Financing in a difficult jurisdiction Mark Tyler Finex 2012.

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Financing in a difficult jurisdiction Mark Tyler Finex 2012

Transcript of Financing in a difficult jurisdiction Mark Tyler Finex 2012.

Page 1: Financing in a difficult jurisdiction Mark Tyler Finex 2012.

Financing in a difficult jurisdiction

Mark Tyler

Finex 2012

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What is a “difficult” jurisdiction?

A great variety of perils in mining

Headline – grabbing perils are not always the

worst....

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What is a “difficult” jurisdiction

Potential perils

War and insurgency Revolution and insurrection Terrorism Expropriation or confiscation Frustration of contract Wrongful calling of guarantees Business interruption Changes in regulation or law Currency inconvertibility Inability to repatriate funds Criminal activity Government and administrative inefficiency International pressure

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Begin with the end in mind....

Exploration finance is materially different from

construction finance

Exploration risks are such that project financing is the least of one’s worries

What one does doing exploration is often difficult to unwind when it comes time to build the mine

Conduct exploration as if one were going to finance a mine

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Political risk defined

Government risks Instability risks

Firm specific risks• Discriminatory regulations • "Creeping" expropriation • Breach of contract

• Sabotage • Kidnappings • Firm-specific boycotts

Country specific risks• Mass nationalizations • Regulatory changes • Currency inconvertibility

• Mass labour strikes • Urban rioting • Civil wars• International conflict

Source : Robert Egge

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Political risk defined

Political risk doesn't include

• Sovereign risk – creditworthiness of hostcountry (although this may induce political risk)

• Company specific labour issues (hard to tell when it is a simple labour issue)

• Environmental issues

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Global political risk

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Political risk insurance

Brokers

Commercial PRI

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Political risk insurance

ECA/DFI

insurers

Asian Development Bank Bulgarian Export Insurance Agency (BAEZ) China Export & Credit Insurance Corporation (SINOSURE) Companhia de Seguro de Créditos, S.A. (COSEC) Compañía Española de Seguros de Crédito a la Exportación (CESCE) Compagnie Française d'Assurance (COFACE) Credit & Export Guarantee Fund (KREDEX) - Estonia Croatian Bank for Reconstruction & Development (HBOR) -ECICS Limited - SingaporeEximbank of Romania Export Credit Guarantee Agency - Oman Export Credit Guarantee Corporation of India Ltd (ECGC) Export Credit Guarantee Corporation of Zimbabwe (ECGC - Z) Export Credit Insurance Corporation (KUKE) - Poland Export Credit Insurance Organization - Greece Export Credits Guarantee Department (ECGD) Export Development Canada (EDC) Export Finance & Insurance Corporation (EFIC) - Australia Export Guarantee & Insurance Corporation (EGAP) - CzechExport Guarantee Fund of Iran Export-Import Bank of Thailand (Thai EXIMBANK) Export-Import Bank of the Slovak Republic Exportkreditnämnden (EKN) - Sweden Finnvera Plc - Finland Garanti-Instituttet for Eksportkreditt (GIEK) - Norway Hermes – GermanyHungarian Export Credit Insurance Ltd (MEHIB) Inter-American Development Bank Inter-Arab Investment Guarantee Corp (IAIGC)

Investment Guarantee Agency (IGA) - Bosnia-Herzegovina Islamic Corporation for Insurance of Investments and Export Credit (ICIEC) Israel Export Insurance Corp Ltd (ASHRA) Istituto per i Servizi Assicurativi del Credito all'Esportazione (SACE) Jordan Loan Guarantee Corp. Ltd (JLGC) Kazakhstan State Insurance Corporation for Export Credit Korea Export Insurance CorporationMalaysian Eximbank (MEXIM)Multilateral Investment Guarantee Agency (MIGA) Nippon Export and Investment Insurance (NEXI) Oesterreichische Kontrollbank Aktiengesellschaft (OEKB) - Austria Office National du Ducroire (ONDD) - Belgium Overseas Private Investment Corporation (OPIC) - USA Serbia & Montenegro Export Credit Agency (SMECA) Slovene Export Corporation Inc (SEC)Taipei Export-Import Bank of China (TEBC) – TaiwanUS Exim Uzbekinvest National Export-Import Insurance Company

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Political risk insurance

Commercial PRI providers

ACE Underwriting Agencies Limited AEGIS Insurance Services, Inc. ATRADIUS Advent Underwriting Ltd. African Trade Insurance Agency (ATI) American International Group (AIG) Global Trade & Political RiskAmlin Underwriting Ltd.Argenta Syndicate Management Ltd. Ascot Underwriting Ltd.Atrium Underwriters Limited Beazley Furlonge Ltd Benfield Brit Syndicates Limited Catlin Underwriting Agencies Ltd. Chaucer Syndicates Limited Chubb Political Risk Credit Guarantee Insurance Corporation of Africa Ltd Eksport Kredit Fonden (EKF) Faraday Underwriting Limited Garant Hiscox Liberty Syndicate Management Limited Limit Underwriting Limited Lloyd'sManaging Agency Partners Ltd.

Markel International Limited Miller Insurance Services Limited Novae Syndicates Limited PwC Deutsche Revision AG Sovereign Risk Insurance Ltd (SOVEREIGN) St Paul Travelers Syndicate Management Ltd Talbot Underwriting Ltd. Watkins SyndicateWellington Underwriting Agencies Ltd. Willis RE XL London Market Ltd. Zurich Emerging Markets Solutions (ZURICH) - USA

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Gold standard license agreement

• Direct agreement with the host stateo Not with the government o Some countries have legislation to permit this for each license – otherwise very difficult to achieveo Should survive change in law

• Agreement should be in some predictable legal system (English, New York, Ontario ...)

• Preferably disputes should be settled by arbitration • Clearly spell out tenure• Include fiscal stability• Provide for off-shore proceeds accounts and ability to hold

foreign currency• Spell out environmental responsibilities and rights

Easy to insure

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Good mining code

Can still insure change of law but it becomes

necessary to prove that changes adversely affect

the licence holder

• Mineral rights are an inalienable property right (essential for royalty finance)• Conditions to be granted right to mine should be clearly defined• Approval should be the default • Stability should be guaranteed – especially tax and regulatory framework• Should have as many “gold standard agreement” terms as possible – in particular clear up transfer pricing issues• Exploration almost always in terms of a mining code, not a direct agreement

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Show up with the mostest...

• Bilateral investment protection agreements• Multilateral institutions

‒ Insurers‒ Lenders

• Bilateral institutions‒ Insurers‒ Lenders

• Influential lending banks• Powerful multinational partners• Influential local partners• Local government shareholding

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Influential lenders

Multilateral lenders

ADB

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Influential lenders

Bilateral lenders

EDC

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When all else fails....

Equity markets will price in political risk but will

generally accept it

Nevsun case study

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Special topic - corruption

• Many financiers operate out of jurisdictions with laws against corruption in foreign

countries

• Will include prohibitions on encouraging corruption in loan agreements

• Might make it difficult for the mining company to operate

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Special topic - corruption

Source : Fraser Institute

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Special topic – “environmental” expropriation

• Hard to insure against unscientific or arbitrary environmental rulings – new focus on social impacts makes it even worse

• Bureaucratic processes can be interminable in jurisdictions where government agency rulings can be challenged in court

• Really difficult jurisdictions have expropriated properties using environmental pretexts

• Consider working with Equator principles in mind

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Special topic – international sanctions

• Prohibition on doing business with a particular country

• Prohibition on using (mostly US) currency in dealings with a particular country

• Hard to insure

• Try to spread the risks – finance from various sources, different off-takers etc

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Conclusions

• Begin with the end in mind

• Financing in a difficult jurisdiction isn't always clear cut

• Have alternatives

• Get a one-armed advisor with experience