INDUSTRIAL METALS, MINERALS AND MINEABLE ENERGYINVESTMENT SUMMIT 2010

LONDON CHAMBER OF COMMERCE & INDUSTRY ● WEDNESDAY, 30 NOV 2010

www.ObjectiveCapitalConferences.com

Funding industrial metal projects Sacha Backes – New Business Dev’t Head, IFC

Mining Financing in

Frontier Countries

Dr. Sacha BackesOil, Gas, Mining & Chemicals DepartmentInternational Finance CorporationWorld Bank Group

Industrial Metals, Minerals & Mineable Energy Investment SummitLondon Chamber of Commerce & Industry

Wednesday 3 November, 2010

Contents

1. Global Market context • Demand• Supply• Access to financing

2. Frontier countries3. What you can do?

The Crisis and Government responses

Impact

• Bankruptcies, debt and equity markets closed/constrained, demand and trade collapse, supply constraints, unemployment

Global responses

• Monetary easing: low interest rates, liquidity supply through packages ( Fed., ECB), QE

• Fiscal policies to stimulate domestic demand: govn’t spending; tax adjustments, etc

Fiscal Stimulus Packages

－ U.S. ~US$ 800 billion 5.5% GDP 　

－ China ~US$ 600 billion 6.9% GDP

－ Europe ~US$ 200 billion

－ Japan ~US$ 100 billion 2.3% GDP

－ Mexico ~US$ 32 billion 4.7% GDP

－ India ~US$ 4 billion 0.3% GDP

－ Australia ~US$ 10 billion 0.9% GDP

－ Argentina ~US$ 13 billion 3.9% GDP

Global economic outlook

• Global recovery? GDP growth of 5.2% in 2007 vs 4.6% in 2015

• China and India led and leading global demand

• Sustainable recovery dependent on successfully phasing out of stimulus packages and resurgence of underlying real demand – but OECD austerity budgets

• Fiscal and monetary interventions rather than structural reform – risk to long term OECD potential growth Source: IMF, World Economic Outlook, Apr 2010

-8%

-4%

0%

4%

8%

12%

2007a 2009a 2011f 2013f 2015f

GD

P gr

owth

,co

nsta

nt p

rice

s (%

)

GDP growth - advanced economies

United States

Japan

Germany

United Kingdom

World

-8%

-4%

0%

4%

8%

12%

2007a 2009a 2011f 2013f 2015f

GD

P gr

owth

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s (%

)

GDP growth - emerging economies

China

India

Russia

Brazil

World

Labor markets

2%

4%

6%

8%

10%

12%

14%

2007a 2008a 2009a 2010f 2011f

Une

mpl

oym

ent (

%)

Unemployment (%)

Newly industrialized Asian economies

Major advanced economies (G7)

Euro area

Ireland

United States

• Dramatic increase in unemployment in advanced economies since the crisis, especially in Europe

• US labor costs down and structural gaps emerging

• Lower unemployment in emerging Asian economies

• Growth potential from BRICs, esp. China - inland infrastructure stimulus will outlive OECD stimuli

• China asset bubbles concerns and Renminbi appreciation impact ? Source: IMF, World Economic Outlook, Apr 2010

China rapidly

catching up

3.44.9

6.07.5

9.4

4.45.1 5.4 5.7 6.2

14.1 14.315.4 16.8

18.2

0

4

8

12

16

20

2007a 2009a 2011f 2013f 2015f

GD

P, 'c

urre

nt' p

rice

s(U

S$ tr

illio

n)

GDP of developed vs emerging economics (GDP)

China

India

Russia

Brazil

United Kingdom

Germany

Japan

United States

6.1%8.5% 9.2% 10.3% 11.5%

7.9%8.7% 8.3% 7.9% 7.6%

25.4%24.6% 23.7% 23.0% 22.3%

0%

5%

10%

15%

20%

25%

30%

2007a 2009a 2011f 2013f 2015f

GD

P, 'c

urre

nt' p

rice

s(%

of g

loba

l)GDP of developed vs emerging economics (% of global)

China

India

Russia

Brazil

United Kingdom

Germany

Japan

United States

• Growth expected across the board

• 1995 developing and emerging economies accounted for 35% of global output (PPP) … today it is around 47%.

• Declining US global share of GDB based on emergence of BRICs, though mainly China

Source: IMF, World Economic Outlook, Apr 2010

Key metal consuming industries• Autos and construction account for around 50% of global

consumption of four key base metals (also major consumers of iron and steel). Auto industry was one focus of the US stimulus package.

• Chinese auto sales continue to increase dramatically and construction continues to be a key element of Chinese stimulus. Chinese Stimulus boosted Chinese demand through infrastructure projects focused on inland areas.

Chinese consumption and Stimulus

• Largest single global consumer and producer; but also stock-building

• Stimulus package substantially boosting Chinese demand, through in-land infrastructure projects, not only coastal areas

Stimulus

CopperAluminiumZincSource: Fairfax, Global Insight, Bloomberg, American Zinc Association, ILZSG

Additional demand from stimulus over next 2 yrs,

MT1.251.841.13

Metals used in Chinese construction

(2008, MT)

1.842.7

1.66

MT % global consumption

Copper 18.2 5.2* 28%Aluminium 39.2 13.7 35%Lead 8.6 2.8 32%Zinc 11.5 3.7 32%Steel 1,370.0 450.0 33%Source: Fairfax, ANTAIKE, Rio Tinto, ABARE, ILZSG* includes purchases by SRB and other investors. W/o those purchases 2008 demand was 4.775 MT

World refined consumption

2008 (MT)

Chinese consumption

MT % global production

MT (Metal content)

% global production

Copper 18.3 3.8 21% 1.0 6%Aluminium 39.7 13.5 34%Lead 8.7 3.1 36% 1.5 41%Zinc 11.7 3.9 33% 3.2 28%Steel 1,360.0 513.0 38%Source: Fairfax, ANTAIKE, USGS, ILZSG, ICSG

Refined production Mine productionChinese productionWorld refined

production 2008 (MT)

Auto sales growth World* China2007 2.8% 22.3%2008 -3.1% 6.6%2009 -4.0% 33.2%

2010q -9.0% 19.0%Source: Bloomberg, OICA

* 57 major countries

• The deterioration in capital and financial markets since April reflect an increasing recognition of the contraction to aggregate demand implied by OECD spending cuts underway in much of the developed world. BUT true impact on real economy will only be felt in coming months.

• However, the forecast growth in emerging and developing economies, especially China, less burdened by fiscal and debt problems, which today constitute nearly half of global output, may provide for some global economic respite, though some short / medium term concerns exist.

• But the extent to which this can be sustained is not clear, but sustained slow and steady growth generally expected.

Summary

Contents

1. Market context • Demand• Supply• Access to financing

2. Frontier countries3. What you can do?

Exploration1. Future supply based on current

exploration efforts

2. Junior companies accounted for ever increasing share of exploration activity until 2008

3. Substantial reduction in spending by juniors during crisis – closed equity markets, heavily discounted junior stocks, cash preservation

4. Juniors expected to lead again in 2010/11 on back of strong metal prices and available equity financing

5. M&A activity started slowly during / after crisis, but now …

Source: Metals Economics Group (MEG)

0

2

4

6

8

10

12

14

US$

billion

Total exploration budget

0%

10%

20%

30%

40%

50%

60%Global exploration budgets

Majors IntermediariesJ uniors Government

% o

f to

tal i

nves

tmen

t

•Gold M&A (not all completed) – 1) Newcrest (Lihir, US$ 8.4 bil), 2) Kinross Gold (Red Back Mining, US$ 7 bil), 3) Goldcorp (Andean Resources, C$ 3.6 bil), 4) Eldorado Gold (Sino Gold Mining, C$ 2 bil), 5) Fronteer Gold (AuEx Ventures, US$ 238 mil), 6) Eldorado Gold (Brazauro Resources, C$122 mil), 7) Apollo Gold (Linear Gold, C$ 102 mil), 8) Kinross Gold (Underworld Resources, US$98 mil), 9) Serabi Mining (Brazil, Eldorado Gold to take 26.8% stake), 10) Goldstone Resources (Bendigo Resources to take 20% stake), 11) Central African Gold (Zimbabwe, taken over by New Dawn Mining),

•Other partnerships: BHP (Potash Corp, US$39 billion, SinoChem?), African Minerals (Shandong Iron and Steel Grp to take 25% project stake for off-take or dividends), Toledo Mining (Jinchuan Group, China’s largest Ni producer, to take 29.5% stake), Bellzone Mining (China International Fund re Kalia iron project in Guinea), Herencia Resources (Nystar to take 10% stake re Paguanta Zn-Ag-Pb-Au project in Chile), Creat Resources (formerly Zeehan Zinc, takes 20% stake in eGalaxy Resources, re tantalum / lithium), Jubilee Platinum & Sylvania Resources (S Africa, PGM processing JV), Sundance (China Harbour and China Rail re Mbalam Fe Project Cameroon and Congo)

• 2010: Gold 40%, Copper 16%, Iron ore 7%, coal 7%, silver 6%• 2010: Canadian / American firms 49%, Asian firms 21% • Chinese strategic partnerships for off-take / resource security

2010 mining M&A – very busy!

Mine DevelopmentConstraints:

Resources - Large/high grade/low cost deposits increasingly rare

Host country – Remaining deposits increasingly located in poorly governed, unstable and/or frontier countries (DRC, Guinea, Mongolia)

Infrastructure - Many deposits in remote areas with major infrastructure requirements

Regulation - Increasingly tight host country regulatory constraints (Zambia, Tanzania, S Africa, Zimbabwe, Russia)

E&S: More rigorous environmental standards, and local communities increasingly aware of the impact of mining and asserting their right for a say in mining development

Metal prices & oil

• Strong metal price recovery since Jan 2009, but costs have also risen.

• Fall in oil price reduced energy cost of production for producers during crisis.

• Price glitch since sovereign concerns surfaced in April / May

• Gold and Silver continue safe haven trend – unwinding of hedge books, low interest rates, possible further US QE

• Industrial metals following growth forecasts

Overall impacts

Likely crisis induced slower pace of new development and metal supply than in the past, against strong demand recovery

Creeping increase in capex and opex; costs seem to have been sticky downwards in 2009, probably in part due to national stimulus packages.

Long term supply price curve likely to be pushed up, though ultimate impact will depend on demand trends / substitutes, etc.

Contents

1. Market context • Demand• Supply• Access to financing

2. Frontier countries3. What you can do?

Mining equities on AIM and market volatility

• Steady capital markets recovery through to April 2010, followed by sovereign debt concerns and fear of contagion.

• Austerity packages have helped re-assure markets, but will dent growth. How many more skeletons in the closet?

Ernst & Young – Mining Eye Index

Dow Jones Industrial Average – Volatility

index

Mining equity financing on LSE AIM

• 14 new listings since Q4 2009!• Lowest level further raisings in Q4

2008 / Q1 2009 … ramp up in Q2, Q3, Q4 2009 on back of recovering share prices, and recent lull!

• Dilution concerns (gold, copper, silver exception) and focus on value adding projects; Some indications of more investor appetite on TSX and ASX.

• New: Q1: Scotgold Res. (Scotland), Stellar Diamonds (Guinea, Sierra Leone), Edenville Energy (Tanzania), Pathfinder Min. (CIS, Africa), Q2: Bellzone Min. (Guinea), Kibo Min. (Tanzania), Metminco (Peru Chile), Q Resources (‘Africa’), Ncondezi Coal (Mozambique). Q3: Horizonte (Brazil), CAML (Kazakhstan) (frontier focus!!)

Debt Syndications

• Syndications still down compared to pre-crisis, in numbers and volume

• Covenants tightened and spreads widened during crisis … recently leveled out; may increase again with renewed uncertainties

• DFIs often needed for large financings in difficult sectors in emerging markets

• Concern re bank exposure to sovereign debt of concerned countries, mostly European

Market Risk Perception

CDS spreads – cost of insuring against credit

default and thus market risk perception indicator

0

50

100

150

200

250

Spre

ad (b

ps)

Credit Default Swap spreads - selected country groups

Kaz, Per, Rus, S Africa, Turk, Chile US, UK, Aus., Jap. China

-

100

200

300

400

500

600 Sp

read

(bps

)

Alcoa Barrick Gold BHPCIA VALE Newmont Phelps DodgeTeck Cominco US Steel Average

Credit Default Swap spreads - selected companies

• Dramatic increases during crisis; now come down, but still above pre-crisis levels

• Spreads not that far away from China, emerging markets heavily priced

• Dramatic increases for Greece, Italy, Ireland, Portugal and Spain during May 2010.

• China spreads closer to pre-2007 levels than OECD

Possible outlook

• Equity markets have recovered well, but risk-aversion has resurfaced; debts markets have still some way to go and may have changed all together.

• Sovereign debt concerns have weighed heavily on market risk perception and investor risk appetite

• Short term: Demand relatively stable and driven by China, BUT uncertainty due to transition from Government fiscal stimulus packages and impact of austerity budgets

• Medium/Long term: Global supply constraints likely in some metals and fundamentals analysis fairly robust

Prices - supply constraints and cost pressures likely to underpin prices in long term

Contents

1. Market context • Demand• Supply• Access to financing

2. Frontier countries3. What you can do?

Mining and the Frontier

Global resource scarcity and relative resource richness in frontier countries have drawn juniors to countries which many had previously avoided.

As a commercially driven development institution, IFC focuses on opportunities in the frontier.

IFC defines the frontier as both the poorest emerging countries and poorer, less developed region in more middle income emerging countries 24

AIM Listed Juniors and Frontier Countries

64%

7%8%

15%

10%

19%

21%

22%

New opportunities, but also challenges and risks:

1) Governance 2) Resource nationalism

High income

Upper middle incomeLower middle incomeLow income

%% AIM-listed companies working in this region

% Average TI corruption index

8.0

3.7

2.36.7

2.8

9.0

3.7

2.3

64% of AIM listed

companies are active in

Africa.

Challenges and Opportunities

Challenges• Uncertain regulatory and fiscal frameworks and challenging business

environments, and increased host country awareness of bargaining power.

• As a result, good geological resource potential may be inadequately explored and developed.

• A company needs to navigate government, local community and environmental requirements skillfully and responsively in order to realize resource potential.

Potential Rewards• These ‘barriers to entry’ against competition can help skilful companies

with the right approach in a particular frontier.

• The generally challenging environment globally for new supply also likely to support prices for successful producers.

Contents

1. Market context • Demand• Supply• Access to financing

2. Frontier countries3. What you can do?

Responses

1. Investors can mitigate national/regional governance issues by building a strong, sustainable relationship with the local community and getting a ‘social license to operate’.

• Three IFC clients who have done this well are: 1. Bema Gold (now acquired by Kinross) in Far East Russia;

2. Lonmin in S Africa;

3. Lydian in Armenia.

2. Other key mitigants: transparency about costs and project economics; and contract terms which share fairly between host government and company.

3. Since frontier countries are higher risk, raising financing can be tough.

• Project Finance may need to involve DFIs, such as IFC, which require high operating standards and strong community engagement.

Key Elements in Raising Finance

Prepare the ground with financiers carefully and start building relationships early on

Strong documentation / demonstration of project quality

Demonstration of project team experience and ability / commitment to manage risks

Evidence of high standards and strong community engagement

Partner with an established industry player and / or a strong and reputable investor

• The combination of tougher market conditions and host country challenges may make it difficult for a junior company to succeed without one or more strong partner.

• This may be a strategic / industry or financial partner – depends on needs. In both cases can:

1. Raise standards - by strengthening management capacity (financial, technical, environmental and / or social)

2. Increase credibility / reputation – give comfort to potential investors and to host government

3. Long term view – stick around even in bad times / deep pockets

Role of value adding partners

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

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

• Convertibles

• 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

Investments by Region, FY09

• Sub-Saharan Africa 17%

• Commitments for IFC’s Account: $10.5 Billion

• Europe and Central Asia 20%

• Latin America and the Caribbean 26%

• Middle East and North Africa 12%

• Global 2%

• East Asia and Pacific 11%

• South Asia 12%

IFC’s Current Mining PortfolioUS$445 million for IFC’s account as of July 31st, 2010

By Product

Diamonds0.1%

Aluminum & Bauxite

9%

Other Metals20.9%

Gold 43%

Copper18%Iron Ore

9%

By Region

Latin America US$89M

E Asia & Pacific

US$41.7M

Eastern & C. EuropeUS$49.6M Sub-

Saharan Africa

US$255.5M

WorldUS$4.6M

MENAUS$4.8M

2010 IFC mining investments

1. Argentex Argentina pending ~US$18 million eq

2. Petra DiamondsTanzania pending ~US$40 million ln

3. Mindoro Resources Philippines July 2010 ~CAD10 million eq

4. Tsodilo Resources Botswana June 2010 ~CAD5 million eq

5. Nyota Minerals Ethiopia June 2010 ~GBP7.5 million eq

6. Kasbah Resources Morocco June 2010~AS$10 million eq

7. Volta ResourcesBurkina Faso March 2010 ~CAD14 million eq

8. Eurasian MiningHaiti March 2010 ~US$5 million eq

9. Helio ResourcesTanzania Feb 2010 ~CAD7.7 million eq

IFC Financing

• * “Mobilization” for 2006 and 2007 includes structured finance, loan participations, and parallel loans.

Strong mobilization mandate

1. Access to financing – With its development mandate, IFC takes on country risk.

2. Seal of Approval - IFC involvement in a project is often seen as a seal of approval, which can give comfort to potential investors

3. Political Risk Coverage - IFC presence in a transaction reduces the occurrence of: 1) corruption, 2) expropriation of funds, 3) mismanagement of revenues, and 4) extraneous regulations

4. Structuring Capability - ‘Honest Broker’ reputation facilitates negotiations amongst diverse groups: 1) foreign investors, 2) local partners, 3) local communities, and 4) government representatives

5. Environmental and social risk – IFC’s Performance Standards help ensure good risk mitigation

The IFC Advantage

Many strong international financiers adhere to IFC’s principles on E&S responsibility risk

management“Equator Principles” adopted by 50+ of the world’s

leadinginvestment banks and based on IFC’s Performance Standards

Apply to 85% of project financing worldwide

HongKong

RiodeJaneiro

IstanbulNewDelhi

Johannesburg

Washington

Paris

Moscow

Cairo

IFCHubsIFCOffices

IFC’s Global Reach

London

IFC Contacts

William BulmerHead of Global Mining Investment Division, Washington DCPhone: +1 202 473 8750Email: WBulmer@ifc.orgFax: +1 202 974 4323

Sacha BackesInvestment Officer, Business Development, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8413Mobile: +44 (0)79 1710 0720Email: SBackes@ifc.orgFax: +44 207 592 8430

Thank you for

your attention!!