

Structured Finance

•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.

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:

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Presentation Title 27

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

Presentation Title 28

Equity and Quasi-Equity

• 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.

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.