Post on 22-Nov-2014
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Investing in Africa – Mining, Risk and Reward
Sacha Backes
Senior Investment Officer, Mining Investment Division
International Finance Corporation
4th Annual Africa Iron Ore Conference
Sandton, Johannesburg
3 & 4 June 2014
IFC: Part of the World Bank Group
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Conciliation
and arbitration
of investment
disputes
Guarantees of
private sector
investment’s
non-
commercial
risks
Interest-free
loans and
grants to
governments
of poorest
countries
Loans to
middle-income
and credit-
worthy low-
income country
governments
Solutions
in
private
sector
development
IBRD
International
Bank for
Reconstructio
n and
Development
IDA
International
Development
Association
IFC
International
Finance
Corporation
MIGA
Multilateral
Investment
and
Guarantee
Agency
ICSID
International
Center for
Settlement of
Investment
Disputes
Est. 1945 Est. 1960 Est. 1956 Est. 1998 Est. 1965
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IFC’s Global Reach
Paris
El Cairo
Tblisi
Moscow
Almaty
Istanbul
New Delhi
Hong Kong
Mexico City
Santo Domingo
Buenos Aires
Sao PauloJohannesburg
Nairobi
Dakar
Washington
HQ/Hub Offices
Country Offices
• 109 country and regional offices worldwide
• 4,015 staff (57% are based outside Washington DC)
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Snapshot of the industry
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Metal prices and oil
• Dramatic
recovery
• Reversal of
fortunes
• China growth
moderating
… or not?
6
Snap-shot of the mining industry
Miners on London AIM:
• Financings
• IPOs
• Delistings
• General investor sentiment
• Mining investor sentiment
7
2013 M&A activity – risk aversion
Africa was largely absent! Why?
Reference: Ernst & Young
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But ... Africa’s global mining role and potential
• Largest reserves in and
largest producer of
several metals globally;
• Africa has ~30% of global
reserves, but output?
• World Bank estimates
US$90b for African
mining in five years;
• Mining generates >20%
of gov’t revenues.
Summary
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Demand: constrained in short term, expected to grow in medium/long term:
» Population growth in EM and rising EM incomes;
» Urbanization and need for infrastructure;
» Continued, commodity-intensive growth in EM.
Supply: will be more expensive and difficult going forward:
» Upward pressure on costs of production: declining resource quality
outrunning technological and economy of scale off-sets;
» New sources of supply – long lead times, more complex deposits,
further from market, difficult local environments;
» Increased focus on African resources.
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The challenges
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“Hardware” challenges:
• Lack of core infrastructure:
• Power
• Rail
• Roads
• Ports
Summary of Challenges for the Mining Sector in Africa
“Software” Challenges:
• Political risk
• Bureaucracy / government capacity
• Underdeveloped legal / regulatory
environment
• Corruption
• Lack of skilled labor force
• Social / community issues
While not unique to Africa, both “Hardware” and “Software”
challenges are hampering the sector’s growth
Iron ore in Mauritania,
Guinea, Liberia , Senegal,
Cote d’Ivoire
Iron ore in R. of Congo,
Gabon, CAR, Cameroon
Coal in Mozambique,
Zimbabwe, South Africa,
Botswana, Namibia
Infrastructure – The Nature of the Challenge
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Vast bulk commodity resources locked in by lack of transport infrastructure
Lack of power also key issue for sector competitiveness across Africa
What is needed?
• Deep water ports
• Rail
• Reliable power
• Roads
What are the issues?
• Scale of projects
• Regulatory framework
• Government capacity
• Lack of coordination
• E&S issues
• Cross-border
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Infrastructure for iron ore – the Scale of the Challenge
Country# of Iron ore
mines
# of
Railways
Required
# New
Ports
required
Est. Cost of
Infra $bn% GDP
% National
Budget
Guinea 2 2 1 10.4 to13.6 91-118% 850-1,100%
Cameroon 2 2 1 6.6 to 8.5 14-18% 120-160%
Mauritania 3 2 0 3.8 to 4.9 53-69% 260-340%
Senegal 1 1 0 3.8 to 4.9 15-19% 90-120%
R. of Congo 3 3 0 3.3 to 4.2 18-23% 90-110%
Gabon 2 2 0 2.9 to 3.8 12-15% 65-85%
Liberia 2 2 0 1.9 to 2.5 80-103% 440-570%
Sierra Leone 3 3 0 1.6 to 2.1 24-31% 250-330%
Source: IFC, RBC Capital Markets, CIA World Factbook
Many of these high-potential projects require greenfield infrastructure, and
billions of dollars of investments, representing sizeable portions of host country
GDP and national budget, in countries that are not credit rated.
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Infrastructure – Maximizing efficiency and impacts
In most of these countries, greenfield multi-user infrastructure for mining can’t be
financed by the public sector, but requires a private sector lead: a major mining
company; or third party vehicle (ideally with a strong private sector lead) under a
PPP, whereby the public sector role is limited to the award and regulation.
Single-user
mining
infrastructure
Multi-user mining infrastructure
Users known at
Financial Close
Users unknown at
Financial Close
Multi–user multi-purpose infrastructure
Users known at
Financial Close
Users unknown at
Financial Close
Low complexity High complexity
Complexities of Multi-user/purpose Infra Advantages of Multi-user/purpose
• Complex contractual set up (tariffs, access, etc)
• Need agreement among many players
• Govt capacity to plan/agree framework
• Limited pool of investors
• Reduced predictability of cash flows
• Unlock significant resources in smaller mines
• Significantly increase development multipliers
• Reduce political risk
• Enhance long term sustainability of the
infrastructure
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Access to the mining infrastructure
Considering the various risks and challenges in Africa, it may be that a haulage
regime under a PPP reduces risks and simplifies structuring more than an access
regime, and thereby maximizes the opportunities for success.
Two access options:
• Access regime – Concessionaire provides access to (eg. tracks) other users
who use own equipment to transport goods (UK, Russia, Australia, Brazil); or
• Haulage regime – A principal operator acts as the sole transport service
provider for other mines or clients (no relevant examples to date);
• Balance: (i) protect debt and equity providers; whilst (ii) encouraging shared
use. Weakly drafted contractual language has often caused failure of shared-
use agreements, especially when infrastructure assets have high capacity
constraints (eg. single-track rail). Several African countries have shared use of
mining infrastructure in their mining codes, but in insufficient detail to be a basis
for structuring an agreement.
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Closing thoughts on mining infrastructure
1. High commodity prices unlocking new opportunities, but
major greenfield infrastructure needed to exploit them;
2. Government financing not an option in most SSA;
PPP schemes seem to be the only credible solution to
unlocking Africa’s untapped mineral resources;
3. But mining companies’ ability to build such greenfield
infrastructure unproven in Africa;
4. Bankability difficult to achieve, especially for multi-user
multi-user/purpose projects: (i) asymmetry of risk profile
between mine and infrastructure; and (ii) political
economy challenges given political instability, regulatory
risk and inexperience of Governments.
5. Greenfield shared-use PPP will have to rely on a large
anchor mine (>25mtpa) and strong sponsor; major
mining companies probably best equipped for this.
6. Will it work? … the jury is out!
Anchor client / sponsor
Tariff setting flexibility
Long-term take-or-pay
Independent regulator
Defined arbitration forum
Expansions through cost sharing
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“Software” Challenge – Political Risk/Govt Capacity
Resource Nationalism is #1 Perceived Risk for
Miners in 2012/2013
Example of Recent
Changes or
Proposed
Changes to Tax /
Mining Codes in
Africa
• Ghana: New mining tax regime with increased rates and windfall tax
• Guinea: New mining code with broader free carry for government
• South Africa: ANC panel of experts tax proposals (incl windfall tax)
• Zimbabwe: Indigenization policy for mining sector
Governments revisiting old, or establishing new, mining agreements / terms
– even with the best will it is difficult to assess what a “fair” deal is …
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“Software” Challenge - Social License to Operate
“South Africa wildcat strikes spread to
more mines”
“Mining communities ‘not benefiting‘ from the profits”
Bench Marks Foundation (South Africa)
Across the world, communities/stakeholders are more vocal about their
demands and more willing to push their claims
“Software” Challenge – Mitigating the Risks
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Build strong and
sustainable relationships
with local communities
Effective local stakeholder engagement (including
public disclosure of ESIA, etc) will reduce likelihood of
undue local expectations and mutual suspicion
Incorporate key
sustainability principles in
operations
Sound sustainability practices will reduce risk of
unexpected incidents and externalities
Transparency / frequent
dialogue with government on
project economics, timing,
etc
Establish fair/transparent partnership with government
(public disclosure of terms, scenario analysis for
revenue sharing, etc) to reduce political risk
Develop partnerships with
reputable groups / strategic
partners (majors, DFIs, etc)
Provides “stamp of approval” and support when things
go wrong
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IFC’s Recommendations to Mitigate the “Software” Risks
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African mining and IFC
IFC’s team includes financial professionals, mining engineers, environmental specialists,
development experts, and communications specialists.
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Investment Services Advisory Services AMC Parallel Equity Funding
• Equity
• Quasi-equity
• Loans
• Capital markets access and
mobilization
• Risk management
• Political risk cover
• Supplier development (linkages)
• Community Development
• Municipal Capacity Building
• World-class environmental and social
advice
• Resettlement & Indigenous Peoples
• Access to Community Development
Funding
• Large Equity Tickets
• Shorter Timeframe
• Similar or Same Terms
• Invests third-party capital alongside IFC
• No Additional Due Diligence
IFC Mining
Integrated Solutions Combining Capital and Expertise
Financing & Sustainability Expertise Under One
Roof
IFC Performance Standards:
Helping Clients Manage E&S Risks
PS1: Assessment and
Management of Social and
Environmental Risks and
Impacts
PS2: Labor and Working
Conditions
PS3: Resource Efficiency
and Pollution PreventionPS4: Community Health,
Safety and Security
PS5: Land Acquisition
and Involuntary
Resettlement
PS6: Biodiversity
Conservation and
Sustainable Management of
Living Natural Resources
PS7: Indigenous Peoples PS8: Cultural Heritage
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IFC in Africa Mining Infrastructure
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IFC leverages off its unique capabilities as well as the broader World Bank to
support “transformational” mining projects in Africa
World Bank Group
IFC Advisory Services
IFC Mobilisation
IFC
Mining
• Global portfolio of $8.4 bn
• $1.3 bn committed and
mobilized in FY13 in Africa
• Examples of recent IFC
Africa power deals:
• Azito (Ivory Coast),
• Thiko (Kenya)
• Kribi (Cameroon),
• Bujagali (Uganda)
• Examples of recent IFC
Africa transport deals:
• Lome Port Terminal (Togo)
• Kenya-Uganda Rail
• Dakar Toll Road (Senegal)
• TRL (Tanzania)
• Advise on PPP frameworks
• Help find strategic
infrastructure investors
• Assist on community
development/linkages
• IFC manages $6 billion in
private equity funds
• Ability to mobilize significant
debt pools (incl new $3 bn
debt fund from SAFE)
• Provide capacity building /
advice to governments
• Fund public sector projects
• Assist governments on
revenue management
IFC Power and Transport
…. by Commodity … Region
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IFC Mining Portfolio (44% equity)
31 Projects in 20 CountriesBook value as of March, 2014
Iron, 42%
Gold, 18%
Diamonds,18%
Industrial Ores, 12%
Other Metals, 8%
Copper, 2%
Sub-Saharan Africa,
78%
LAC,16%
Eastern Europe & Central Asia, 4%
Middle East & North
Africa, 1% World, 1%
Total Portfolio: $409 Million
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IFC in Africa – Select Mining Investments
IFC Hub Offices
IFC Country Offices
Cape Town
Johannesburg Maputo
Antananarivo
Lusaka
Nairobi
Kigali
Douala
N’Djamena
Lagos
Accra
Ouagadougou
Abidjan
Dakar
Cairo
Algiers
Rabat
Monrovia
Kinshasa
Addis Abala
Dar-es-SalaamBujumbura
Bamako
Bangui Juba
Morocco
Burkina Faso
Guinea
Liberia
Cote d’Ivoire
South Africa
Ghana
Botswana
Egypt
Ethiopia
Tanzania
Zambia
Mozambique
The End - Thank You
Sacha Backes
Senior Investment Officer
IFC Mining Investment Division
sbackes@ifc.org
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