The Role of Financial Institutions - UNEP Role of Financial Institutions in Sustainable Mineral...

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United Nations Environment ProgrammeDivision of Technology, Industry and Economics

A copy of this Report is available on the following website:

Mineral Resources Forum (www.mineralresourcesforum.org)

For more information please contact:

United Nations Environment ProgrammeDivision of Technology, Industry and Economics,Tour Mirabeau,39-43 quai André Citroën,75739 Paris cedex 15,FranceTel: +33 1 44 37 14 50

This Report is printed with the assistance ofStandard Bank London Limited.

UNITED NATIONS PUBLICATIONISBN: 92-807-2145-3

FOREWORD

Financial institutions investing in mineral exploration, mine site development andmetals production are increasingly aware of the environmental and social risksassociated with these activities.

This heightened awareness is largely due to the fact that the financial performance ofcertain mining projects over the past decade has been negatively impacted by miningaccidents, many of which could have been avoided. Governments, multilateralagencies, labour, environmental groups, and civil society are now demanding higherstandards with regard to environmental, social, and economic issues.

It is in that context that the United Nations Environment Programme (UNEP)commissioned this Report on “The Role of Financial Institutions in SustainableMineral Development”, prepared by Andrew Zemek. The objective of this report is toassist financiers in better understanding the mineral development process fromexploration, through development to mine closure and land reclamation, and toencourage them to evaluate all related risks.

Decisions about investment in mining activities should be taken only after carefullyconsidering the potential environmental and social impacts at each stage of thedevelopment process, and attentively listening to all stakeholders’ viewpoints.

I hope that this report will also help other stakeholders interested in promotingsustainable development to better understand the issues related to mining projectfinancing.

Jacqueline Aloisi de LarderelAssistant Executive DirectorDirector, Division of Technology,Industry and Economics

The Role of Financial Institutions in Sustainable Mineral Development

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Contents

1.0 INTRODUCTION………………………………………………. 82.0 OBJECTIVE…………………………………………………….. 93.0 SCOPE…………………………………………………………. 94.0 METHOD………………………………………………………. 95.0 PAPER OUTLINE……………………………………………… 106.0 STAKEHOLDERS……………………………………………… 106.1 Governments………………………………………………….. 106.2 Owners………………………………………………………. 116.3 Technical Consultants……………………………………….. 116.3.1 Project team……………………………………………….. 126.3.2 Independent Engineers……………………………………. 126.4 Advisers……………………………………………………… 136.5 Investors……………………………………………………… 136.6 Banks…………………………………………………………. 136.7 Multilateral Financial Institutions……………………………. 146.7.1 IDA………………………………………………………… 156.7.2 IBRD………………………………………………………. 156.7.3 IFC………………………………………………………… 166.7.4 MIGA……………………………………………………… 176.7.5 ICSID……………………………………………………… 196.7.6 Dedicated environmental units of WB……………………. 196.7.7 EBRD……………………………………………………… 196.8 Export Credit Agencies……………………………………….. 206.9 Insurers……………………………………………………….. 236.9.1 Project Insurance…………………………………………… 246.9.2 Political Risk Insurance (PRI)……………………………… 256.10 Construction Firms……………………………………………. 256.11 Service Providers…………………………………………….. 266.12 Local Communities…………………………………………… 267.0 INVESTMENT TIMELINE……………………………………. 267.1 Exploration…………………………………………………… 267.1.1 Government preparatory work…………………………….. 267.1.2 Desk research………………………………………………. 277.1.3 Exploration licence………………………………………… 277.1.4 Prospecting………………………………………………… 277.1.5 Exploration Drilling……………………………………….. 287.1.6 Bulk sampling and test work………………………………. 297.2 Pre-development……………………………………………… 297.2.1 Scoping study……………………………………………… 297.2.2 Pre-feasibility study……………………………………….. 307.2.3 Feasibility study…………………………………………… 317.2.5 Environmental and Social Impact Assessment (EIA & SIA) 357.3 Financing……………………………………………………… 367.3.1 Financing strategy…………………………………………. 377.3.2 Financing methods…………………………………………. 387.3.2.1 Equity financing………………………………………… 38


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7.3.2.2 Debt financing…………………………………………… 387.3.2.3 Structured finance……………………………………….. 397.3.3 Typical products……………………………………………. 397.3.4 Finance providers…………………………………………… 407.3.5 Financing process…………………………………………… 417.3.5.1 Competent person’s report………………………………. 427.3.5.2 Information memorandum………………………………. 437.3.5.3 Due diligence……………………………………………. 437.3.5.4 Conditions precedent……………………………………. 437.3.5.5 Loan documentation and legal reviews…………………. 437.4 Development…………………………………………………. 477.4.1 Final design………………………………………………… 477.4.2 Construction………………………………………………… 477.4.3 Commissioning……………………………………………… 477.4.4 Non-recourse……………………………………………….. 487.5 Operation…………………………………………………….. 487.6 Closure……………………………………………………….. 507.6.1 Accrual Approach…………………………………………. 517.6.2 Closure Bonds and Guarantees……………………………. 517.6.3 TRAC programme………………………………………… 517.6.4 Restore-as-you-go………………………………………… 527.6.5 Social aspect………………………………………………. 527.6.6 Premature closure…………………………………………. 538.0 VIEWS FROM WITHIN THE FINANCE INDUSTRY……….. 538.1 Declared high level of awareness…………………………….. 538.2 International and local standards……………………………… 548.3 Praise for the multilaterals……………………………………. 548.4 Doubt about the Export Credit Agencies…………………….. 558.5 Heavy reliance on ‘competent persons’……………………… 568.6 The price of a good reputation……………………………….. 578.7 Could ISO 14000 standard be used as a benchmark?………… 588.8 German banks greener than the rest………………………….. 598.9 More insurance is not the answer…………………………….. 598.10 When things go wrong……………………………………….. 599.0 CONCLUSIONS……………………………………………….. 60

APPENDIX A…………………………………………………… 62 Report contributors…………………………………………… 62APPENDIX B…………………………………………………… 64 Printed reference sources……………………………………. 64APPENDIX C………………………………………………….. 66 Mining projects sponsored by the International Bank forReconstruction and Development (IBRD)………………………

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APPENDIX D…………………………………………………… 76 Mining projects sponsored by the Multilateral InvestmentGuarantee Agency (MIGA)……………………………………..

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APPENDIX E…………………………………………………… 79 Mining projects sponsored by the International Finance ……. Corporation (IFC)……………………………………………. 79


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APPENDIX F…………………………………………………… 83 Feasibility Study Reports…………………………………….. 83

List of Tables

Table 1 Types of finance and sources of funds for mining projects 14Table 2 Accuracy and contingency at various stages of the mining

project32

Table 3 Typical duration of pre-development studies 33Table 4 Pre-development cost (A$ 000’s) 33Table 5 Overall guidelines to the cost of pre-development 34Table 6 Financing of the Antamina Zn/Cu project, Peru 45

List of Figures

Figure 1 Sectors covered by MIGA policies 18Figure 2 Mine pre-development owner direct costs – cumulative 34Figure 3 Financing of the Antamina Zn/Cu project, Peru (debt only) 46


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1.0 Introduction

Mining activity is, by its very nature, environmentally invasive. Mining causessubstantial changes to the landscape, air and water in the vicinity of operations,consumes large amounts of energy and produces great quantities of waste – in manycases as much as 99 per cent of the material originally excavated.

Some environmental damage is inevitable. Other types can be mitigated by preventivemeasures, but these can have a serious impact on project cost1.

Recent well-publicised mining disasters, in particular cyanide contamination inRomania and a tailings dam failure in Spain, have highlighted the importance ofprevention and swift clean-up action when disaster strikes. Tailings dam failures inSpain and in the Philippines have also highlighted the effect of these accidents oncorporate balance sheets. It is said that the total of direct and indirect costs to Boliden,the company responsible for the Spanish operation, was in the region of US$120−130million. The very tangible provision of US$42.5 million can be found in the accountsof the company as a direct result of the accident2.

In other high-profile cases, mining operations have been halted or new projectsprevented from opening because of local community pressure. Annual GeneralMeetings of major banks have been disrupted by protests over the banks’ involvementin mining finance and NGOs have sometimes been very vocal.

Historically, little attention has been paid to environmental issues because the long-term impacts were not understood. Preventive measures always create costs and neverprofits. Environmental issues have been gaining importance over the last 15−20 yearsand the recent wave of accidents and scares has brought the environmental and socialaspects of mining into the news and has shifted them to the top of the agendas formining companies and their financiers.

No major mining project can be developed nowadays without a significant role beingplayed by banks and financial institutions – be it as lenders or advisers. They alsohold a major enforcement tool for any policies: access to funds.

Should banks be mainly concerned about repayment of their loans or should theyconsider a broader remit and encourage ‘good citizenship’ on the part of other parties?Do the banks have a right to impose higher environmental standards than thoseprescribed by local law? Or is this another symptom of globalisation and corporationsexercising more power than governments? Will ‘too much care’ and ‘too highstandards’ make some projects un-economical and, as a result, deprive communitiesof the jobs and development that would otherwise be forthcoming if standards wereless stringent?

1 According to N.J. Coppin and Kevin d’Souza, Wardell Armstrong, new non-ferrous metal minedevelopment in the US will have about 20 per cent of its budget consumed by various types ofenvironment-related expense (“Costing the Earth” – paper for the Mining Finance into the NextMillennium Conference, London, June 1999).2 “Mining waste hits headlines”, by Priscilla Ross, in Mining Finance magazine, June 2000.


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UNEP wants to ensure that financial implications of environmental (and social)impacts are adequately and appropriately considered, and to involve otherstakeholders in mining operations at much earlier stages of mine planning than mineoperations. UNEP is interested in finding ways of combining government policies andregulation and investor behaviour to create an environment in which mine owners andinvestors have to address environmental issues in the early stages of investment.

2.0 Objective

The purpose of this background paper is to chart the investment process in the miningindustry (from early exploration to mine closure and land reclamation) and to identifythe key stakeholders at each stage as well as their role in shaping the environmentaland social side of mining projects. The paper will provide background information fora UNEP, World Bank and MMSD conference on Finance, Mining and Sustainability:exploring sound investment decision processes to be held in January 2002, in Paris,France.

3.0 Scope

The three stages where most of the environmental and social problems occur are mineconstruction; operation; and closure. However, as many problems stem from earlierstages, this paper covers the whole process from early exploration through feasibilitystudies, construction and operation to mine closure and land reclamation.

Tens of mining projects are financed every year around the world and they differenormously in size, nature and environmental and social impact. It is, therefore, ratherdifficult to analyse a ‘typical project’ and certain assumptions have to be made.

While this paper concentrates on new greenfield projects, examples of expansions,brownfield re-development or privatisation are mentioned where appropriate. Thecapital expenditure on a ‘typical project’ discussed is understood to be US$30–100million. If the comments refer to a very large or very small project, this is clearlyindicated.

4.0 Method

Most of the material for this paper was collected during a series of face-to-facediscussions with key decision-makers (usually Heads of Mining Finance) in banks,financial institutions, insurance companies, technical consultancy firms and somemajor mining companies.

General, written reference material was also used in the form of articles published inthe Mining Finance, Metals Finance, Mining Journal, Mining Magazine, and MiningEnvironmental Management journals, and in Internet publications. Some companypublications and handbooks were also used.


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The book ‘Moving Mountains: Communities Confront Mining And Globalisation’,published recently by The Mineral Policy Institute (an Australian NGO), was alsoused as a reference.

The full list of companies and organisations that helped with research on this papercan be found in Appendix A. The main written reference sources are listed inAppendix B.

The objective was not only to chart the mining investment process but also to gatherindustry views and information about current industry practice in respect ofenvironmental and social issues in mining.

The resulting paper is a composite picture of current financial industry thinking.Ultimately, it represents the author's perception based on the available information,although the author has tried to be as objective as possible.

5.0 Paper Outline

The paper first identifies main parties involved in the mining process (both providingfunding and services), and describes the main types of financing available to miningprojects. It then follows the investment timeline explaining ‘who is doing what’ and‘who pays for what’. Subsequent chapters present ‘views from within’ the financeindustry, concentrating on environmental and social issues. Author’s conclusionsclose the paper.

6.0 Stakeholders

Numerous parties are involved in the investment process in mining, but the term‘stakeholders’ is even broader, involving those who may not be investors but who areexposed to the impact of mining operations (e.g. farmers on the land adjacent to themine, or fishermen working on local rivers). This paper concentrates on the keyparties involved in the decision-making process at various stages of the investmentprocess.

6.1 GovernmentsGovernments have very important roles in the process, mostly:

• Facilitating mining operations;• Setting the rules of engagement.

The two areas overlap and form the mining policy of a country.

Facilitating operations is mainly achieved by doing the groundwork, i.e. preparinggeological maps and databases, setting up the licensing system or preparing theregulatory framework.


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Setting the rules means laying down more specific regulations and criteria that haveto be met before a mining project can go ahead. In particular, this means regulationsregarding environmental protection.

In most countries, submission of an Environmental Impact Assessment (EIA) is acondition for obtaining the operating licence. Governments also set the permissiblepollution levels for water and air.

It was quite clear from the author's interviews that this is a very important issue.

All projects must always comply with regulations (by obligation), but not all projectswill set themselves higher standards if the regulations of a country are lax.

Taxation is frequently used as an instrument to attract mining investment and to re-distribute some of the wealth created by the operation; it is not, however, the mainfocus of this paper. Financial institutions do not have powers to alter tax regimes andcan therefore only accommodate existing rules in their financing structures.

Governments also have a responsibility to direct some of the taxes and royalties backto the communities most directly affected.

6.2 OwnersA multiplicity of names is used to describe the owners of a mine. Owners andsponsors are the most common ones (used in this paper) but other names – juniorsand majors in particular, depending on the size of the company − are also used.

Owners are key movers of a mining project. Their focus is (quite naturally) on theeconomic viability of the project and, ultimately, its profitability. Environmental andsocial issues are ‘among many’ to be addressed.

A common view in the financial community is that projects with substantial externalfunding are usually more environmentally sound than those funded mostly by thesponsors themselves, as bank guidelines (particularly in a consortium with amultilateral institution) are much stricter than the in-house ones of mining companies.

Few owners deliberately avoid environmental or social issues. Problems are due to acombination of lack of experience, optimism (‘things won’t go wrong’), a lack ofurgency (‘we’ll do that task tomorrow’), the difficulties in working with differentcultures, a lack of trust on both sides, and lack of local reward because taxes are paidto central coffers, to give just a few reasons.

6.3 Technical consultantsTechnical consultants play a vital role in preparation and monitoring of mininginvestment. Their role must not be underestimated, as everyone else, including theowners and bankers, relies on them.

A team of technical consultants can either be made up of in-house or freelancespecialists, or can be from a large, international specialised firm.


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Depending on their role in the investment process, and on whose behalf they work,technical consultants can work as a Project Team or as Independent Engineers.

6.3.1 Project team

The owner will appoint a project team to evaluate the deposit, to identify the keyissues and to determine the best way of addressing them. The project team usuallyconsists of a core team with consultants or engineering companies appointed toaddress specific issues as required.

As a project will cover a wide range of disciplines, different groups of engineers willbe involved. Managing the interface between these groups is a critical activity, toensure that the project’s conclusions are sound. This is the responsibility of the projectmanager. The project manager is responsible for selecting the project team, settingthe scope of work, setting-up processes to ensure that each group interactsappropriately, managing the budget, monitoring progress, and for understanding theconclusions being drawn. As the project manager is usually from one professionaldiscipline, there can be a tendency for project managers to focus on some aspects ofthe project and not on others.

Another aspect that needs to be managed is the balance between cost, expertise andindependence. One criticism that has been made of some engineering companies isthat they subsidise the cost of the feasibility study with the intention of improvingtheir chances of winning the Engineering, Procurement, Construction andManagement (EPCM) contract later. This can lead to bias and therefore doubt aboutthe soundness of the estimates.

Another area of concern is the use of appropriately skilled staff. To keep costs down,junior staff are used to do most of the work and their work is reviewed by moreexperienced staff. However, errors can occur if the review process is not as thoroughas necessary because of work pressures or review staff not being available, etc.Alternatively, engineers with experience in a generic field (e.g. open pit mining) maylack experience in the specific field (e.g. open pit mines in the Arctic).

6.3.2 Independent Engineers

When owners approach a bank for project finance, the bank’s project finance teamusually requires a second opinion of the project and appoints a team of technicalengineers who have not had any significant involvement in the project, i.e. areindependent of the project.

These engineers are required to confirm that the project cashflow is reasonable, andthat there are no material omissions. The independent engineers team usually consistsof a core of 3−6 people with additional support staff brought in as necessary to cover:resource estimation, geotechnics, mining operations, processing operations, capitalestimation, tailings, environment, and hydrology. The engineers will: review thefeasibility study; verify the process used; compare the parameters used with otherexisting, similar operations; and check the cashflow.


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6.4 AdvisersIn the context of mining investment, the term ‘advisers’ usually applies to the bankadvising the owners of the project, for a fee. The success fee is frequently linked tothe final amount of the finance raised.

Most banks would prefer to be advisers rather than lenders. Profitability is muchhigher, timescale shorter than for loan tenure, and advising requires lessadministration than lending. Finally, the exposure of the banks is much less than inthe case of lending.

Some banks are prepared to take a small equity stake in the project at an early stagewith a view to participating in the higher returns associated with equity. This policyalso enables them to get to know the project better and eventually capture the advisorybusiness.

The reputational risk of being an adviser to a project that goes wrong is as great aswhen lending, but the financial repercussions are less severe. If there is an accidentduring operation of the mine the link to the advisor at the financing stage is not allthat obvious.

6.5 InvestorsIn the initial stages, investors (equity holders) are the individuals or companies whoput the seed capital into the project.

If the project is listed on one of the junior stock exchanges (e.g. OFEX or AIM), theinvestors buying shares are either the individuals interested in these particular projectsor specialised finance houses. In either case, they are very aware investors who knowthat both the risks and the rewards are high.

The general public and general investment funds usually only become investorsduring full listing on a recognised exchange. There are comparatively few dedicatedmining funds – most shares end up as part of either region-oriented funds or parts ofdispersed portfolios.

Venture capital, which can come into play at the earliest stages, plays a specific role.

No one the author spoke to had any knowledge of any so called ethical fundsdedicated to the natural resources sector.

6.6 BanksBanks, usually understood to mean commercial banks, are the main providers of debtfinancing to mining projects. In most cases they do not take straight equity andprimarily provide the project finance or corporate finance or a mixture of both. TwoSouth African Banks – the Standard Bank and the Rand Merchant Bank (RMB) − areknown to take small equity stakes (below US$ 5 million) at the earlier stages ofmining projects (e.g. to finance the feasibility study). Other banks are known to havetaken quasi equity in the past (warrants, convertible loans), but this is the exceptionrather than the rule.


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The prevailing mining finance instrument is still project finance loan. Table 1 showsthe types and sources of funding at various stages of mining projects.

Commercial banks provided the bulk of the finance for some 160 mining projectsworth over US$50 billion between 1996 and 20013.

Development Stage Type of Funding Source of Funding

Prospecting Equity Shareholders

Initial Exploration Equity Shareholders

Advanced Exploration Equity/ Venture Capital Shareholders / SpecialisedResource Funds

Preliminary Feasibility Equity/ Venture Capital /Quasi Equity

Shareholders / SpecialisedResource Funds/ Selected Banks

Definitive Feasibility Equity/ Quasi Equity/ Debt(with recourse)

Shareholders / Selected Banks/Commercial Banks

Construction Equity/ Debt (limited recourse) Shareholders/ Selected Banks

Post Commissioning Equity/ Debt (non-recourse) Shareholders/ Selected Banks

Source: Wardell Armstrong (Kevin d’Souza)

Table 1: Types of finance and sources of funds for mining projects

6.7 Multilateral financial institutionsMultilateral financial institutions are created and funded by governments and theirremit is broader than just providing equity or debt for profit. They are supposed tocontribute to the development of the lesser-developed countries, promoteenvironmentally and socially responsible investment, and help with education andawareness, etc.

In strictly financial terms the key word is “additionality”, i.e. they are not supposed toreplace the commercial banks, but to provide ‘additional’ service where commercialfinancial institutions are unable or unwilling to provide finance.

Multilaterals active in the mining sector include the World Bank Group, theEuropean Bank for Reconstruction and Development (EBRD) and regionaldevelopment banks (e.g. African Development Bank, Inter-American DevelopmentBank, Asian Development Bank).

3 According to the Mining Finance Database, published by the Mining Finance Magazine (October2001).


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The World Bank Group consists of:

• the International Development Agency (IDA);• the International Bank for Reconstruction and Development (IBRD);• the International Finance Corporation (IFC);• the Multilateral Investment Guarantee Agency (MIGA); and• the International Centre for Settlement of Investment Disputes (ICSID).

6.7.1 International Development Agency (IDA)

The IDA is the World Bank’s concessional lending window. It provides long-term(35−40-year tenure) loans at zero interest to the poorest of the developing countries(per capita income in 2000 less than US$885) that lack the financial ability to borrowfrom the IBRD. The IDA's goals are to reduce disparities between and withincountries, especially regarding access to primary education, basic health, water supplyand sanitation, and to bring more people into the mainstream by raising theirproductivity.

The IDA does not finance individual mining projects, although some money destinedfor other purposes may end up financing a mining project if it is left to the receivinggovernment's discretion. Discussion of accountability for IDA-lent money is beyondthe scope of this paper.

6.7.2 International Bank for Reconstruction and Development(IBRD)

The IBRD provides loans and development assistance to middle-income countries andcreditworthy poorer countries. Voting power is linked to members' capitalsubscriptions which, in turn, are based on each country's relative economic strength.Frequently referred to simply as ‘The World Bank’, the IBRD is active in the miningsector where it provides loans to governments.

In the last 10 years the IBRD and IDA have provided funding to 34 mining-relatedprojects4 in 22 countries, totalling US$3.55 billion5.

Typical projects include help in mining sector policy reforms, preparation forprivatisations, assistance in developing environmental regulations and support forprotection of the environment in areas mined by state-owned companies, etc.

Good examples of this type of assistance are a Mining Sector Development project inArgentina (US$30 million in 1996 and further US$40 million in 1998) or miningsector policy reform assistance in the run-up to privatisation of Zambia ConsolidatedCopper Mines, Ltd. (ZCCM), where US$21 million of IBRD funds were used toupdate and improve the legal, fiscal and environmental frameworks to attract newinvestors, particularly to copper mining.

4 In this context the word ‘project’ is used in a broader sense than in mining finance and does not justrefer to building of a mine or plant. For instance, helping a government of a given country to re-writeits Mining Code is an IBRD ‘project’.5 Source: IBRD material prepared for the Extractive Industries Review.


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In the coal industry, the IBRD provided substantial funds for restructuring of thesector, mine closure programme and environmental protection in Poland, Romania,India, Ukraine and Russia (US$ 2.7 billion)

The full list of IBRD-funded mining projects can be found in Appendix C.

The World Bank also provides guarantees. Its guarantee instrument was formallymainstreamed in 1994 to address the growing need to offer political risk mitigationproducts to commercial lenders contemplating financial investment in theinfrastructure sectors of developing countries. The Bank's fundamental objective inoffering guarantees is to mobilise private capital for such projects on a "lender of lastresort" basis.

At present, the Bank offers three basic types of guarantees:

• Partial credit guarantees, covering debt service defaults on a specified portionof a loan or a bond. Such guarantees allow public sector projects to extendmaturities and lower spreads.

• Partial risk guarantees, covering debt service defaults on a loan to a privatesector project caused by a government's failure to meet its contractual obligationswith regard to a private project.

• Policy based guarantees, covering a portion of debt service on borrowing by aneligible member country from private foreign creditors in support of agreedstructural, institutional, and social policies and reforms.

Although the IBRD does not lend to individual mining projects, it plays an importantrole in creating the right environment to attract direct investment to the sector.

6.7.3 International Finance Corporation (IFC)

The IFC plays a key role in providing both equity and debt directly to private miningprojects. It promotes private sector investment, both foreign and domestic, indeveloping member countries.

The IFC supports private sector projects in several ways: through equity and debtfinancing; the syndicated B-Loan programme; security placement and underwriting;and advisory services.

IFC's investment and advisory activities are designed to reduce poverty and toimprove people's lives in an environmentally and socially responsible manner. Itswork includes activities in some of the riskiest sectors (e.g. mining) and countries(e.g. Indonesia, former Soviet Central Asian Republics).

The IFC serves as an investor and an ‘honest broker’ to balance each party's interestin a transaction, reassuring foreign investors, local partners, other creditors, andgovernment authorities. The IFC advises businesses entering new markets andgovernments trying to provide a more hospitable business environment, to createeffective and stable financial markets, or to privatise inefficient state enterprises.


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The IFC is also a standard bearer for the World Bank’s environmental and socialpolicies. Because of the IFC’s direct involvement with mining projects it has theability to enforce these policies in practice, although the Bank's officials stress thatthey do not see its role solely as that of environmental policeman. The IFC is proving,in practice, that environmentally sound projects benefit everyone, including thebottom line profit and loss account.

The dedicated Environment and Social Development Department of the IFCcomprises three units:

• Environment and Social Review Unit, vetting all projects financed by the IFC.

• Environmental Projects Unit, specialising in projects dedicated to theimprovement of the environment.

• Financial Markets Unit, responsible for the environmental and social review offinancial intermediary projects which continue to be an ever-increasing segmentof the IFC’s portfolio. Investments in financial institutions currently account forapproximately 40 per cent of total investments made by the IFC.

The Department publishes policies, guidelines, guidance notes and good practicemanuals, etc. A very comprehensive collection of documents can be found on theDepartment's dedicated website at http://www.ifc.org/enviro/.

In the 1993−2001 period, the IFC financed 61 mining projects providing US$1.53billion worth of equity and debt financing (or 35 per cent of the capital of thoseprojects) 6. By way of comparison, IFC’s involvement in the Oil and Gas sector wasUS$2.8 billion in the same period.

6.7.4 Multilateral Investment Guarantee Agency (MIGA)

MIGA does not finance projects but insures them. The type of insurance provided byMIGA is referred to as Political Risk Insurance (PRI). It can cover equity,shareholder loans and loan guarantees issued by equity holders, and can also coverloans by unrelated institutions, usually commercial banks, provided that ashareholder's investment in the project is also being insured by MIGA.

Like other investment insurers, MIGA can provide broad coverage to investorsagainst such risks as:

• Transfer Restriction: protection against losses arising from an investor'sinability to convert local currency (capital, interest, principal, profits, royaltiesand other remittances) into foreign exchange for transfer outside the host country.Currency devaluation is not covered.

• Expropriation: protection against loss of the insured investment as a result ofacts by the host government that may reduce or eliminate ownership of, controlover, or rights to the insured investment.

• Breach of Contract: protection against losses arising from the host government'sbreach or repudiation of a contract with the investor. In the event of an alleged

6 Source: IFC material prepared for the ‘Extractive Industries Review’. According to some sources, thenumber of projects may be smaller, as this statistic counts expansions as separate projects.


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breach or repudiation, the investor must be able to invoke a dispute resolutionmechanism (e.g. arbitration) in the underlying contract and obtain an award fordamages. This cover should also protect the investor against revocation of themining licence by the host government.

• War and Civil Disturbance: protection against loss from damage to, ordestruction or disappearance of tangible assets caused by politically-motivatedacts of war or civil disturbance in the host country, including revolution,insurrection, coups d'état, sabotage, and terrorism.

For loans and loan guarantees, MIGA will pay the insured portion of the principaland interest payments in default as a direct result of damage to the assets of theproject caused by war and civil disturbance.

War and civil disturbance coverage also extends to events that result in aninterruption of project operations essential to overall financial viability for aperiod of one year. This type of business interruption is effective when theinvestment is considered a total loss. At that point, MIGA will pay the book valueof the total insured equity investment. For loans and loan guaranties, MIGA paysthe insured portion of the principal and interest payments in default as a result ofbusiness interruption caused by events covered.

It is not quite clear if this type of policy would cover social disturbance caused byenvironmental or other concerns of the local community relating directly to amining project.

MIGA can normally issue coverage within a few months of an investor's application,since it does not enter into counter-guarantee arrangements with the host countrygovernment of the project (as is the case with IBRD guarantees).

Over the last 10 years MIGA has provided guarantees to 15 mining projects in 11countries, for a total liability of US$618 million7.In percentage terms, MIGA is more involved in the mining sector than the IFC. It isalso worth noting that coverage of the Oil and Gas sector is smaller than mining (seethe graph below).

MIGA Outstanding Portfolio Distributionby sector, percent, FY 01

36

30

9

9

6

5

3

2

Financial

Infrastructure

Manufacturing

Mining

Services

Oil and Gas

Agribusiness

Tourism

Figure 1: Sectors covered by MIGA policies

7 Source: MIGA.


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The beneficiaries of MIGA policies in mining were both banks and miningcompanies.

6.7.5 International Centre for Settlement of Investment Disputes(ICSID)

The ICSID is an institution specially designed to facilitate the settlement ofinvestment disputes between governments and foreign investors. It does not provideany financing. The ICSID has provided arbitration in over 10 mining cases over thelast three decades, resolving disputes between private investors and the governmentsof Jamaica, Ghana, Papua New Guinea (PNG), Burkina Faso, Congo and Iceland.Three other mining cases are currently pending.

6.7.6 Dedicated environmental units of the World Bank (WB)

Apart from the Environment and Social Development Department of the IFC, theWorld Bank operates the Environmentally and Socially Sustainable DevelopmentNetwork (ESSD) − a single point of contact for all matters relating to the environmentand social development. In addition, all those affected by the activities of the IFC orMIGA can contact the Office of the Compliance Advisor/Ombudsman (CAO) if theysuspect that the WB standards or policy requirement (e.g. on disclosure) are not met.

6.7.7 European Bank for Reconstruction and Development(EBRD)

The function of the EBRD is similar to that of IBRD and IFC combined, except thatthe EBRD's activities are restricted geographically to Eastern Europe and the formerSoviet Union (FSU).

The EBRD provides advisors to governments to assist them with privatisations andlegal reform (in this respect it acts in a similar way to the IBRD) but also becomesdirectly involved in projects with regard to both equity and debt (project andcorporate finance). In some instances, the EBRD also takes an active role byappointing its own board members in companies in which it holds equity.

During its history the EBRD has provided finance to four mining projects. All ofthese were gold mines located in the FSU. According to EBRD officials, preference isgiven to gold projects (over other minerals) as they generate good hard currencyrevenue streams for the host countries and provide relatively quick return. Theprojects concerned were Zarafshan in Uzbekistan, Kubaka in the Russian Far East,Kumtor in Kyrgyzstan and Buryatzoloto in Russia. All four now have westernsponsors. However, at the time of financing, Buryatzoloto was an entirely Russianentity and the management of the EBRD took an entirely Russian risk.

The total value of finance provided by the EBRD to the mining sector is close toUS$300 million (16 per cent of its natural resources commitments). Mining was thelargest sector after oil and gas8.

8 Source: EBRD materials and interviews. Coal mining projects are included in the Power Sector bythe bank and are not part of this statistic.


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EBRD also quotes the principle of “additionality” – it perceives itself not as acompetitor of the commercial banks but as a leader to be followed. It also worksclosely with the IFC and, increasingly, the European Investment Bank (EIB).

The EBRD puts a lot of emphasis on the economic and environmental soundness ofprojects, which it believes should be setting an example for other sponsors.

The geographical limits and fairly stringent environmental criteria required of projectsbefore financing have resulted in comparatively few mining projects being financedby the bank. The ill-fated Baia Mare gold project, in Romania was, apparently, turneddown by the EBRD.

The EBRD has a dedicated Environmental Appraisal Unit, which vets all projects atan early stage. Apart from the compulsory and extensive Environmental ImpactAssessments required, it has a strong public disclosure and consultation policy. Afully disclosed EIA must be available for public consultation for a minimum of 60days for private-sponsored projects and 120 days for publicly financed projects beforethe Bank’s board considers the project.

The EBRD’s environmental unit structure and policies were modelled on those of theWorld Bank.

Because of its specific geographical coverage the bank’s situation is unique in manyways, e.g. due diligence and EIA operations are facilitated by a substantial number ofSoviet-era pre-development studies of many deposits.

6.8 Export Credit Agencies (ECAs)Export Credit Agencies, Government Development Agencies and InvestmentInsurance Agencies, commonly known as ECAs, are public agencies that providegovernment-backed loans, guarantees, credits and insurance to private corporationsfrom their home country to do business abroad, particularly in the financially andpolitically risky developing world. Most industrialised nations have at least one ECA,usually an official or quasi-official branch of their government. The official OECDwebsite lists 49 such agencies.

Today, ECAs are collectively among the largest sources of public financial supportfor foreign corporate involvement in industrial projects in the developing world. Forexample, ECAs are estimated to support four times as many oil, gas and miningprojects as all the Multilateral Development Banks such as the World Bank Group9.

Typically, ECAs provide part of the finance required for a mining project’s purchasesof goods and services in the agency’s home country. For example, if Komatsu earthmoving equipment is to be used, the Japanese agencies would finance its purchase; ifCaterpillar equipment was planned, the American agencies would step in.

Bearing in mind that most of the heavy equipment used in mining operations ismanufactured in the developed countries, and many large construction companies are

9 According to the NGO Eca-Watch (www.eca-watch.org).


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based there, it is understandable that the involvement of ECAs from those countriescan be quite substantial.

Unlike the case of the World Bank or EBRD, there is no one central body supervisingthe environmental standards of ECAs. Environmental and social requirementstherefore vary substantially and, in recent years, ECAs have come under severecriticism from leading NGOs.

Since late 2000, the OECD has embarked on a difficult mission to codify andharmonise the ECAs' approach to environmental issues. In spite of 15 months ofnegotiations, no consensus has been reached, but substantial progress has been made.

In the words of OECD Secretary-General, Donald J. Johnston10 “the current proposalof common approaches, after fifteen months of negotiation, has also taken intoaccount consultations with civil society organisations. The implementation of thisproposal by most members from January 2002 will mean that all major exportingcountries of the OECD will now be applying environmental review mechanisms. Thisresults in the first common "greening" of export credits and should be seen as a majoraccomplishment".

In spite of the achievements of the OECD’s working party, at the time of writing mostECAs still did not have or have very weak disclosure policies. It is therefore difficultto assess their true impact on mining projects.

ECAs have played a very significant role in some well-publicised cases. For example,51 per cent of finance required for the largest mining project ever – the Antamina zincand copper mine, in Peru (US$2.3 billion) − was provided by the ECAs. They alsoplayed a significant part in the insurance cover for the remaining part. Japan's JEXIMalone provided US$245 million (18 per cent of the total finance) followed by theGerman KfW’s US$200 million and Canada’s EDC’s US$135 million. Forcomparison, the largest commitment from any of the participating commercial bankswas less than US$50 million. (For more details about the financing of Antamina, seeTable 6, below).

ECAs are the ‘quiet giants’ of mining finance. Their aggregated lending is probablymuch higher than all the commercial banks and multilateral institutions combined. Nodata are readily available for the mining sector, but in terms of general lending to(mostly large) projects, annual new commitments of officially supported exportcredits increased by more than four times between 1988 and 1996 (from about US$26billion in 1988 to US$105 billion in 1996). In 1996, they accounted for 24 per cent ofthe total indebtedness of all developing countries, and for 56 per cent of their officialdebt11. By comparison, annual financing of all projects by the World Bank during thesame period was only US$21.5 billion p.a.12. Some dispute these figures, claimingthat ECA activities in recent years were on a much smaller scale, reaching only

10 Quoted from the official OECD statement dated 4 December 2001, found athttp://www.oecd.org/oecd/pages/home/displaygeneral/0,3380,EN-document-347-nodirectorate-no-12-22688-24,FF.html11 According to the NGO ECA-watch (www.eca-watch.org).12 The World Bank Annual Report 2001.


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US$55 billion in 200013. Another source, however, puts the figure much higher – atUS$400 billion14 .

In general, ECAs have a poor environmental record. As recently as in 1998 most ofthem had no official environmental policies. A Working Paper prepared by Axel Breeand David Hunter for CIEL15 in September 1998 stated that:

“… all agencies, except for Israel’s, say they take environmental issues into accountto some, degree, but none of them have a detailed, written environmental policy as oftoday. Four of the agencies specifically referenced the 1998 OECD Resolution on theConsideration of Environmental Issues as providing guidance to them. For example,both Germany and France referenced the OECD resolution in explaining that theywere (or would be shortly) requiring applicants to complete an environmentalquestionnaire for proposed projects. Only Australia currently appears to require anenvironmental assessment of projects significantly affecting the environment,although the German agency’s questionnaire does ask whether an environmentalassessment has been done. A few agencies explicitly stated that they apply hostcountry or international standards. Three agencies, including those of Canada,France and Norway, are currently revising their policies.”

It seems that 1999 was a ‘wake up year’ for many ECAs. During that year the FrenchECA (COFACE) started working on environmental guidelines and appointed an in-house environmental expert with responsibility for environmental project review16.

In the same year, Japan’s Bank for International Cooperation (JBIC) publishedenvironmental guidelines17. JBIC is a successor (from October 1999) to the JapaneseECA, JEXIM, which has been involved in the Antamina copper and zinc mine.During a recent presentation to UNEP (October 2001), JBIC (one of the biggestlenders to the mining industry) explained its procedures for confirming theenvironmental consideration of projects financed by the bank.

According to their Environmental Guidelines, a project located in a “sensitive area”will be classified as a Category A project. When the project belongs to Category A,JBIC requires the submission of an EIA as a compulsory document for its review; asite visit will also be conducted by JBIC itself during the review process. A miningproject that is not located in a “sensitive area” will be categorised as a Category Bproject. For Category B projects, JBIC’s review process will be one of two differenttypes, depending on the project's potential environmental impacts. If the project isdeemed to have a potentially high adverse impact, it will be reviewed in almost thesame way as a Category A project (i.e. review based on EIA and site visit.). TheJBIC Environmental Guidelines also say that, based on its past experiences, CategoryA projects and Category B projects are both deemed to have significant likelihood of

13 According to COFACE – the French ECA.14 See footnote 42 for source.15 Paper published on www.eca-watch.org16 More information on COFACE’s environmental policies can be found on its website (published inSeptember 2001) http://www.coface.com/anglais/rub2/environment/environment.htm17 “Environmental Guidelines for JBIC International Financial Operations” is a comprehensive 54-pagedocument available from JBIC at http://www.jbic.go.jp/english/environ/guide/finance/index.php


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affecting the environment. Based on this recognition, JBIC will pay due attention tothe potential impact of those projects when conducting its review.

When the Environmental Guidelines were published, in 1999, JEXIM wascongratulated by many NGOs18 for “taking a first step towards environmentalassessment standards and moving faster than most of their ECA counterparts in thedirection of reform” it has also been severely criticised for “consideration but notimplementation of (…) internationally accepted standards and safeguards, ambiguouslanguage, inadequate assessment process, weak standards and lack of transparency”as well as “too much reliance on subjective borrower information”.

Similar voices of praise and criticism were raised at the same time when anothermajor player, the Canadian EDC, published its Environmental Framework in 199919.EDC was involved (among others) in two controversial mining projects with a historyof environmental problems: the Ok-Tedi copper project in PNG, and the Omai goldmine in Guyana,

It seems that the movement started at the meeting in Mesum, Germany20 in March1998 is bearing some fruit. It is no coincidence that the ECAs started to ‘wake up’ toenvironmental issues in 1999.

With the release of its new Environmental Framework, EDC is apparently seeking toassume a leadership role in discussions within the OECD Export Credit WorkingGroup. EDC also recently became a signatory to the UNEP Statement by FinancialInstitutions on the Environment and Sustainable Development.

The OECD working group has made significant progress on common environmentalguidelines for the ECAs, but so far no final standard of classification, screening orreporting has been agreed. For example, the Finnish Finnvera classifies large miningprojects as category A (compulsory EIA) and also requires that such an EIA beaudited by independent environmental experts, while other agencies could stillclassify such projects as category B. Similarly, while Finnvera requires the EIA to becompliant with ‘international standards’, other ECAs are satisfied with localstandards, recommending international and home country standards as ‘goodpractice’. For projects it classifies in category A, the Finnish ECA also requires asocial impact assessment21.

6.9 InsurersWhen discussing insurance of mining projects, a clear distinction must be madebetween insurance of the project and insurance of the investment.

While, as a rule, a project is insured by its owners, the equity and debt provided areusually not insured, except for Political Risk Insurance in some cases.

18 http://www.eca-watch.org/jeximmesum.pdf19 http://www.eca-watch.org/edcmezum.pdf20 163 non-governmental organizations (NGOs) from 46 OECD and developing countries gathered inMesum to discuss how to achieve environmental and social reforms for bilateral export credit, financeand insurance agencies (ECAs).21 www.finnvera.com


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The rationale behind not insuring bank investment is that, for project finance, bankseither have recourse to the sponsors (before completion) or to the project (aftercompletion).

In reality, banks avoid taking possession of a troublesome asset. If the project defaults(i.e. there is something wrong with it) most banks would rather extend extra fundingto it to ‘get things right’ than rush into taking it over.

In some cases, the lenders decided to write off the debt rather than becomeadministrators of a project. This was the case at Baia Mare, Romania, where banksdid not wish to be associated with one of the worst environmental disasters in Europein the last decade.

For base metals and coal, banks also require the project to be ‘insured’ against pricevariation through long-term off-take contracts. For precious metals, hedging is oftenrequired and may become part of the structured finance package offered by the bank.

6.9.1 Project Insurance

The standard insurance contracted by owners of projects at the construction stagewould cover:

• loss or damage to the project;• third party liability (this would also cover environmental liabilities to certain

limits);• marine cover (particularly if large items of equipment needed for the project are

to be transported by sea) 22.

The cover would normally extend to anything mentioned in the project detaileddescription. This may include social housing if this is a part of the project.

There are numerous interesting aspects of current insurance practice. The insuredparty is the owner of the mine, but the lending banks are heavily involved in draftingthe policy and liasing with the insurers. No policy will come into effect if it is notapproved by the lending banks. The banks are also named as parties to the insurancepolicy and the policy is assigned to them. In case of a claim, the proceeds go into aspecial bank account and the lending bank(s) decide how they should be distributedbetween the interested parties.

A minimum insurance schedule is written into the loan agreement.

Banks also frequently insist on a sponsor's guarantee – a pledge by the project ownersthat in case of the project not proceeding to completion the loan will be paid back bythe project owners.

Therefore, technically speaking, banks are not insured, but from the practical point ofview they are well covered.

22 Most information in this section was provided by Marsh UK Ltd - Bankrisk Services (StructuredFinance).


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When a project moves to the operational stage, it is covered by an OperationalInsurance Programme which typically covers:• property damage;• theft;• business interruption (7-14 days of lost production might be covered under

“business interruption”);• mechanical breakdown;• third party liability (property damage and bodily damage).

It was not clear from the author's research if events like a “business interruption dueto social disturbance caused by environmental concerns” would be covered. Ingeneral, most insurers would require that any damage suffered be “sudden” and“accidental”.Gradual events (like increasing pollution of a river by tailings) would not be covered.

In theory, specialised Environmental Cover is available covering a broader range ofsituations including gradual events, but it is very rarely (if ever) contracted.

Project insurance is usually bought via insurance brokers, and banks may employ aspecial adviser (like Bankrisk Services – part of the Marsh Group) to help them infinding the best balance between cost and cover.

6.9.2 Political Risk Insurance (PRI)

This type of insurance is taken directly by banks, either from private sector insurers orfrom ECAs or international institutions like MIGA. The cost is normally recovered infees from the sponsors.

PRI would usually cover:• war;• terrorism (not clear if environmental terrorism would be covered);• confiscation;• local currency non-conversion risk.

There is also a possibility of insuring against licence suspension by the hostgovernment but, in most cases, this is an optional extra.

In case of a large consortium of lenders, insurance matters are usually delegated toone of the consortium members (known as an ‘insurance bank’ or ‘technical bank’ or‘facility agent’). Such a bank appoints a specialised insurance adviser to liase withinsurance brokers and sponsors. The insurance adviser also makes sure that thecompulsory insurance requirements of the host country are met.

Insurance cost for an average project is estimated to be around 5 per cent of theproject value.

6.10 Construction firmsConstruction firms and their subcontractors play a vital role in finishing projects onschedule. Construction firms are equally responsible for adhering to the approved


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design. They are tied to the project by the EPCM contract awarded by the sponsors.They are usually required by the sponsors to provide a Construction CompletionGuarantee. More details on the role of construction firms in the investment processcan be found in the ‘Investment Timeline’ section below.

6.11 Service providersMany smaller and larger advisors and service providers, such as accountants andlawyers, are involved in the investment process. Their function, however, is of a moreadministrative than decision-making nature. It is not therefore discussed in greaterdetail here.

6.12 Local communitiesLocal communities may (or may not) be consulted in the pre-development process,even though their daily life is likely to be most affected by the new mining operation.Strict disclosure requirements of institutions like MIGA, IFC or EBRD makeconsultation with local communities compulsory. The level of consultation may varyconsiderably if these organisations are not involved. There are very few provisions forsocial impact assessment in ECA guidelines.

Some provision for local community consultation is made in EIA regulations in mostcountries.

7.0 Investment timeline

This part of the paper traces the investment process from early-stage exploration allthe way to mine closure, highlighting the key developments and participants at eachstage.

There is no set definition of stages for mining investment. The ones described beloware ‘consensus stages’ that emerged from the author's interviews and referencesources.

7.1 ExplorationThe term exploration covers the initial stages of searching for a mineral deposit, up toa point where the individual mining project begins to shape on paper. There are,however, no definite boundaries as to when the exploration stage ends and pre-development begins. The exploration stage is often measured in years and decadesmay elapse between the first indications of presence of a mineral and the first projectoutline.

7.1.1 Government preparatory work

Most mining projects start with preparatory work by the central or local governmentof the host country. This mainly includes preparation of geological maps of thecountry and allowing potential sponsors access to them. The quality and detail of thiswork has a considerable impact on all other stages of the mining investment processand can bring considerable benefits to the host country government. This work is


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usually done by the host country's relevant ‘Geological Survey’ or ‘Ministry ofNatural Resources’.

The World Bank is actively engaged in assisting governments with this work. Forexample, by extending a loan facility of US$40 million to the Government ofArgentina, it considerably accelerated this preparatory work which resulted in aninflux of exploration and mining companies to Argentina and a rise in thegovernment's mining revenue from US$300 million to US$3.1 billion in about fouryears23.

7.1.2 Desk research

The long route to an operating mine starts with desk research – studying the maps ofthe region of interest and looking for features indicating likelihood of the presence ofminerals of interest.

7.1.3 Exploration licence

Before moving to location, the potential prospectors have to obtain an explorationlicence. This is issued by the government of the host country and is limited to aparticular area; it may have a time restriction attached and may also be restricted to aparticular mineral. This latter restriction may potentially lead to conflict betweendifferent prospectors looking, for example, for gold and copper at the same locationunder separate licences. The cost of obtaining an exploration licence is usually low,e.g. in Sweden a 3-year licence can cost as little as US$1500.

7.1.4 Prospecting

On-location work usually starts with remote sensing and structural mapping usingimages from satellites and aircraft equipped with the appropriate sensing equipment.This is followed by a geologist’s visit to the site and soil sampling. Very limitedamounts of drilling may be involved.Impact on the environment at this stage is minimal – some noise and a few small drillheaps. It is nevertheless important to involve local communities at this stage, toexplain the purpose of prospecting. Early involvement shows the prospectingcompany to be environmentally responsible and caring about the community. It mayprove crucial in winning community support at later stages.24.

“This is where your reputation starts” – says John Groom from Anglo American plc –“and this is where it can finish if you don’t get your relationship with the communityright”.

The financing requirement at this stage is modest – typically US$10−50 thousand andis almost always provided by private investors or funded from the cash resources ofan existing mining company.

This stage is also known as a reconnaissance stage or grass roots exploration.

23 According to Peter van der Veen from The World Bank (telephone conversation, 19 October 2001).24 This is the approach Anglo American plc is aiming to adopt. (Conversation with John Groom – H&SOfficer of the company).


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7.1.5 Exploration Drilling

If prospecting and remote sensing indicate that there might be an economically viabledeposit, then the drilling programme begins. The extent of this programme and itscost and duration vary enormously depending on the nature of the deposit and itslocation.

It is usually assumed that exploration drilling requires US$30−100 per metre drilled.Cost of the drilling programme could easily run into several millions of dollars and atthis stage a junior exploration company may seek external financing, either fromprivate equity sources or by listing on the lesser stock exchanges like OFEX or AIMin London or the Canadian Venture Exchange.

The level of uncertainty at this stage is high. Banks are not therefore very interested inparticipating in financing. Debt financing is ruled out, as the project has no cashflowto pay the loan back.

Some banks would, however, consider equity involvement on a limited scale.Standard Bank (London) and Rand Merchant Bank (Johannesburg) are known tobecome involved in equity financing at this stage. Standard Bank limits itsinvolvement to a maximum of US$5 million in case of a robust project (typicallyUS$2−3 million).

The drilling programme could last anywhere from a few months to several years. It isusually stopped and re-started either for interpretation of the results, a scoping study(see next chapter), or because of weather conditions (winter/summer).

Environmental impacts increase with size, depth and the number of drillholes.Increased level of activity may also lead to anxiety among local populations aboutpotential future developments. Addressing these issues early is important for futuretrouble-free development of any project.

Some companies understand environmental and social issues better than others. Anexcellent example comes from a Canadian junior, Donner Minerals Ltd. (Donner)operating in Labrador. In September 2001, Donner, its South Voisey Bay partners,and Falconbridge Ltd., entered into an agreement whereby Falconbridge earned a50 % interest in the South Voisey Bay Project, located in Labrador, Canada.

The exploration activities were to occur in an area subject to land claims involving theInnu Nation. The Innu Nation requested companies with mineral interests in the areato seek Innu consent, and to abide by community guidelines.

Shortly after entering into the agreement, Falconbridge, Donner and the Innu Nationnegotiated an agreement to address environmental and archaeological issues and Innubusiness and employment opportunities at South Voisey Bay.

Under these agreements Falconbridge and Donner agreed to undertake certainactivities, including the following:1) to hire an Innu environmental monitor at certain times during active programs;2) to undertake archaeological and wildlife studies prior to any field activities

that involve ground disturbance;


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3) to provide the Innu with employment and business opportunities (e.g.expediting, catering, fixed wing and helicopter support);

4) the agreement is in force until such time as the Innu and the provincial andfederal governments settle Innu land claims, but is subject to periodic review.

7.1.6 Bulk sampling and test work

If the results of the Stage I drilling are promising, the programme moves to Stage IIdrilling. The main objective is to obtain a bulk sample to graph a more detailedprofile of the ore body. A bulk sample is typically 10−100 tonnes of ore. Test holesmight be 150 m long and deeper. Sometimes shafts are developed.

Stage II drilling may have more pronounced impacts on the environment − apart fromthe drilling itself, and the spoil heaps, explosives may be used and there is a lot oftruck and equipment movement.

At this stage, environmental responsibility rests very much with the prospecting anddrilling company. Its behaviour towards the environment is regulated solely by theexploration licence conditions (if any). In the UK, for example, all drilling takinglonger than two weeks requires planning permission25, but this is the exception ratherthan the rule.

Stage II drilling is financed in the same manner as discussed in the previous section.

7.2 Pre-development

Predevelopment activities for any project commence at identification of a deposit andcontinue until commitment by the owner to proceed with project construction or adecision to stop further evaluation.

The emphasis during this phase of development is primarily on determining thetechnical and economic options and potential viability of development of the depositand the risks associated with any future investment.

Predevelopment activities can, in their own right, directly add value to an identifieddeposit. They must, therefore, be engaged in with a view to best future return oninvested funds

7.2.1 Scoping study

All exploration efforts concentrate on answering the question “what is down there?”.The scoping study is the first attempt to answer the question “what can be done withthe deposit found?”

After initial identification of a potential resource, scoping or conceptual studies areundertaken to identify:

§ general features and order of magnitude parameters of the project;

25 According to C. Hall, Behre Dolbear, London.


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§ technical issues requiring further investigation or test work;§ costs and time required to undertake further predevelopment; and§ options for mining, processing, waste disposal etc, and preliminary evaluation

of viability, costs and acceptability.

Scoping or conceptual studies are not sufficiently accurate to carry out a meaningfulassessment of the economic viability of any project. The only questions addressed are‘whether’, and ‘how much’ further predevelopment effort is warranted. They alsohelp define the completeness of existing data.

If the results of the Stage II drilling are very conclusive and definitely indicate aneconomically attractive deposit, the scoping study stage may be skipped.

This kind of study is primarily undertaken by owners using in-house resources andstaff assisted by specialists or consultants assigned specific tasks. A ‘typical’ scopingstudy will take about 2−9 months and may cost US$40–60 thousand or 0.1−1 per centof the total project cost.

The cost of this type of study is financed by owners from their own resources.

7.2.2 Pre-feasibility study

While scoping studies mainly plot the route for further work before a decision isreached as to whether it is worth going ahead with mine development, the pre-feasibility study is the first rough attempt to shape the future project on paper and todefine the resources and reserves.

Once sufficiently accurate information is available, pre-feasibility studies can beundertaken with the objectives of:

• assessing the possible reserves and approaches to extraction;• identification of the techniques and rates of extraction;• outlining the possible features of the facilities;• developing capital and operating cost estimates;• testing the marketability of the commodity;• assessing the economic viability; and• determining what further efforts are required to allow the pre-development

activities to advance.

Pre-feasibility studies are generally sufficiently accurate to allow a comparativeanalysis of economic viability to be developed for alternative capacity and projectconfigurations.

Depending on the owner’s expertise and the complexity of the project, the pre-feasibility study is either led by the owner’s in-house staff with areas assigned toconsultants, or entirely subcontracted. A popular solution is to assemble a team ofindividual consultants from different disciplines coordinated by an in-house projectmanager.


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The full EIA is usually not done at this stage, but baseline studies are more common.These are, in reality, preparation for an EIA at later stages. The main aim of suchbaseline studies is to obtain a ‘before’ picture of the environment of the locality. Thestudy has to monitor the environment through the full cycle of seasons; it thereforelasts for at least one full year.

A ‘typical’ pre-feasibility study will take about 9−13 months and may cost US$80–160 thousand, or 0.2−2 per cent of the total project cost.

7.2.3 Feasibility study

This type of study is the most serious attempt to shape the future mining project onpaper before raising finance to pursue it. The key questions it has to answer are:

• How big are the reserves?• How much is minable (from both technical and economic points of view)?• What is the best method of mining and/or processing it?• What are the limiting factors (including social and environmental)?

Feasibility studies are undertaken at two levels:

• for internal final assessment purposes (mainly in larger mining companies);• to obtain external funding, (‘bankable quality feasibility study’).

Based on the alternative sizes and configurations evaluated during the pre-feasibilitystage, one size and configuration is generally selected and technical and economicfeasibility established within the accuracy limits of the available data.

Feasibility studies are undertaken with the objectives of:

• establishing the proved and probable reserves within the overall measured,indicated and inferred resources;

• proving the technical viability of the mine and extraction methods;

• defining the features and capacity of the facilities;

• estimating the development, capital and operating costs of the mine over theeconomic life of the resource;

• establishing the market for the commodity;

• completing economic assessments of the selected project configurations;

• assessing the economic sensitivity of the proposed development to variousfactors;

• setting a framework for the implementation of capital investment in thedevelopment.

In mature mining companies the feasibility study is usually managed by the owner'sstaff assigned fully to the study, with defined areas or disciplines being assigned toconsultants or contractors. In the case of so-called small and medium enterprises, it isalmost always contracted-out to a specialist technical consultancy firm or EPCMcontractor.


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There is a great deal of ambiguity as to what the feasibility study involves. Fortechnical consultants, for example, it is a finite set of documents to be presented to thefinanciers. For others, this is the part of the investment process between explorationand construction involving any activity including legal due diligence, permitting, etc.According to some interviewees, it can cost as much as US$20 million26. However,the consensus figure is more in the region of half a million to several million dollars,depending on the complexity and size of the project.

A ‘typical’ feasibility study will take 1−2 years, and may cost anything from US$400thousand to US$5 million and more, or 4−8 per cent of the total project cost.

The differences between scoping, pre-feasibility and feasibility studies can also bedescribed by the degree of accuracy and contingency resulting from each study27.

Accuracy is defined as “the forecast of the probable magnitude of one standarddeviation from the mean of an estimate”. It does not set an absolute range or limit onthe estimate.

One standard deviation for a normal distribution results in two chances in three of theactual cost being within plus or minus one standard deviation of the mean.

Hence for an estimate quoted as $100 million ± 10 per cent there are two chances inthree that the final cost will be between $90 million and $110 million. (Poorestimating will increase the likelihood of the estimate being outside of the onestandard deviation range.)

Contingency is defined as an amount assigned by experienced estimators to covercosts that will occur but for which a specific scope cannot be established fromavailable drawings, specifications or schedules.

Contingency is not provided to allow for changes in scope, capacity or schedule and isevaluated from experience based on the quality of definition available at the time theestimate is prepared. It is a true estimated cost, with no discretion as to whether it willor will not be disbursed.

Activity Scoping - Conceptual Pre-feasibility Feasibility Definitive

Accuracy 30−35% 20−25% 10−15% 5−10%

Contingency 20−25% 15−20% 10−15% 5−10%

Table 2: Accuracy and Contingency at various stages of the mining project

The last column in Table 2 refers to a Definitive Project Cost Estimate, made at theconstruction stage.

The relative difference between stages is well illustrated by the following series oftables taken from the Cost Estimation Handbook for the Australian Mining Industry,published by the AUSIMM, 1993. When interpreting the tables, it should be borne in

26 C. Hall, Behre Dolbear.27 Cost Estimation Handbook for the Australian Mining Industry, AUSIMM, 1993.


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mind that the values expressed there are in 1992 Australian dollars28. They areprovided here to illustrate proportions rather than absolute values.

Scoping Study MonthsEstablish data and basis of study 2Study core period 3−4Review and evaluation 2−3

Total 7−9Pre-feasibility Study

Establish data and basis of study 2−3Study core period 4−6Review and evaluation 3−4

Total 9−13Feasibility Study

Establish data and basis of study 3−4Study core period 6−9Review and evaluation 3−4

Total 12-17Source: Cost Estimation Handbook for the Australian Mining Industry, published by the AUSIMM, 1993

Table 3: Typical duration of pre-development studies

Cost trends for each stage of predevelopment range, in AU$ (000’s) at 1992 values,are shown in Table 4.

These cost trends are generally valid for projects in the AU$50−200 million rangewith normal levels of complexity in the mine, processing and infrastructure facilities.

Table 4: Predevelopment Cost (AU$ 000’s)

In addition to these task-dependent costs there is a certain level of time-dependentcost, mainly the management time of the owner's project team. 28 Current exchange rate (October 2001) is around 1US$ = 2 AU$.

Activity Scoping Pre-feasibility Feasibility

Mine development including geology andhydrology 30−40 40−60 80−100

Extraction or processing excluding laboratorytest work 20−30 40−60 80−100

Facility definition or preliminary engineering 10−20 40−60 150−300

Capital and operating cost estimates 5−10 10−15 20−30

Environmental (very locality specific) 5−10 30−40 150−350

Site issues - survey, services, geotechnical nil 10−20 40−80

Total AU$(000’s) 75−120 180−275 540−1020


34

At today’s prices (2001) the total cost of a full feasibility study is likely to be inthe region of US$1–2 million (2−4m AU$). Figures for Australia tend to be lowerthan elsewhere because projects there are usually less complex.

Figure 2: Mine Pre-development Owner Direct Costs - Cumulative

Costs of development can vary significantly in accordance with client approach,resource, location and project size factors. Guidelines to costs are therefore sensitiveto many issues. With these riders in mind, the typical overall cost factors are listed inTable 5Owner’s costs are included, but resource delineation, test work, legal and marketingcosts are excluded.

Table 5: Overall Guidelines to the Cost of Predevelopment

Internal feasibility studies may be less accurate and detailed than a bankablefeasibility study – a document that will form a basis for banks to decide whether ornot to finance a project.

Costs as percentages of capital cost

Stage Complexity and/or sizeLow Moderate High

Scoping or Conceptual 0.10−0.20 0.20−0.50 0.50−1.00Pre-feasibility 0.20−0.50 0.50−0.75 0.75−1.50Feasibility 1.00−2.00 1.50−2.50 2.50−3.50Total % of Capital 1.3−2.7 2.20−3.75 3.75−6.00

1000

2000

1500

500

2500

0

Inclusive of Staffing, Overheads and ExpensesExcluding Drilling, Exploration and Test Work

FeasibilityHigh Complexityor size

FeasibilityMedium Complexityor size

Pre-feasibility study

Scoping study

Complex

Medium

0 5 10 15 20

AU$ Thousands

Months


35

At some point during the preparation of a feasibility study, the owners have to applyfor the operating licence (mining licence) – there is not much point in spending allthe money for the study without the certainty that the company will be allowed tooperate once it has raised the necessary finance. Equally, banks would not providefinance before the operating licence is obtained.Depending on the regulatory framework of the host country, a separate environmentallicence may be required.

A very important and integral part of a feasibility study is a cashflow projection of theproject.

As discussed in the Stakeholders section of this paper (0), in recent years,construction companies have started to offer feasibility studies as part of their serviceportfolio. These studies may be much cheaper than those provided by independentconsultants and draw a lot of criticism, as the construction companies have a vestedinterest in projects progressing to construction stage and therefore cannot be trulyunbiased in their assessment of the viability of the project.

A good feasibility study should also contain provision for mine closure, howeverremote that might be. Some companies (like SRK or WA) include them as a matter ofcourse, others when instructed by the client.

7.2.5 Environmental and Social Impact Assessments (EIA & SIA)

The Environmental Impact Assessment (EIA) is an important element of a pre-development stage of mining investment.

Some of the author's interviewees saw the EIA as an integral part of a feasibilitystudy. Others saw it as a separate document in its own right (implying that in theorythere could be a feasibility study without one). Isolated voices claimed that when theEIA was not a regulatory requirement in the host country, there was no need toprepare one. (Apparently it is not required by law in Romania).

ECAs usually require an EIA only in case of financing of the most environmentallysensitive projects falling into ‘category A’. Mining projects do not always fall intothis category.

However, most banks and technical consultants stated categorically that they wouldnot even think of lending to a project without an EIA. In most countries today,presenting the EIA (and the associated environmental management and closure plans)is a condition for obtaining an operating licence.

The EIA analyses the impact on the environment (water, soil and air in particular) ofthe selected mining/processing method. It might recommend alternative technologies,which were rejected in a pre-feasibility study if they have a lesser impact on theenvironment. Finally, it suggests ways of mitigating the negative impact.

In particular the EIA needs to:

§ consider alternatives;


36

§ assess impacts in terms of size of effect and perceived/actual value ofresources impacted;

§ evaluate mitigation options;§ assess residual impacts;§ include the Environmental Management Plan (EMP) − (especially for

accidents and monitoring); and§ assess impact of mine closure.

Mitigation, monitoring and closure should be costed, as well as social impact fromconstruction and operations.

In the process of preparation of the EIA, some form of public consultation usuallytakes place.

The situation is less clear with the Social Impact Assessment (SIA) and theassociated Social Management Plan (SMP). Some consultants would include socialelements in the EIA, others would prepare a separate document, but many admit thatwhen costs have to be cut, the SIA is usually one of the first victims. A good exampleof a combined socio-environmental impact assessment is the EIA prepared for theCanadian nickel deposit at Voisey's Bay.

In case of brownfield development (if it is basically a continuation of an existingoperation), an EIA may not be required. However, there has been a growing trend inrecent years for licensing authorities in many countries to require EIAs for brownfieldprojects as well. These EIAs are, however, more focused and restricted in their scope.

An interesting example of such an EIA is a ferro-chrome slag extraction project inRussia. Large quantities of waste slag from previous smelting operations are to beprocessed in a new plant to recover the metallic elements. A limited scope EIAfocusing on positive impacts is currently under way29

7.3 FinancingOnce the bankable feasibility study has been prepared, the project is ready to obtainfinancing for its construction.

In theory, the owners prepare the feasibility study with the help of externalconsultants and present it to a bank with a request for finance. In practice, banks getinvolved at a much earlier stage, either formally as advisers, or less formally.

In fact, the whole process of preparing a feasibility study (which may take up to twoyears and more) is a process of ‘going back and forth’ between the owners and thepotential financiers. This approach increases the probability of obtaining finance andallows banks to signal their requirements at an early stage.

Banks’ interest in the project is usually of a two-fold nature:• as potential financiers;• as advisers to the owners.

29 Information from a reputable independent firm of consultants. The name of the project cannot berevealed, as bidding for the project is still in progress.


37

The latter is frequently more financially rewarding and less risky than actually lendingmoney to the project.

Apart from different debt and equity products that could be used to finance a project,there are many possible approaches to organising multiple financiers. The two mostpopular are:

• to have an adviser;• to have an arranger.

In the first case, the owners hire a bank or financial services company30 acting asadviser to them for a fee. Such a bank may or may not also be involved in financing(usually not). The bank’s mandate is to act on behalf of the owners and to find enoughsources of finance, be it equity or debt, to cover the project. The adviser will liasewith the stock exchange, arrange the due diligence and negotiate with other banks toobtain best lending terms for the owners.

In the second case, the key lending bank takes the reins and finds other banks to forma syndicate or consortium. It is also usually an underwriter of the deal.

7.3.1 Financing strategy

The formulation of an appropriate project financing strategy follows sequentially afterestablishment of technical and economic feasibility, and starts much earlier than abankable feasibility study.

Raising finance is not merely an extension of the feasibility activity, it is a distinctactivity in its own right and, from a project sponsor’s viewpoint, is dependent not onlyon project economics but also on corporate philosophy and strategy.

Sound financing principles are based on thorough cashflow analysis which, in turn,depends on an accurate and detailed feasibility study.

Another major element of successful financing is the identification and satisfactorymitigation of key project risks. In view of the lead time involved in raising finance, itis recommended that detailed financing studies commence as early as possible and, inany event, no later than during the preparation of the pre-feasibility study.

Initially, a financing plan is formulated containing likely financing concepts,including levels of equity, debt, and perhaps alternative financing structures.

This plan forms the basis of financing and is subsequently refined or modified oncompletion of the final feasibility study and as more accurate information becomesavailable.

30 E.g. Cutfield Freeman, Warrior or PWC.


38

7.3.2 Financing methods

Essentially, there are two financing methods for any project: equity and debt. Mostproject financing is a balance between the two.

7.3.3 Equity financing

Early stages of the mining investment process (from exploration to pre-feasibilitystudy) are almost exclusively financed by equity.

All investments are highly speculative at this stage and the project has no productionor cash flow to repay any debt. Amounts of money involved are comparatively small,from tens of thousands of dollars to a million.

Equity funding at this stage comes from private individuals, company’s own cashresources, joint-venture partners, sometimes governments, and sometimes from publicequity raised through specialised stock markets like OFEX or AIM in London, theCanadian Venture Exchange, or ASX in Australia.

According to the UK consulting firm SRK, only about one-third of earlyexploration/scoping study projects ever progress to the production stage.

Some banks would consider equity involvement on a limited scale. Standard Bank(London) and Rand Merchant Bank (London) are known to be involved in equityfinancing. Standard Bank limits its involvement to a maximum of US$5 million in thecase of a robust project (typically US$2−3 million).

Equity financing can also be used to raise the main funds for mine construction, but itis more common to use project finance (debt) for this purpose, at least in case of newgreen field projects. The share of equity is proportionally much greater in expansionof existing projects and in privatisations.

Equity finance is usually raised ‘in one go’ with additional new tranches raised asnecessary.

Also, see ‘Structured Finance’ section (0) below.

7.3.2.2 Debt Financing

Debt finance falls into two categories: project finance and corporate finance.Project finance

Project finance (known as the ‘mining finance’ in the sector) covers commercialloans linked firmly to a particular mining project. The release of money is strictlylinked to certain stages of project development, and the project itself is treated as asecurity for the loan with the project’s cashflow repaying the loan. This type offinancing is most common for the majority of mining projects, large or small. Therelease of money in project finance is staged and closely linked to achieving certainstages in construction. A vital step of this type of financing is the change of statusfrom ‘recourse’ to ‘non-recourse’ at the point of commissioning (see‘Commissioning’ section (‘0) below).


39

Corporate finance

Corporate finance is lending money to a company to spend ‘as the company wishes’.This type of finance is not linked to any particular project, though it may very well beused for one. Depending on the size of the loan and the credit assessment of thedebtor, these loans may be secured or unsecured. Bankers tend to extend this type ofloan to established companies where the level of confidence is high. Release ofmoney is either in a one-off payment or (more typically) as a stand-by facility, whenthe debtor can draw according to its needs.

7.3.2.3 Structured Finance

Structured finance is a hybrid where part of the amount required is provided byequity (frequently via full listing on a major stock exchange) and a part is provided asproject finance (debt). Other products could be added to the mix – notably corporatebonds, preference shares, convertible notes, and shareholder loans. Some productsare frequently linked to a series of commodity futures and options transactions onthe London Metal Exchange, Comex, London Bullion Market, etc.Structured finance is used to alter the project’s risk profile, to raise more money thanwith straight debt or equity and also, quite frequently, for tax reasons.

7.3.3 Typical products

The number of financial products on offer is as broad as the imagination of theirinventors and marketing departments. New products are invented almost every weekand the competition between banks forces them to use a variety of different names foressentially the same thing. The description of products below does not form anexhaustive list; the products listed are, however, the most typical used in the financingof mining projects.

Commercial Bank Loans

Commercial bank loans are the most common source of debt finance for projects andare available in all major currency denominations. The most common currency used isthe US dollar, being the trading currency in which prices of most major commoditiesare quoted, thereby providing a natural hedge for loan principal and interest paymentsagainst currency exchange rate fluctuations.Commercial bank loans have been used to finance most of the major mining projectsworldwide in recent times.

Gold and Silver Production Loans

These were a common source of debt finance in the previous decade, particularly inAustralia when gold mining enjoyed tax-free status. Gold or silver loans may beprovided directly by commercial banks or, for smaller transactions, by bullion houses.Alternatively, the transaction may involve a bullion lender in addition to acommercial bank, which would protect the bullion lender against the risk of non-delivery of gold or silver.

Commodity Indexed Loans

These types of loans may be offered as a funding option within the financingstructure, typically for base metal projects, whereby loan proceeds are disbursed andprincipal repayments are made in cash. Principal repayments are indexed to the priceof the commodity produced.


40

Leasing and Tax Driven Structures

Various leasing structures are available to finance a range of plant and equipment,from processing facilities and major items of mobile equipment to small fleetvehicles. Such structures include direct leasing, leveraged leasing, cross-borderleasing. However, leasing structures are rarely used nowadays, since tax benefitscurrently available do not provide sufficient justification.

Leasing has largely been replaced by innovative tax driven structures designed tomaximise tax benefits and create economic advantage for the project sponsor.

Development Bank Loans

Loans may be provided by the IFC or area development banks such as the AfricanDevelopment Bank or the EBRD particularly for mining projects in developingcountries. Such loans are usually made to projects in countries where commercialbanks may be reluctant to lend without the protection of either political risk insuranceor the presence of a development bank as a provider of debt or equity to the project.

Export Finance

These are loans, provided by various government export agencies for certain items ofqualifying equipment or services to be purchased from the country providing thefinance, usually as part of a project’s capital requirements. In terms of volume, thistype of financing plays a very important role in mining finance on a par (if notexceeding) all commercial bank lending (For more information, see section (6.8),‘Export Credit Agencies’).

Vendor Finance

Vendor finance is equipment finance provided by manufacturers or suppliers of majoritems of equipment to promote sales. This method of financing is no longer common.

7.3.4 Finance providers

Investors (Equity Holders)

Equity is usually raised either via the stock exchanges or via private placement frominvestors and using sponsors’ own funds.

Banks

Debt financing is mostly provided by commercial banks like Deutsche Bank,Citibank, Standard Bank, Dresdner31, Barclays, ANZ Bank, WestLB and such like,but also by specialised development banks (usually focusing on a particular region,e.g. African Development Bank or the EBRD).

Multilateral financial institutions

Multilateral financial institutions like the IFC, tend to lend to projects in more riskycountries needing development.

31 Dresdner Kleinwort Wasserstein officially withdrew from the financing of mining projects inOctober 2001.


41

Export Credit Agencies

As already explained (section 6.8), export agencies get involved where there ispurchase of capital equipment from countries of the equipment's origin. In the case ofthe Antamina copper and zinc mine (US$2.3 billion), ECAs provided 51 per cent ofthe debt finance, guaranteed 8 per cent and were part of the consortium guaranteeing afurther 25 per cent. In one way or another, ECAs were, in this case, involved inarranging over 84 per cent of the debt finance required. The exact breakdown of theirparticipation in the project is shown in Table 6 and Figure 3, below.

Banks Consortia and Syndicates

To spread the risk, banks frequently act as syndicates or consortia when financinglarge projects (usually above US$50 million). These maybe of a club type, where allbanks are equal, or subordinated when one bank plays the major role of the ‘arranger’(or ‘lead’) assigning roles to other banks. The decision-making process (includingenvironmental and social issues) on the type of the consortium or syndicate. In case ofa single ‘lead’, the ‘lead’ decides on the acceptable standards, in case of a club-likearrangement it is not so clear. In either case, the banks want to believe that the(environmental audit) standards the consortium works to are “the highest commondenominator”32.

7.3.5 Financing process

There are two main scenarios in the financing process, outlined below.DIY with an adviser

The mining company has its own adviser (usually a bank or an advisory boutique).The company then talks to many banks simultaneously on a one-to-one basis andchooses its financiers with the adviser.

Even though the initial negotiations between the banks and the sponsors might be on aone-to-one basis, the final deal is usually a coordinated consortium agreement. Intheory, the company could enter into a series of bilateral loan agreements withindividual banks, but in practice this never happens. The drawback of such a series ofun-coordinated, one-to-one negotiations for the company is the amount andmultiplicity of the paper work and the need to satisfy, sometimes, different requestsfrom different banks. The advantage is the potentially lower borrowing cost.

Leave everything to the arranger

The mining company approaches one of the potential financiers and asks it to eitherlend or arrange with other banks to lend the required amount. Assuming that the bankfinds a feasibility study ‘bankable’, the process of syndication begins.

There are no hard and fast rules as to how the chosen bank approaches this process. Itmay opt for a club-like agreement with other banks or can benefit from its positionand ‘assign’ roles to other banks. These roles may be either just lending or performingcertain administrative functions, or both.

32 This is an issue open for discussion because all the banks must agree about the standards beingapplied (as described in Information Memorandum). If, therefore, one of them applies higher standardsand does not agree with what is being proposed by the ‘lead’, it may walk away from the table andtherefore not be a part of the consortium. Could this, in fact, lead to a ‘lowest common denominator’?


42

Regardless of whether there is one, two or a whole group of banks, a negotiationprocess between the company and the bankers begins. Depending on the complexityof the project and the number of banks involved, this process can last from severalmonths to two years.

7.3.5.1 Competent Person’s Report

Normally the first thing the bank would do is to ‘get a second opinion’ i.e. ask anothercompetent technical consultant (a specialised firm) to read and critically assess thefeasibility study. This could last 1−2 months and cost US$70−120 thousand. It mayinvolve site visits, sample taking and, occasionally, drilling.

Key elements to be checked should also be the competence and experience of minemanagement and the management reporting and feedback procedures. This is a non-technical part; it should therefore should be assessed by the bank as well as by theconsultants.

As a result of this review an Independent Engineers Report is produced.

The importance of these competent technical consultants cannot be overestimated.Ultimately they ‘have the knowledge’ of what is required for a successful andenvironmentally-sound mining operation. Lending banks rely on them heavily, bothfor completeness of the feasibility study and for ‘the second opinion’.

“There are only so many hours in the day” one banker said, and consultants say thattheir teams are too small to be able to check everything.

In the case of Baia Mare, Romania, one of the worst cyanide spills in Europe in recentyears, the consultants’ report stated that “the water balance was not checked, but weconsider the issue to be immaterial”. After the event it turned out that poor monitoringof the water table and unusually heavy snowfall were the main causes of the disaster.The water balance was, in fact, very ‘material’. As a result, two financing banks wroteoff their loans. Shareholders lost all their equity. No one was prosecuted.

More and more often, banks are requiring that a feasibility study be prepared by‘reputable consultants’ from a pre-approved list.

The heavy reliance on consultants came up over and over again during the author'sinterviews: "banks shouldn't be second guessing" one banker stated, and expressed theopinion that what they should be doing is having the original feasibility study auditedby another reputable independent consultant. When clients' resources are limited, thisis not always done.

Unlike doctors or barristers, there is no ‘central licensing authority’ stating who is andwho is not a ‘competent person’. There are different sets of guidelines issued byprofessional bodies, such as the Institutions of Mining and Metallurgy. As aconsequence a ‘competent person’ (individual or a company) who makes a majorblunder has only a reputation to lose, not a licence (as there is none). In the case ofenvironmental issues, ISO 14000 certification of a consultants’ firm could provide a


43

form of reassurance for its clients. The subject of ‘reputation’ is discussed further inthe ‘Views from within the Finance Industry’ section (8) below).

In case of raising of equity through stock exchange listing, the exchange wouldnormally have quite specific rules describing who can and cannot be a ‘competentperson’, but these rules vary considerably and tend to be less stringent for more juniormarkets.

7.3.5.2 Information Memorandum

The Competent Person’s Report in turn becomes the basis for an InformationMemorandum, distributed to other banks invited to participate in the financing. TheInformation Memorandum contains the detailed description of the project (includingthe project economics and cashflow projections) as well as the suggested terms andstructure of financing.

7.3.5.3 Due diligence

Due diligence is the whole process of the bank's ‘checking up’ on the project. Inaddition to the steps described above, it involves checking the property title, potentialnative title, and that the company has obtained required licences from the hostcountry’s (and local) government, and any other material issue.

7.3.5.4 Conditions Precedent

Once due diligence is completed, and the bank is satisfied with the proposeddevelopment, it issues a conditional offer to finance the project subject to ConditionsPrecedent being met.

There are certain important aspects of the project − depending on the particularfinancing arrangements − that the sponsor has undertaken to carry out in theformation and development of the project and that the bank insists on being finalisedbefore funds will be advanced.

Conditions Precedent usually cover the spectrum of technical, commercial, financialand legal inputs to the project. Responsibility for meeting these requirements usuallyfalls well outside the control or influence of the project’s technical experts. From aproject planning and scheduling point of view, it is important that the likely timeframefor satisfying Conditions Precedent be taken into consideration.

Matters referred to in this regard could include: execution of major constructioncontracts and sales contracts; permitting approvals to have been obtained;environmental plans and independent consultants’ reports to have been prepared; andfinancial audits and legal reviews, etc. to have been undertaken. And all this to thebanks’ satisfaction.

7.3.5.5 Loan documentation and legal reviews

Loan documentation is a time consuming and costly exercise, and it is usual for thisactivity to overrun both time and cost expectations.

The costs of loan documentation are always borne by the project sponsor and includethe cost of legal advisers for both the sponsor and the bank.


44

Costs of loan documentation would not normally be directly relevant to theestablishment of economic feasibility of a project. However, the time elementinvolved in marshalling finance for project construction may be directly relevant tothe project development schedule. Given the interdependent nature of technicalproject development and fund raising and, since loan documentation is normally theresponsibility of the sponsor company’s finance department, a coordinated approachis needed in scheduling these activities to avoid possible delays.

For large projects with numerous finance providers, the financing process can becomevery complex. Table 6 and the graph in Figure 3 show the project finance structure forthe Antamina zinc and copper project.


45

Table 6: Financing of the Antamina Zn/Cu Project, Peru

Type ofLender

Insurancecover Lender

Amount(US$

million)

% of totaldebt

financingJEXIM 245.00 18.3%KfW 200.00 14.9%EDC 135.00 10.1%

Not Covered

Leonia Bank 55.00 4.1%

Export CreditAgencies($689m)

Finnvera ABB Bank 54.00 4.0%Bank of Tokyo-Mitsubishi 40.00 3.0%Fuji Bank 25.00 1.9%ABN Amro 5.70 0.4%ANZ Investment Bank 5.70 0.4%Bank of Montreal 5.70 0.4%Bank of Nova Scotia 5.70 0.4%Barclays Capital 5.70 0.4%CIBC 5.70 0.4%Citi Bank/Salomon SB 5.70 0.4%

PRI providedby JEXIM($105m)

Deutsche Bank 5.70 0.4%ABN Amro 20.70 1.5%ANZ Investment Bank 23.03 1.7%Bank of Montreal 7.80 0.6%Bank of Nova Scotia 20.70 1.5%Barclays Capital 20.70 1.5%CIBC 26.50 2.0%Citi Bank/Salomon SB 23.00 1.7%Deutsche Bank 20.70 1.5%Dresdner 40.00 3.0%Societe General Securities 37.50 2.8%West LB 30.00 2.2%Toronto Dominion Bank 37.50 2.8%Royal Bank of Canada 16.60 1.2%

PRI providedby syndicate

of:EDC

Office Nationaldu Ducroire

MIGASovereign Risk

InsuranceZurich US

($335)

Dai Ichi Kangyo Bank 10.00 0.7%ABN Amro 17.30 1.3%ANZ Investment Bank 15.00 1.1%Bank of Montreal 35.90 2.7%Bank of Nova Scotia 17.20 1.3%Barclays Capital 17.20 1.3%CIBC 11.60 0.9%Citi Bank/Salomon SB 15.00 1.1%Deutsche Bank 17.20 1.3%Banco de Credito del Peru 25.00 1.9%Royal Bank of Canada 8.30 0.6%Dai Ichi Kangyo Bank 5.00 0.4%Banco de Lima Sudameris 10.00 0.7%

Co

mm

erci

alL

end

ing

($65

0m)

Not Covered

Banco Continental 10.00 0.7%

Total Debt 1,339.03 100.0%

Total Equity 935.00

Total Project $2.27 billion

Source: Mining Finance Magazine


46

Figure 1: Financing of the Antamina Zn/Cu Project, Peru(debt only)

Export Credit Agencies

Commercial Lending18 banks

Guaranteed by Finnverafor ABB Bank

Not guaranteed

Guaranteed by JEXIM

Guaranteed by

syndicate:EDCONDMIGA

Sovereign RIZurich US

Not Guaranteed

Out of the total US$2.26 billion required forthe project, equity partners provided 41 percent. The remaining 59 per cent (US$1.33billion) were provided by 23 financialinstitutions in four tranches. Two trancheswere covered by the Political Risk Insuranceprovided by JEXIM and syndicate ofinsurers, led by Export DevelopmentCorporation from Canada. Most commercialbanks participated in three tranches withdifferent terms and different insurancecoverage (see Table 6 for details).

Source: Mining Finance Magazine


47

7.4 DevelopmentPhysical construction of a mine begins long before the first cheque is issued by thefinancing bankers, according to the rule that “equity goes in first”. Obviouslysponsors must be reasonably confident that they will get financing to finish theproject, so the negotiations with debt providers must be well underway. The ‘equityfirst’ rule also gives banks more confidence in the project. By the time of the first loandrawdown, as much as 30 per cent the project’s total value may have already beenspent.

Depending on the complexity of the project, the construction phase can last from eightmonths to two years.

7.4.1 Final Design

A fairly detailed description of the mine has already been provided in a feasibilitystudy, but it now has to be broken down to the very last nut and bolt required forconstruction. The task of final design is normally entrusted to the constructioncompany that will carry out the construction (e.g. Bechtel. Kvaerner, SNC Lavelin,AMEC, Bateman, Lycopodium, etc.).

7.4.2 Construction

The company selected to build the plant is normally awarded an EPCM contract andis also responsible for managing all purchases of equipment for the project.

Some banks appoint an independent engineer at this stage to monitor constructionprogress and adherence to the loan agreement and conditions precedent. This isusually the same company as the one used to prepare the Independent EngineersReport.Appointing such an engineer becomes compulsory when financing is by a consortiumor syndicate of banks.

7.4.3 Commissioning

The construction stage ends with the Mechanical Completion Certificate and theplant is ready for commissioning. Engineers differentiate between ‘dry’ and ‘wet’commissioning, but from the financiers’ point of view the most important iscommercial commissioning. It takes place within around three months of technicalcommissioning once certain quality and commercial parameters of the operation aresatisfactory.

Commercial commissioning is not only a ‘moment of glory’ for planners andconstructors (with a few exceptions in recent years) but also a ‘point of no return’ forthe financiers – in most loan agreements it is at this point that the loan ‘goes ‘non-recourse’, i.e. the sponsor is no longer held responsible for the repayment of the loanshould the project fail. This moment is typically refereed to as Completion by thebankers.

The commissioning process is usually monitored by the bank’s independentconsultant. When finance is raised through syndication, such a monitor is alwayspresent.


48

7.4.4 Non-recourse

For most mining finance deals, the lenders have recourse to the sponsors in case ofdefault before commercial commissioning. In other words, if the project fails forwhatever reason (commercial or technical failure, loss of licence or abandonment dueto social unrest/pressure) the sponsors are expected to repay the loan from otherresources. In practice they have to rectify the problem or raise more equity.

In the case of established companies with other active and established operations inparticular, this recourse affords reasonable comfort to banks.

After commercial commissioning, the only recourse the lenders have is to the project.In theory, this is security enough − after all, the borrowed money has been spent onthe project and the cash converted into project assets.

In reality, recourse to the project is the last thing banks want. The very fact that therewas a default means that something must have gone wrong with the project, be it anenvironmental disaster, local community protests or a technical flaw. Therefore,taking possession of the project means acquiring a ‘troublesome asset’, which may beworth less than the sums originally invested in it. There can be additional liabilities,e.g. for a clean-up operation.

Furthermore, bankers are, after all, not very good at operating mines. They wouldneed somebody else to do it for them, incurring further cost and inconvenience. Incase of a consortium (see the Antamina graph in Figure 3) it may be very difficult tomanage the jointly owned project.

Re-possessing a project in case of default is the last resort for lenders. They will oftenre-schedule the original loan or even lend more money to the project to put thingsright rather than risk re-possession and the associated trouble.

Some would rather write off the loan than become owners of a troublesome project. Itis now common knowledge that this happened in case of the cyanide spill in Romaniain January 2000 – each of the financing commercial banks wrote off US$4 millionand ‘walked away from the project’.

7.5 OperationOperation is the longest period in a mine’s life and can extend to 20 or more years.Project finance loans tend to be medium- to long-term: frequently 5−15 years. Smoothand trouble-free operation of the project they have financed is in the bank's bestinterest.

This is also a period when banks are usually very passive – simply collectingrepayments − and a period when things are most likely to go wrong. Wear and tear,increasing complacency on the part of management and staff, and increasinglydifficult geological conditions are all ingredients of a potentially fatal environmentalaccident.

The most common disasters include tailings dam failures and contamination of waterby cyanide or heavy metals from the tailings.


49

Progressively more visible deterioration of the environment (growing in proportion tothe size of the operation) can also radicalise the local population and cause socialpressure and/or unrest, that may result in the mine closure (e.g. Ok-Tedin in PNG).

To minimise potential liabilities, owners usually create a ‘financial vehicle’ to operatethe mine. The operator is typically a limited company co-owned by the sponsors.Because of its limited responsibility status, any potentially financially ruinousliabilities arising from a disaster are capped at the level of the capital of the operatingcompany.

This was precisely the case in the Baia Mare cyanide spill – the mine operator wasAurul S.A. – a Romanian company 50 per cent owned by the Australian miningcompany Esmeralda Exploration Ltd, with the Romanian government holding a 45per cent stake and the remaining five per cent being owned by Romanian enterprises.The pre-disaster market cap for Esmeralda was US$5 million, while the post-disastercompensation of the Hungarian Government alone was in the region of US$100million. Esmeralda went into receivership two months after the disaster, willing onlyto pay compensation to owners of 14 hectares of land immediately adjacent to thetailings.

In certain jurisdictions (e.g. USA, Canada) using an ‘operating vehicle’ does notnecessarily protect the owners or even the financing banks from being sued, but in therest of the world this is unlikely. After numerous turns and U-turns, the HungarianGovernment case against Esmeralda goes before the courts in Budapest in December2001.

From the environmental point of view, there are certain aspects of operation whichmerit special attention:

§ The mine should have an Environmental Management Plan (EMP).Such a plan is usually devised at the Feasibility/Final Design stage; itforms a natural ‘pair’ with and is a consequence of the EIA.

§ The mine should have contingency plans in place in case of environmentalaccident (toxic spill, tailings dam failure or an explosion in the smelter).

§ Key environmental parameters (emissions to the air, quality of wastewaterdischarged) should be routinely monitored.

§ All key elements of the infrastructure (e.g. dam walls) should be regularlymonitored, well maintained and kept in good repair.

§ Key structures such as tailing dams should be constructed and expandedproperly during operation.

It appears that in many cases of environmental accident, neither design nor inadequatestandards of construction were at fault but the lack of proper monitoring (and actionsfollowing it) or ‘poor maintenance and repair’. The same observation applies to manygovernments in developing countries: their environmental standards are good, buttheir monitoring and enforcement (past the commissioning stage) tend to be lax ornon-existent.


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7.6 ClosureThe concept of an orderly mine closure is comparatively new – it only began to bediscussed widely some 10 years ago. In earlier times, miners just ‘walked away’having done only the most basic closure tasks required by the regulators.

Mine closure and land reclamation is a thorny subject. At the time of closure returnsare diminishing; the ore body is almost depleted; production shrinks; and geologicalconditions are possibly the worst in a mine’s life. Cashflow is also shrinking. At thesame time, damage to the environment is at its greatest (for example in terms of thepit size); employment shrinks; and the local community starts getting nervous aboutlife after the mine.

In most cases the bank loans acquired to build the project have been paid off long agoand the banks are no longer on the scene. The owners have most of their attentionconcentrated on another project, often in a different part of the world. Insurance coveris likely to be reduced, as it is now the sole responsibility of the owners without banksexercising caution.

Environmental liabilities arising from mines ‘just left behind’ could be staggering.According to some estimates, there are half a million abandoned mines in the USA,primarily from historic mining. Mitigation of their environmental impacts may costUS$32−72 billion. In South Africa, it is estimated that the overall cost of closure isbetween US$12,300 and US$37,000 per hectare. The direct cost of cleaning uppollution of rivers alone (caused by acid mine drainage) has been reported by Mudderand Harvey (1998) as AU$ 1 billion in Australia, C$2-5 billion in Canada and at leastUS$4 billion in the USA33.

Historically, the focus of mine decommissioning and closure has been on earthmoving, re-grading, demolition and re-vegetation. More recently, the impact of riskssuch as ongoing water contamination and radiation hazards are also being addressed.

The mine closure process involves:• plant decommissioning;• land rehabilitation;• land development (e.g. reclaiming it for forestry, agriculture, recreation, or

other productive uses – commercial or industrial).

Apart from these finite tasks, there is an ongoing activity of monitoring and control,for example of acid drainage from the mining works.

Closure planning requires cost estimates to be made.

33 Mike Hagger (Kvarener) and Andy Smithen (SRK): “Closing a Mine” in Mining Finance magazine,August 1999.


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In some countries (e.g. UK), new legislation is being introduced requiring allindustrial sites to prepare a closure plan and, in this context, mining is comparativelywell prepared for the new regulations34.

The social aspect includes re-training and re-education of former miners, although thisis hardly ever a concern of the mining company. The World Bank has financedseveral projects (mostly in the coal industry) focusing on the social aspects of mineclosures (see Appendix C for more details).

7.6.1 Accrual Approach

At this final stage of the mine’s life it is difficult to approve any major spending onclosure and land rehabilitation. Financial provision for mine closure should thereforebe made much earlier – in fact at the stage of the Feasibility Study, before the mine iseven built.

Most mining companies adopt an ‘accrual approach’ to mine closure – they makeaccounting (non-cash) provisions for mine closure, but as no cash fund is set aside forthis purpose these provisions frequently remain paper commitments only.

7.6.2 Closure Bonds and Guarantees

In the developed mining countries, such as USA, Canada or Australia, such provisionsare no longer considered adequate to mitigate the risk of non-performance of mineclosure activities. Instead, companies are required to secure funding prior tocommencement of operations, by providing guarantees, bonds, letters of credit,deposits of cash or gold, insurance and other methods.

As yet there are no specific international guidelines or recommendations dealing withthe acceptable financial provisions for mine closure35.

In some countries, the specific requirement for mine closure provisions is set out inthe conditions of the mining licence.

7.6.3 The Transfer Risk and Accelerate Closure (TRAC)Programme

Mine closure is of comparatively little interest to the banks as, by then, their loans arepaid off. However, the Transfer Risk and Accelerate Closure (TRAC) programme,implemented recently in South Africa and the US, may arouse their interest.

The TRAC programme is a risk-based, fixed-price approach whereby the miningcompany enters into a fixed-price contract for the purpose of transferring the risks andresponsibilities for mine closure to a contractor. The contractor is then responsible forconducting the closure process in accordance with the mine’s EnvironmentalManagement Programme and insuring the risks of any future liability33. This clearlyfalls into the risk management category and might be of interest to banks (although it

34 Integrated Pollution Prevention and Control (IPPC) Directive issued by the government'sEnvironment Agency in the UK35 Mehrdad Nazari “Financial Provisions for mine closure” in Mining Environmental Managementmagazine, May 1999 (Mr Nazari is the Principal Environmental Specialist at the EBRD).


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would probably be handled by their Risk Management teams rather than MiningTeams).

The advantage to the mining company is the known and fixed cost. The advantage forthe environment is that there is a dedicated contractor looking after the rehabilitationprocess, and that the contractor's insurance is (should be) adequate to meet any costs.

Risks usually covered by such contracts include:• ground and surface water risks;• land risks;• atmospheric risks;• socio-economic risks;• ecological, aesthetic and noise risks;• legal risks.

This approach requires extremely detailed contracts and specifications to ensure thatthere is adequate insurance cover.

7.6.4 Restore-as-you go

Some mining operations, such as open pit coal mines, could be suitable for a restore-as-you go approach. This is being tried by Anglo American plc in open pit coaloperations in Ireland. Rather than waiting for the entire mine to close, the alreadyexhausted parts of the mine are subject to on-going progressive rehabilitation.

7.6.5 Social aspect

In places where mines sustain whole communities a mine closure may spell a socialdisaster. Serious mitigation of its consequences is not possible without some external(i.e. governmental) aid programmes, but there are some good examples of companysponsored activities in this respect.

Ashanti Goldfields’ Geita gold mine in Tanzania still has some 15 years of mining lifein it, and yet numerous steps have been taken to mitigate the impact of the inevitablefuture closure.

According to the Mine Manager36, the following projects were initiated andimplemented by the mine management:

• Microfinance Credit Scheme: small business development loans in the districtfinanced by the Company and administered by an NGO.

• Mine Closure Plan Working Committees: formed with local and nationalgovernment and community leaders.

• Agroforestry Project: an expatriate agronomist assisting local farmers in theplanting of Moringa tea tree oil crop and market gardens. Arrangement madewith processing plant in Tanzania to buy produce from farmers when matureand assist in training and transport.

36 E-mail correspondence with the Geita Mine Manager, Mr Harry Michael.


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• Water pipeline: with off-takes for local community use provides year roundsupply.

• Cut Flower business: feasibility study commencing early 2002 on possibilityof developing a cut flower business on waste dumps as they are rehabilitated.

Projects like this are sustainability in action – not only are they good PR for themining company but will help the local community to survive in the future.

7.6.6 Premature closure

Sometimes a mine has to close early for a variety of reasons, be they commercial (lowcommodity prices), social or political. In cases like these, it is even more importantthat adequate financial provision for mine closure be made early. An interestingexample of such a situation is the closure of Los Frailes mine in Spain (announced inearly 2002) as a direct result of the tailings dam failure in 1998.

8.0 Views from within the finance industry

As part of the background research for this paper the author conducted extensive37

face-to-face interviews with key decision makers in the mining investment process.They included 17 different entities involved in the financing of mining projects:seven banks (including The World Bank); three technical consultants firms(responsible for feasibility studies and EIAs); an investment advisory firm; a miningresearch company; a stock broker and equity provider; an insurance broker for themining industry; a Non Governmental Organisation focused on mining; a miningfinance magazine; and one of the largest mining companies with worldwide interests.The full list can be found in Appendix A. Other mining professionals (mainly frommembership of the Association of Mining Analysts) were also asked for their viewson the topics raised in this paper.

Bearing in mind the number of people consulted, it is fair to assume that this paperreflects the current thinking of the people professionally involved in provision offunds for the mining sector.

Wherever possible, information obtained during these interviews and the viewsexpressed have been inserted in the relevant places in this paper.

This section includes views not expressed elsewhere in the paper and the author'sgeneral impressions.

8.1 Declared high level of awarenessMost interviewees declared high levels of environmental and social awarenessregarding the mining projects financed. Most said that they would not even consider aproject without an EIA, regardless of whether this was required by local regulations or

37 Lasting on average 2−3 hours.


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not. Some leading technical consultants also said that they would include a socialimpact assessment as a matter of course into their EIAs.Some admitted, however, that if sponsors were short of cash and sacrifices had to bemade, a ‘lowest common denominator approach’ might be adopted – satisfying therequired local minimum of standards and documentation only.

8.2 International and local standardsThe question of adhering to various environmental standards caused some discussion.Where compliance with local standards of the host country is required by law, therewas a difference of opinion about exceeding these standards.

Most banks declared that they would follow The World Bank’s ‘standards’ or‘guidelines’, while one leading German bank was firmly committed to following theEU standards regardless of the location of the project. The majority of interviewees,however, found them too restrictive, and argued that while they are justified indensely populated Europe, the standards in geographically different and lesspopulated countries can be less restrictive.

Some expressed the view that forcing lesser-developed countries into environmentalstandards significantly exceeding their own can do more harm than good to thosecountries, as this policy may make projects uneconomical (or less attractive) and as aresult they may not go ahead at all, thus depriving the local economy of jobs, revenue,improvements in infrastructure, etc.This argument was opposed by one of the leading consultants with significant ‘on-the-ground’ experience in sub-Saharan Africa who stated that in the current difficulteconomic climate only the most robust projects will go ahead and, as such, they canafford the extra expense of higher environmental standards.

There was a consensus that The World Bank’s standards were ‘just about right’ andthat a lot of bad press the mining sector gets is caused by older projects financed andconstructed in times when both awareness and standards were lower.

8.3 Praise for the multilateralsThe participation of one or several multilateral financial institutions significantlyraises the environmental and social standards of a project. Both the World Bank group(IBRD/IDA, IFC, MIGA) and EBRD have very high standards and elaborateprocedures for environmental screening, disclosure and public consultation. None ofthe interviewees questioned or criticised the sound approach of these institutions (ifanything there was a feeling that these are standards to aspire to, even though inreality meeting them is not always possible). Many NGOs, not usually easy to please,stated that they found the WB and EBRD’s standards satisfactory. Various guidelinesand reports published by UNEP were also mentioned in a positive context, except forone case where they were referred to as ‘international busybodies’.


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One could only wish that the institutions mentioned were more involved in the miningsector. Even the very imperfect38 comparison below shows that these institutions areonly involved in a fraction of all mining finance.

The total value of mining projects financed in developing countries39 in the last fiveyears was around US$34 billion. The total engagement of IFC and MIGA, which dealwith individual projects, was US$1.5 billion over the same period (around 5 per cent).

The percentage participation of IFC/MIGA by number of projects was higher (around15 per cent) though this figure needs to be double-checked because of differentcounting methods used in different statistics40. Even small (by value) involvement ofIFC, MIGA or EBRD in a project triggers the environmental vetting proceduresdescribed in their policies. In such instances their very presence forces the highestcommon denominator onto other finance providers.

8.4 Doubts about the Export Credit AgenciesAs already mentioned (in section 6.8) ECAs finance a disproportionately largeamount of mining projects41 (either by providing straight finance or guarantees forother parties). They are much less tightly regulated than other finance providers andtheir transparency and disclosure policies leave a lot to be desired.

ECA activity is explicitly excluded from the World Trade Organisation (WTO),despite its direct impacts on trade42 (however the exclusion under item (k) of theWTO subsidy code does not directly refer to the environment). ECAs are alsogenerally exempt from important national legislation that would impose criticalenvironmental, social, transparency and accountability standards. In Australia, forinstance, the Government's Export Finance and Insurance Corporation (EFIC) wasspecifically exempted from the 1999 Environment Protection and BiodiversityConservation Act.43

Even the leading ECAs started publishing environmental guidelines only in 1999, andin many cases these are rather vague and general.

38 Available statistics cover different periods: 1996−2001 in case of the Mining Finance magazinedatabase (total around US$50 billion), 1991−2001 for IBRD/IDA (total US$3.55 billion), 1993−2001for IFC (total US$1.55 billion), 1991−2001 for MIGA (total US$0.618 billion) and 1992−2001 forEBRD (Total US$0.3 billion). The common period 1996−2001 was used for comparison. In case of theIFC and MIGA the financial year of approval was a criterion. Sources: IBRD, IFC, MIGA, EBRD,Mining Finance magazine.39 The World Bank Group does not finance or guarantee loans to projects in the developed countriesand therefore, for fair comparison, projects in the USA, Canada, Australia and Western Europe wereexcluded.40 Some statistics quote mine or smelter expansions as separate projects, others do not. This isirrelevant when counting by value, but may cause error when counting by number of projects.41 For example, the Australian EFIC committed 97 per cent of its program for Papua New Guinea tothe mining sector in 1992, (Lawless, G (1992), Address by Managing Director of Export Finance andInsurance Corporation, PNG Mining and Petroleum Conference, 31 August–1 September, Sydney).42

Rich, B., 'Trading in dubious practices', Financial Times, February 24, 2000.43

Aid/Watch and Mineral Policy Institute (1999), Putting the ETHIC into EFIC: a discussion paper onaccountability standards within the Export Finance and Insurance Corporation, Aid/Watch andMineral Policy Institute, Sydney.


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The OECD has been trying to come up with common guidelines for the last 16months. Some agreement seems to be in sight.

The main elements of the proposal for common approaches that have been negotiatedto date are44:

§ Screening of all projects with a repayment term of two years or more.

§ Classification of projects in one of three categories, according to theirpotential effect on the environment, in order to indicate the extent of theinformation required for the subsequent environmental review.

§ Review of projects, including scrutiny of EIAs in sensitive sectors andlocations, in order for Members to evaluate whether to cover or decline officialsupport and, if support is to be provided, the extent of any mitigationrequirements.

§ Benchmarking of projects against international standards such as thosecontained in the guidelines of the World Bank Group.

§ Exchange and disclosure of information with relevant stakeholders and withother Members.

§ Reporting and monitoring, and a review no later than the end of 2003.

Many agencies (like France's COFACE45) decided to adopt these guidelinesunilaterally before the adoption of the official OECD agreement. COFACE is alsoworking on a separate set of guidelines specific to the mining sector.

8.5 Heavy reliance on ‘competent persons’From the first steps of exploration to mine design and production, the process requiresa high level of technical expertise. The amount of detail and technical complexitymakes it inevitable that external consultants have to be used by finance providers tohelp them assess the various degrees of risk associated with a project. The consultant'sword is usually taken at face value. Good practice requires banks to seek a ‘secondopinion’ from another consultant, but this is not always done, as such an audit can addup to US$100 thousand to the cost of a project, paid ultimately by the sponsors.

Therefore the whole ‘chain’ of people, including the consortium of lenders, insurers,sponsors and investors, relies heavily on the opinion of the technical consultants.They come from different regulatory regimes (different countries) and representdifferent levels of working practice and experience46. As a rule, they are not licensedby any specific body (unlike doctors or barristers) and therefore cannot ‘lose theirlicence’ in case of incompetence.

44 According to official OECD statement of 4 December 2001 published at:(http://www.oecd.org/oecd/pages/home/displaygeneral/0,3380,EN-document-347-nodirectorate-no-12-22688-24,FF.html )45 Source: COFACE – this unilateral move will be effective from January 2002.46 For example, in the guidelines of the Australian IMM, a Competent Person for reporting mineralreserves has at least five years experience in the estimation of that type of mineral reserve.


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It is up to the finance providers and sponsors to assess which consultants are suitable.

“We have to rely on them heavily” – said one banker – “as there are only so manyhours in the day and our small team has a lot of financial work to do”.

“Who are we to second guess” – said another.

Errors of judgement by technical staff can have dire consequences, as demonstratedby the consultant's report at Baia Mare, Romania, qualifying the water balance as“immaterial”(see section 7.3.5.1).

Many technical consultants are covered by Professional Indemnity Insuranceagainst potential court action by their clients, although this is usually much less thanthe value of the project. Others look to the financing banks to indemnify them for anysuch responsibility. The latter option may make the cost of using the consultantscheaper, but may land the banks in deep trouble in case of an accident.

8.6 The price of a good reputationThe issue of reputation is taken much more seriously by the banks than by technicalconsultancy firms. This is particularly true in the case of banks that have investmentarms (providing mining finance) as well as a high-street presence.

Bad publicity associated with a mining project may sway high-street customers awayfrom a bank. Retail branches of Australian Westpac Bank were picketed by protestersas a result of the bank’s involvement (as a major lender) in the controversial Jabilukauranium mine. A similar thing happened to Barclays.

During the author's research, the view was expressed (from outside the bankingcommunity) that the major banks are not very concerned about environmental issues,because mining revenue is a very small part of their revenue (frequently about 1 percent) and an occasional loss of several million dollars (due to an environmentaldisaster or court case) is insignificant in financial terms.

This view was strongly opposed by the bankers. Most mining teams are small (nomore than 5−10 people) and they generate on average no more than US$10 million inprofits for the bank. If a bank sustains a loss from a project of (say) US$5 million, it isa major blow for the team both in terms of reputation, and financially. In fact it maybring an end to the very existence of the mining team in a given bank. Even in timesof economic slowdown, a single deal in the new technology sector (e.g.telecommunications) can bring the bank several times more profit than a whole yearof the mining team’s activity (e.g. US$30 million).

Relatively small losses can have a disproportionately large impact on the bank’sthinking. In recent months, one of the banks involved in the infamous Baia Mare goldproject decided to pull out of financing of mining projects. The decision was taken‘on the grounds of economics’, but its is hard to believe that the massive negativepublicity about the accident had nothing to do with it. The AGM of the bank wasdisrupted by protesters, and German tabloid newspapers carried headlines comparingthe use of cyanide in Romania to its use during the Holocaust.


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The next mining project (after the Baia Mare incident) financed by the bank, inTanzania, attracted the attention of the very top figures in the bank (including theChairman) who discussed in detail the need for a cyanide detoxification unit.

Throughout the author's research, a high level of environmental awareness was foundamong all banks interviewed. There was also a deep feeling of injustice regarding themedia and NGOs who seem not to see the improvements in environmental screeningthat banks introduce and concentrate on a few bad examples.

One of the interviewees used a football hooligan analogy: out of the hundreds goingto a match only a handful cause trouble, but “everybody is tarnished with the samebrush.” Bad publicity applies to everyone.

In some ‘mining banks’, like the Standard Bank, a much higher proportion of theirbusiness comes from mining or metals business, so they are quite naturally morecautious in taking onboard doubtful projects.

8.7 Could the ISO 14000 Standard be used as abenchmark?

The lack of an international licensing or benchmarking system could possibly besubstituted by a wider use of ISO 14000 family of standards.

Introduced in 1996, Environmental Standard ISO 14001 (Environmental managementsystems – Specification with guidance for use) is increasingly being adopted bymining companies, although the take-up rate is slower than in other industries:between 1998 and 2000 the overall number of issued ISO 14001 certificates grew by146 per cent in all industries worldwide, by only 105 per cent in quarrying andmining47.

ISO 14000 is a family of standards and some of them, in the author's opinion, couldsuccessfully be used to benchmark environmental auditing activities of banks andtechnical consultants. The three standards listed below seem to be particularlyadequate for the purpose:

• ISO 14004:1996 Environmental management systems – Generalguidelines on principles, systems and supporting techniques.

• ISO 14010:1996 Guidelines for environmental auditing – Generalprinciple.

• ISO 14011:1996 Guidelines for environmental auditing – Auditprocedures – Auditing of environmental management systems.

• ISO 14012:1996 Guidelines for environmental auditing – Qualificationcriteria for environmental auditors.

47 “ISO 14000 – Meet the whole family ! and “The ISO Survey of ISO 9000 and ISO 14000 Certificates- Tenth cycle: up to and including 31 December 2000”, official publications and statistics of theInternational Standards Organisation, Geneva 2001. The relevant numbers for the mining sector were:88 certificates in 1998, 181 in 2000.


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More recently (September 2001), ISO has started looking into the introduction of astandard for corporate social responsibility that may address the social issuesassociated with mining projects48.

8.8 German banks greener than the restThe German banks – Dresdner Kleinwort Wasserstein49, Deutsche Bank andWestdeutsche Landesbank − seem to take their environmental responsibilities moreseriously than others. This is probably related to the strong position of the Green partyin Germany and the generally high level of environmental awareness in Germansociety.

Dresdner and Deutsche Bank have dedicated environmental units issuing guidelines toother parts of the banks. EBRD also has a dedicated environmental unit, and allprojects have to be approved by it. Barclays also has such a unit.

The IFC has a whole Environment and Social Development Department (comprisingthree separate units) and is a leading example of practical application ofenvironmental and social screening of mining projects.

8.9 More insurance is not the answerIn spite of their involvement in drafting insurance policies for projects, banks takesizeable risks when financing mining projects. In the early stages of the constructionof a project, they are covered by recourse to the project owners and by the fact thatfunds are released in instalments. For example, Deutsche Bank, which agreed tofinance TVX Hellas gold project in Greece, has not lost any money as no cashadvance had been made when the project was stopped by the courts.

Once the project goes ‘non-recourse’, the only protection they have is recourse to theproject. Environmental disaster clean-up and compensation costs should be paid outby the project’s insurance, but this is usually capped, so a major loss can cause theproject to default on the loan.

Profit margins in mining finance are slim – taking on more insurance would erodethem even further. More specialised insurance products are on offer e.g. a dedicatedenvironmental cover and ‘enforced abandonment insurance’, but they are not verypopular.

Some stoppage risks might be covered under Political Risk Insurance (social unrest)but this varies considerably from project to project.

8.10 When things go wrong…When things go wrong, banks lose money and reputation. And they are very aware ofit. Unpaid loans, debt rescheduling, court cases, and compensations are, naturally,things they wish to avoid, but the decision as to which projects to finance and which 48 “ISO looks into standards for corporate social responsibility” – press release no. 800 published onhttp://www.iso.org/iso/en/commcentre/pressreleases/2001/Ref800.html

49 DKW withdrew from mining finance in October 2001.


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to drop is not an easy one. If banks impose too many restrictions on themselves theprojects they drop will be picked up by less scrupulous financiers or less regulatedentities and will still go ahead.

The first days of the year 2002 brought further proof that ‘prevention is better thancure’ − when the cure becomes difficult, the patient is often left to die.

In January 2002, BHP-Billion, 52 per cent owners of the Ok-Tedi copper mine inPNG, will ‘walk away’ from the project having written off US$430 million, becausethe problem of pollution of the Fly river is too difficult to rectify50. BKPB’s stake willbe handed over to the PNG Government, together with the entire environmentallegacy. If one of the mightiest mining companies on earth cannot rectify the problem,who can? The mine took US$1.4 billion and eight years to build, beginning in 1984.

Another recently announced51 ‘walk away’ as a result of an environmental disaster isthe closure of the Los Frailes mine in Spain which experienced a serious tailings damfailure in 1998.

Then there is a question of a more fundamental and ethical nature – do the financeproviders have right to interfere with the local regulation and impose unilaterallydifferent (higher) standards? To control and regulate is, after all, a government’s role.

9.0 Conclusions

It seems that the combination of recent environmental disasters, pressure from NGOsand the general rise in environmental awareness in western societies has forced socialand environmental issues close to the top of the agenda of banks and other financialinstitutions.

ECAs – the major mining finance providers and guarantors – have made significantprogress since 1999 in asserting their “green credentials” but still have a long way togo before they reach the thoroughness of the screening and transparency standardsrepresented by the World Bank group.

The role of technical consultants in ensuring environmental soundness of projects isgrossly undervalued.

There is a lack of an internationally recognised benchmarking system for miningfinance banks and technical consultancy firms. Greater use of the ISO 14000 familyof standards could possibly provide a recognised benchmark.

More dialogue with NGOs can bring genuine improvements to environmentalmanagement and improve the image of the financial institutions and mining

50 Alec Hogg “BHPB urged to face US$430m PNG nightmare” article, published on The MiningWebon 30/12/2001. The full text can be found at:http://www.mips1.net/MGCoal.nsf/Current/4225685F0043CE9F42256B32003D407051 Mining Journal, London, 4 January 2002


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companies alike, but many NGOs will have to drop their militant rhetoric (“No to allmining!”) for such a dialogue to be possible.

More environmentally and socially responsible mining cannot be achieved by anysingle group of stakeholders, be it governments, regulators, local communities,mining companies, NGOs or financial institutions.

Partnership and information exchange between all stakeholders are the keys tosustainable development of mining and less environmental impact from this industrywhich, by its very nature, is environmentally invasive, but without which our moderncivilisation cannot exist.

n

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Appendix A

Report ContributorsThe Companies, Organisations, Institutions and Individuals listed below kindlycontributed their knowledge and information during research for this paper:

Anglo American plcDr John Groom, Senior Vice President - Safety, Health & Environment20 Carlton House Terrace London SW1Y 5AN, UKT+44-20-7698 8888, +44-20-7698 8560, [email protected]

ANZ Investment BankDavid R. Balint, Assistant Director, Infrastructure & MiningMinerva House, P.O. Box 7, Montague Close, London SE1 9DH, UKT+44-20-7378 2202, F+44-20-7378 2118, [email protected]

AWR S.a.r.l.Alexander James Wood, Director, Mining & Metals8-10 rue de la Bienfaisance,75008 PARIS, FranceT+33-1-42.30.58.93, F+33-1-53.01.34.83, [email protected]

Behre Dolbear International LtdChristopher Hall, President24 Pepper Street, London, SE1 0EB, UKT+44 020 7902 5980, F+44 020 7401 6926, [email protected]

Credit Suisse - First Boston BankCharles Hutson, Head of Metals & Mining20 Columbus Courtyard, Canary Wharf, London E14 4QJ, UKT+44-20-7888 5396, F+44- 20-7888 3466, [email protected]

Deutsche Bank AGGeorge Rogers, Head of Mining FinanceWinchester House, 1 Great Winchester St, London EC2N 2DB, UKT+44-20-7545 7873, F+44-20-7545 7130, [email protected]

European Bank for Reconstruction and DevelopmentMark Rachovides, Principal Banker, Natural ResourcesMehrdad Nazari, Principal Environmental SpecialistOne Exchange Square, London EC2A 2JN, UKT+44-20 7338 7729, F+44-20-7338 6848, [email protected]

Loeb Aron & Co LtdDr. Frank Lucas, Managing DirectorGeorgian House, 63 Coleman Street, London EC2R 5BB, UKT+44-20-7628 1128, F+44-20-7638 0756, [email protected]

Marsh UK Ltd (Bank Risk Services)Peter Le Vey - Risk Consultant - Structured FinanceNo. 1, The Marsh Centre, London, E1 8DX, UKT+44-20-7357 5192, F+44-20-7357 5126, [email protected]

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Mineral Policy Institute (NGO)Nina Lansbury, Research Co-ordinatorPO Box 21, Bondi Junction, NSW 1355, Australia.T+61-2-9387 5540, F+61-2-9386 1497, [email protected]

Mining Finance MagazineRod Morrison, EditorIFR Publishing, Aldgate House, 33 Aldgate High St, London EC3N 1DL, UKT+44-20-7369 7570, F+44-20-7369 7399, [email protected]

MJRS Ltd(Mining Journal Research Services)Richard Thompson, DirectorAbchurch Chambers, 24 St Peter's Road, Bournemouth, BH1 2LN, UKT+44-1824-750 260, F+44-1824-750 409, [email protected]

SRK (UK) Ltd,Geoff Ricks ,Principal Environmental Scientist/DirectorDavid Pearce, Senior Mining EngineerWindsor Court, 1-3 Windsor Place, Cardiff, CF10 3BX, UKT+44-29 2034 8150, F+44-29 2034 8199, M+44-7778 [email protected]

Standard Bank London LimitedDon Newport, Head of Mining FinanceCannon Bridge House, 25 Dowgate Hill. London EC4R 2SB, UKT+44-20-7815 8786, F+44-20-7815 4284, M+44-7880 [email protected]

The World BankPeter van der Veen1818 H Street, N.W., Washington, DC 20433 U.S.AT+1-202-473 2442, F+1-202-477-6391, [email protected]

Monika Weber-Fahr, Senior EconomistTel: +1-202-473.0879, Fax: [email protected]

Wardell ArmstrongKevin PC J D'Souza, Mining EngineerLancaster Building, High Street, Newcastle upon Lyme, Staffs. ST5 1PQ, UKT+44-1782-612626, F+44-1782-662882, [email protected]

Westdeutsche Landesbank London (WestLB)Alex Panko, Director, MiningGlobal Structured Finance - Metals25 Basinghall Street, Woolgate Exchange, London EC2R 6AE, UKT+44 20 7970 3108. F+44 20 7457 2108, Direct +44-20-7020 [email protected]

64

Appendix B

Printed Reference Sources1. N. J. Coppin, Kevin d’Souza “Costing the Earth” – paper for the Mining Finance

into the Next Millennium Euromoney conference, London, June 1999

2. Priscilla Ross “Mining waste hits headlines” in Mining Finance Magazine, June 2000

3. “Mining Finance Database” published by the Mining Finance Magazine, Oct 2001

4. IBRD materials prepared for the Extractive Industries Review

5. IFC materials prepared for the Extractive Industries Review

6. MIGA materials prepared for the Extractive Industries Review

7. EBRD promotional brochures

8. NGO ECA-Watch website (www.eca-watch.org)

9. “Cost Estimation Handbook for the Australian Mining Industry”, AUSIMM, 1993

10. Mike Hagger and Andy Smithen, “Closing a mine” in Mining Finance Magazine,August 1999

11. Mehrdad Nazari “Financial Provisions for mine closure” in Mining EnvironmentalManagement Magazine, May 1999

12. Gilbert Swan, “ZCCM saga is finally over” in Mining Finance Magazine, June 2000

13. Bernard J Guarnera, “Technical Flaws in bankable documents” in Mining FinanceMagazine, Feb 1998

14. L. Nell and S. Burks, “The Bateman approach towards achieving economic andfinancial requirements for feasibility studies” in The Journal of South AfricanInstitute of Mining and Metallurgy, Oct-Dec 1999

15. “Guidelines for Mine Feasibility Studies” – internal document published by theInternational Finance Corporation in 1995

16. Sir Robert Wilson, “A Sustainable and Economic Industry” in the Mining Magazine,Sept 2001

17. “Public Participation” in Mining Environmental Management Magazine, May 1999

18. “ISO 14000 – Meet the whole family !” and “The ISO Survey of ISO 9000 and ISO14000 Certificates - Tenth cycle: up to and including 31 December 2000” officialpublications and statistics of the International Standards Organisation, Geneva 2001

19. “ISO 14000” in Mining Environmental Management magazine, May 1999

20. “Mining Finance Debt League Tables 1998/9” in Mining Finance Magazine (June1999)

21. “Low cost, low prices fuel Peru’s copper action” in Mining Finance Magazine, June1999 – about the Antamina project

22. Gerard Holden, “Miners need to change methods to access capital” – an interviewgiven to Andy Blamey of Reuters News Agency and published on 21 Sept 2001 onReuters newswire

23. “Friendly warning” – a leading article from the Mining Journal, London, 12 Oct 2001

24. “Moving Mountains: Communities Confront Mining and Globalisation” – a bookpublished by the Mineral Policy Institute, Australia, October 2001

65

25. “Tailings Dams: Risk of Dangerous Occurrences – Lessons learnt from practicalexperiences” – joint publication of ICOLD (Bulletin 121) and UNEP, Paris 2001

26. Suzanne Miller “Globalisation is not a win-win equation” in The Banker, London,October 2001

27. “Sustainability Reporting Guidelines on Economic, Environmental and SocialPerformance” published by the Global Reporting Initiative, Boston, MA, June 2001

28. “Mining & Minerals Sustainability Survey 2001” published byPriceWatehouseCoopers and Mining, Minerals and Sustainable Development Project,London 2001;

29. Meeting Report from Finance Mining And Sustainability Conference, April 2001published by the Mining, Minerals and Sustainable Development Project/International Institute for Environment and Development, London 2001.

30. Ryan T. Bennett, “Technical Due Diligence Requirements For Mining ProjectFinance”, paper presented at Randol Mining Investment Opportunities Conference,Denver, November 1996

66

Appendix C

Mining projects sponsored by the International Bank for Reconstruction and Development (IBRD)

IBRD/IDA Investment and Structural Adjustment Loans with Mining Components FY90 - FY01Further details of the project can be found at http://www4.worldbank.org/sprojects/

FiscalYear Country Project Name Project

ID Instrument Status IBRD/IDA Commitment US$ Million

2001 Algeria Energy and Mining TA 67567 TAL Active 18

The project assists the Ministry of Energy and Mines (MEM) to implement the Government of Algeria's market-oriented reform programme in the energy andmining sectors. The project's three main components comprise a focus on the hydrocarbon, electricity, and mining sectors. Each of these three maincomponents includes the following support: 1) assistance on legal and regulatory matters, dealing mainly with the preparation of new laws and/or regulationsand procedures; 2) assistance on institutional matters, dealing mainly with the establishment and the initial operation of new institutions, including thecontracting and regulatory agencies; and 3) assistance to reform the state-owned entities (SOEs) in the electricity and mining subsectors, dealing with theadaptation of SOEs to the new sector policy, and support to private sector development.

1996 Argentina Mining Sector Development 6055 TAL Active 30

To develop the government’s policy, regulatory and institutional reforms to encourage the expansion of private investment in mining in an environmentallysound way. The project has a number of components: 1) a policy development component to ensure the consistency of mining sector policy with thecountry's overall economic liberalisation efforts; to revise and prepare the legal framework; and to develop tools for its implementation, including proceduresfor the provincial administration of mining rights and appropriate environmental norms and standards; 2) a policy implementation component to help developthe capacity of the federal Mining Secretariat and sector agencies in selected provinces including their cadastral and registry systems and advisory services,as well as the mechanisms to monitor and enforce environmental management. It will also finance relevant skills transfer, training and divestiture efforts; 3)a support services component to build up the geological and thematic mapping; a sector data bank and public information network; mineral and marketstatistics and promotion facilities; a geological repository and ancillary facilities; and the selective strengthening of the mineral and geological laboratorysystem;

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1998 Argentina Mining Development TA 55477 TAL Active 40

The project is to develop and support the Federal and provincial governments' policy, regulatory and institutional reforms which encourage theenvironmentally sound expansion of private investment in mining. The project has a number of re are five components 1) Institutional frameworkdevelopment including reorganisation and staffing of key administrative units, setting-up of efficient work procedures, and training of staff in the publicmining agencies of the 17 provinces this project concentrates on. 2) Mining cadastre and registry system to improve the reference mining geodetic network,introduce unified registering procedures and clear up backlog of pending concession applications. 3) Environmental management and environmental andsocio-economic baseline studies in selected mining districts. 4) Unified mining information system to strengthen information management

1995 BoliviaRegulatory Reform & Capitalization

Assistance37005 SIL Closed 14.7

The Capitalization Programme Adjustment Credit supported the Government's programme to divest six major public enterprises. The programme involvestransferring management control and up to 50 percent of the ownership of state-owned enterprises to strategic investors through the purchase of a newshare offering. The remaining shares corresponding to the State's present ownership of the existing assets were transferred entirely to all adult Bolivians.These share were transferred to individual deferred distribution accounts to be managed by private pension funds. The project comprised the followingcomponents: 1) the preparation of sector-specific legislation and the establishment of a sound regulatory framework to promote investment and acompetitive, efficient environment in the hydrocarbons, telecommunications, electricity, mining, railway and aviation sectors; 2) the capitalisation of six largepublic enterprises that dominate these sectors; 3) institutional and legal reforms to enable fair and swift adjudication of regulatory commercial disputes; and5) financial sector reforms to deepen long-term financial markets by strengthening the regulatory framework.

1996 BoliviaRegulatory Reform & Capitalization

Assistance6173 SECAL Closed 50

See above

1997 Burkina FasoMining Sector Capacity Buildingand Environmental Management

Project283 SIL Active 21

The main objectives of the Mining Sector Capacity Building and Environmental Management Project are to help: (i) establish an enabling environment toboth promote private investment in mining and to ensure real and sustainable contribution to economic growth; (ii) strengthen public and private sectorcapacity to effectively administer regulations and to monitor sector developments; and (iii) establish capacity in the country for environmental management.Additionally, the project aims to: (i) stimulate private sector response to the growing need for a variety of mining and environment related technical goodsand services; and (ii) identify and adopt appropriate mechanisms to facilitate the development of small scale mines and to improve the social, health andenvironmental conditions of artisanal miners. The project comprises four main components: 1) regulatory and fiscal framework and training; 2) institutionalstrengthening and resources management; 3) environmental management; and 4) small scale and artisanal mining.

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1994 Ecuador MINING TECHNICALASSISTANCE

7129 TAL Closed 14

This project had two main objectives - to attract new private mining investment and support the systematic development of increased, environmentallysound mineral production; and arrest mining related environmental degradation and mitigate the damage that may result from the use of primitive andinadequate technology. The project also assisted the government to implement the new mining law by strengthening sectoral institutions; upgrading smallscale miners' technology; instituting applicable environmental standards and a monitoring system; helping contain and possibly detoxify mining relatedhazardous waste; and monitoring mining related health issues.

1995 Ghana MINING SEC.DEV & ENV 966 SIL Active 12

The overall objective of the Mining Sector Development and Environment Project is to support the development of Ghana's mining sector on anenvironmentally sound basis through strengthened mining institutions and the provision of appropriate technology and organisational support to small-scaleminers. The project will strengthen mining sector institutions through: 1) support to the Minerals Commission to improve its organisational structure; expandits promotional activities; formulate regulations and amend existing legislation; develop guidelines and standards for environmental monitoring and control; 2)support the Mines Department to carry out its inspection, monitoring and enforcement responsibilities; 3) support the Geological Survey to improve itsgeological information base; 4) support to the Ministry of Energy and Mines to carry out its policy planning and coordination role. The project will alsoprovide assistance to small-scale mining enterprises through: 1) pilot testing of identified modules of small-scale mining equipment for improving bothproductivity and yields; 2) a programme to make better geological information available to small-scale miners through the assistance of geologists todelineate recoverable ore bodies; 3) improvements in the sector framework for small scale mining operations (SSM); and 4) reclamation and rehabilitation ofpriority areas degraded through past SSM activities as a pilot exercise.

1996 Guinea MIN SECT INV PROMOT 1077 TAL Active 12

The overall objectives of the Project are to strengthen the government's capacity to act as facilitator and regulator, and to attract private investment formining sector development. The project provides financing for technical and capacity building services needed to: 1) revise the legal and regulatoryframework; 2) furnish adequate geological information to private investors; 3) improve the efficiency of the administration; and 4) restructure existing miningoperations in line with the new policies and regulations. The project gas 1) a legal component, aimed at improving the overall legal and regulatoryframework for the mining sector; 2) a data component, aimed at furnishing essential information for investors and public administration, such a mining databank and a geological map; 3) an institutional component, aimed at strengthening the government's capacity to facilitate private investment and applyregulations in the mining sector; and 4) a restructuring component, aimed at preparing the restructuring of existing mining enterprises.

1993 India JHARIA MINE FIRE CON 10411 TAL Closed 12

The main objective of the project were to set the stage for investments aimed at extinguishing or containing the spread of the mine fires in the Jharia coalfield. The project had two components: (1) development of a fire fighting programme which will provide for a detailed survey of the fires and the preparationof a programme that will indicate the most cost-effective approach for dealing with these fires taking into account economic as well as social andenvironmental concerns; (2) preparation of an environmental management plan to mitigate the adverse environmental and social effects of the fires.

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1996 India COAL ENV & SOCIALMITIGATION

43310 SIL Active 63

The Coal Sector Environmental and Social Mitigation Project will assist India in making coal production more environmentally and socially sustainable. Theproject comprises the following three components: 1) a capacity building component, which will consist of technical assistance and the provision of funds forstudies and training aimed at enhancing India's capacity to deal more effectively with the environmental and social issues of coal mining operations; 2) aninvestment component which will be used for the implementation of Environmental Action Plans, Rehabilitation Action Plans and Indigenous PeoplesDevelopment Plans for the 25 mines slated to receive financial assistance under the project; and 3) a social remedial action component which will providefunds for the preparation and implementation of social remedial action programs for the four coal mine projects which have received Bank support in thepast.

1998 India COAL SECTOR REHAB 9979 SIL Closed 532

The main objectives of the project were to support India's current market-oriented reforms in the coal sector and, specifically, to provide financial andtechnical support to India's efforts to make itself commercially viable and self sustaining. Underpinning India's broad drive to achieve economic growth, theproject also aims to increase domestic supplies of coal. The project consisted of (a) an investment component - high return and quick disbursing investmentsto maintain or improve the profitability of the 24 existing mine sub-projects; and (b) an assistance and training component - a study of the rules andregulations governing the coal industry, in light of the Government's decision to open up the coal sector to private investors; and technical assistance tosupport India's institutional capacity development in project implementation and mining operations and management.**

1990 Jordan Integrated Phosphate 5293 SIL Closed 25

The Integrated Phosphate Project was an important second step in the development of the Shidiya phosphate deposit, whose objective was to enableJordan to increase its export of phosphate rock and to increase foreign exchange earnings. It also had as objective the rehabilitatation of the fertilizer plant atAqaba. The project financed beneficiation of plant equipment, including a washing and flotation plant; phosphate ore and product handling, storage, reclaimand loading facilities; townsite expansion; industrial infrastructure, including power distribution and water supply; and fertilizer plant equipment.

1998 Madagascar MINING PROJECT 56487 LIL Active 5

The Mining Sector Reform Project aims to (a) complete sector reforms aimed at establishing an enabling environment to both promote foreign directinvestment in mining and integrate small-scale and artisanal activities into the formal economy, which would ensure a real and sustainable contribution toeconomic growth; (b) build institutional capacity to effectively enforce laws and regulations, administer mining titles, monitor sector developments, and makegeological information available to potential investors; (c) establish capacity in the country, by means of pilot projects, to identify and address environmentalas well as social impacts from mining; and (d) identify and adopt appropriate mechanisms to facilitate the development of small-scale mines and to improvethe social, welfare, health, and environmental conditions of artisanal miners. The project components include: (a) normalisation of small-scale mining; (b)the development and maintenance of an environmental information system/sector environmental control and assessment; (c) institutional reform andcapacity building; and (d) project coordination.

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1992 Mali MINING CAPACITY 1756 SIL Closed 6

The main objectives of the project are to strengthen the capacity of the government to attract more investment in the mining sector and to help develop avibrant industry consisting of small-, medium- and large-scale mines financed with both foreign and local capital. The project comprises two maincomponents. The policy and strategy component consists of several studies, audits, and advisory services to help design and implement a new policy andstrategy for the mining sector. Studies cover the legislative, economic, fiscal, institutional, artisanal, and environmental aspects of the mining sector.Implementation of the strategy involves restructuring the institutional framework of the sector, revising relevant legislation and procedures, and closingand/or selling public enterprises and their holdings in the sector to private investors. The investment promotion component consists of financing consultingservices, equipment, and some works to: (a) organise the documentation centre's information and rehabilitate its facilities; (b) synthesise existing geologicaldata and improve the geological information system; (c) fill the gaps in the geochemical data coverage of prospective mining areas of the country; and (d)promote specific mineralised areas to potential investors.

1999 Mauritania MINING SECTOR CAPACITY 57875 TAL Active 15

The project aims to strengthen the Government's capacity to facilitate and regulate mining activities, and increase private investment in the sector, which willprovide a sound basis for exploitation, over the long term, of the country's natural resources potential. The main components provide for: 1) Capacitybuilding, which will restructure and strengthen the Ministry of Mines and Industry for mining law enforcement. This includes organisation and staffing of keyadministrative units with new procedures, staff training, supply of equipment, and rehabilitation of facilities. Additionally, proper computer based cadastreand mine reporting systems have been established, together with explicit criteria and non-discretionary procedures for granting/foreclosing of mining rights;2) Geologic infrastructure, which includes the preparation of digital geological maps, and, development of a data base for compilation/update of geologicalinformation. Supporting the geological mapping, a geophysic airborne survey is being implemented; 3) Environmental management system, to includecapacity building at the Ministry, for monitoring and enforcement of environmental regulations. Studies will assess and monitor social, cultural, andeconomic impacts on local communities.

1994 Mongolia ECONOMIC TRANSITIONSUPPORT

4341 SIL Closed 20

The objective of the project was to finance imports and technical assistance to Mongolia in order to maintain and develop key sectors of its economy. Itfinanced the import of equipment, materials, spare parts and other inputs needed in coal and copper mining and the transport sector.

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1996 Mongolia MONGOLIA COAL PROJ. 35697 SIL Active 35

The main objective of the project is to reverse the decline in Mongolia's coal production by increasing sustainable production levels at the Baganuur mine to4 million tons per year. Additional, associated objectives are for Baganuur Joint Stock Company (BJSC) to: 1) develop financial self-sufficiency; 2) increaseequipment productivity and improve efficiency; 3) operate as an independent commercial company; and 4) operate in an environmentally acceptablemanner over the long term. The principal components of the project are: 1) procurement and commissioning of equipment to rehabilitate the Baganuur coalmine operation; 2) procurement and turnkey installation and commissioning of equipment for a coal-handling plant consisting of crusher, linear stacker,underground reclaimer and train-loader; and 3) technical assistance to BJSC including in-country and overseas training to: (a) improve mine operations andmine supervision practices and procedures; (b) develop mine maintenance management and materials management systems; (c) upgrade financial andcost accounting/management information systems; and (d) improve environmental management capabilities.

2001 Mozambique Mineral Resources Project(NRMCP)

1808 TAL Active 18

The project aims to encourage private investment in mining; increase fiscal revenues; develop environmental and social management for mining; andimprove capacity of government institutions. The project consists of five components: 1) The institutional reform and capacity building of public mininginstitutions component will support modernisation of regulatory framework, institutional reform/capacity building, mining cadastre and registry system,investment promotion, and intranet network . 2) The development of the country's geological infrastructure component will support these subcomponents:component supervision and coordination, geophysics airborne survey, geological mapping of Mozambique, geochemical sampling, seismological network,documentation centre, Minerals Information System, industrial minerals survey, rehabilitation of the geological museum, and reinforcement of NationalDirectorate of Geology's central laboratory network. 3) The environment management system component will set up preventive environmental protection formining. 4) The sustainability of small scale and artisanal mining component will improve the general awareness of small-scale and artisanal and the overallimpacts on the local communities. 5) The project coordination and management component will finance to set up a Mining Project Coordination Unit tocoordinate project implementation.

2000 Papua New GuineaMining Sector Inst. Strengthening

TA60330 TAL Active 10

The project aims to strengthen institutional capacity within the Mining Department (DoM) and the Internal Revenue Commission (IRC) to administer andregulate exploration and mining projects and to thereby contribute to socially and environmentally sustainable private mineral investment. The project hassix main components: 1) The policy and regulatory institutional strengthening component reviews and develops mineral policy, strategy, and regulation inorder to promote exploration, and finances small-scale mining, offshore mining, mine safety and health, and mine closure. The 2nd component developscapacity to monitor and execute technical audits and mining activities by preparing monitoring and auditing strategies; implementing new institutionalarrangements including organising, staffing, and work methodology; and providing training. The third component strengthens the DoM's mineral tenementsmanagement by conducting field assessments, and developing a database. The 4th.component develops project coordination and environmentalassessment capacity for sustainable development in mining project areas. The 5th. & 6th. components fund institutional strengthening for the geologicalsurvey and develop geological information system capabilities; and implement new institutional arrangements for the IRC as well as upgrade equipment.

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1993 Peru PRIVATISATION ADJUSTMENTLOAN

8047 SAL Closed 250

The loan supported the privatisation programme and related sectoral policy, legal and regulatory reforms being implemented by the Government of Peru.The programme was designed to promote competition and private investment, and improve economic efficiency and fiscal performance. The reformprogramme included three components: (a) maintaining a satisfactory macroeconomic programme and financing plan; (b) implementing policy, legal andregulatory reforms in key sectors to promote competition and private investment and to facilitate privatisation; and (c) implementing the government'sprivatisation programme, focussing on mining, hydrocarbons and telecommunications, and selected holdings in fisheries, industry, air/urban transport andthe water sector.

1999 Poland HARD COAL SECAL 57957 SAD Closed 300

The project supports the government's Hard Coal Sector Restructuring Programme, and the implementation of socially acceptable and effective employmentrestructuring (which includes addressing the needs of miners leaving the industry, ensuring adequate funding of social support activities, safeguarding atransparent flow of funds, and helping unemployed workers find jobs). The benefits of the project include: a) stemming the losses of the coal companiesand eventually turn a money losing state controlled sector into a competitive and profitable private industry; b) direct social and economic benefits in themining areas with the immediate beneficiaries of the Programme will being the miners and their immediate dependents and c) indirect benefits throughimproved economic performance and an macroeconomic stability with tax revenues being channelled to social and economic needs rather than to proppingup a loss-making industry.

2001 Poland Coal Adj 57957 SAD Active 100

The project provides continued support for the Government's Hard Coal Restructuring Programme.

2000 Romania MINE CLOSURE 65351 SIL Active 45

The objective of the project is to support implementation of the Government's 1998-2002 Hard Coal Sector Reform Programme and the revised whichcontains more extensive mine closures and employment reduction than in the original Programme. Specific objectives relate to support for actions to 1)assist workers leaving the industry to find new jobs; 2) improve the industry payment of taxes and fees to government; 3) accomplish further progressregarding preparation for privatisation; and 4) continue progress to improve environmental performance. The immediate beneficiaries of social mitigationmeasures under the Programme, and the project are the miners and their immediate dependents.

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1996 Russian FED. COAL SECAL 38550 SAD Closed 500

The project helped the government put in place a consistent policy and institutional framework for the continuous and socially sustainable restructuring of thecoal sector and provide assistance in implementing the initial steps of the overall restructuring programme. The project supported 1) a programme for theprogressive reduction and eventual elimination of subsidies through the elimination of subsidies for operating losses and investment, the redirection ofremaining subsidies towards restructuring and related social programs and the establishment of a transparent mechanism for the allocation and effectivemonitoring of subsidies; 2) special community support and employment programs in areas where coal-related unemployment is expected to be high; and 3)the development and initial implementation of measures intended to commercialise and de-monopolise the coal sector.

1996 Russian FED. COAL IAP 45622 TAL Active 25

The project aims to enhance the effectiveness in implementation of the coal sector restructuring programme through assistance to the government, affectedpeople and organisations. Specifically, the project has the following objectives: 1) improvements in management of the restructuring process throughincreased participation of stakeholders as well as enhancement in transparency and openness; 2) filling critical skill gaps in a number of key areas whichare essential to design the details and implement the restructuring programme effectively; and 3) strengthen the country's institutional capacity to sustainreform. The project comprises 1) support for stakeholders participatory activities; 2) social programs; 3) strengthening of subsidy management to enhancetransparency and financial accountability through provision of consultant services and computer equipment; 4) technical assistance and training forcommercialisation and demonopolisation of coal companies; 5) technical assistance and training for environmental management; 6) technical assistancefor mine closures; and 7) support to the Foundation for Promotion of Restructuring the Coal Industry.

1998 Russian FED. COAL SECAL II 50486 SAD Active 800

The objectives of the project are to: a) separate state management functions and commercial activities in the industry and improve sector governance; b)reduce the impact of the coal sector on the federal budget by supporting the decrease of subsidies; c) promote the long term efficiency, commercial viabilityand sustainability of the sector, together with its privatisation; and d) cushion the impact of restructuring on coal miners, their families and affectedcommunities. The project consists of five components. 1) Commercialisation and demonopolisation to bring about competition among coal companies. 2)Privatisation and investment - state support to be in the form of loans, provided on a competitive basis. 3) Mine closures and workforce reductions to beconducted at minimal cost and social protection benefits to be provided to all eligible persons. 4) Subsidies to be paid to finance physical mine closures,scientific research activities, severance payments and wage arrears, disability payments, and a contingency Social Protection Reserve Fund. 5) Publicparticipation and social impact monitoring to inform the public regularly about the restructuring programme and their legal rights, and to consult them ondecisions affecting their social safety net.

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1995 Tanzania MINERAL SECTOR DEV. 2812 TAL Active 13

The principal objective of the project is to support Tanzania's private sector-oriented mining development policy and to expand private investment in mining.The secondary objective is to strengthen the capacity of mining institutions to efficiently administer and regulate the sector. The project also aims atimproving productivity and environmental and social viability of artisanal and small-scale miners. The legal, regulatory, fiscal and environmental componentwill help introduce appropriate mining laws and regulations and fiscal and environmental framework to promote and guide private investment in mining. Theinstitutional strengthening component will improve organisational, manpower, and logistical capacity of the Mineral Resource Department (MRD), helpreactivate MRD's environmental and mine safety inspection, and strengthen MRD's geological services including publication of geological map sheets andthe improvements of its mineral laboratory. The small-scale mining component includes a baseline data survey, the dissemination of information anddemonstration of simple and environmentally-sensitive technologies, and training and capacity building support to small-scale miners through the RegionalMiners Associations.

1996 Ukraine COAL PILOT 44110 SIL Closed 16

The objective of the project was to mitigate the social and environmental consequences that arise from the government's decision to close uneconomic coalmines, as part of government's overall restructuring programme for the coal sector. The project sought to: 1) test ways to implement the government'sdecision to close mines safely, with due regard to technical, environmental, economic, financial and social aspects; 2) ensure that mine workers are affordedopportunities to either transfer to other jobs in the sector or exit the industry with reasonable compensation and a choice of assistance for seeking otheremployment; 3) transfer social assets to municipal management, support their rationalisation and help ensure that adequate social protection measures areput in place to support the most vulnerable people; and 4) through monitoring and feedback, gain experience from the project for subsequent bankassistance operations in the sector. The project consisted of the following five components which served as the basic framework for mitigation initiatives insubsequent sector operations requested by the government: 1) mitigation of mine closure including physical closure and environmental mitigation; 2) socialmitigation; 3) social infrastructure divestiture; 4) institutional strengthening and job counselling; and 5) technical assistance.

1997 Ukraine COAL SECAL 40564 SAD Closed 300

The Coal Sector Adjustment Loan provided a significant portion of Ukraine's balance of payments and budget deficit financing needs in late 1996 and in1997, including part of the fiscal costs of restructuring the coal sector. The SECAL was quick disbursing and provided budget and balance of paymentssupport, linked to the conditionality specified for tranche release.

2001 Ukraine Coal Sector Social Mitigation 40561 SIL Active

N/A

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1991 Zambia Mining Technical Assistance 3238 TAL Closed 21

The project helped the government of Zambia to implement an effective development strategy for the mining sector. In the short term, the strategy aimed atmaking the mining sector more efficient and productive so that mining can continue to generate the resources needed to support recovery and diversificationof the Zambian economy. In the longer term, the strategy supported the development of new copper mines by private investors. The project (a) assistedZambia Consolidated Copper Mines (ZCCM) to improve its mining and metallurgical operations (ii) supported development and implementation of acomprehensive corporate plan (iii) assisting ZCCM in joint-venturing its undeveloped copper resources and in the divestiture of subsidiaries and/or assetswith little direct relation to mining; (iv) supporting a programme to encourage new private investments in gemstone mining; (v) facilitating the preparation of aplan to assist small-scale miners (vi) developing a long-run strategy for Maamba Collieries; and (vii) assisting in developing environmental regulations andsupport for protection of the environment in the areas mined by ZCCM, Maamba and the small-scale miners.

1995 Zambia 2nd. Economic & SocialAdjustment

3224 SAL Closed 90

The Credit supported a reform programme that included (a) macroeconomic stabilisation; (b) selected financial sector reforms (c) social security reforms and(d) mining sector policy reforms.

1996 Zambia Economic Recovery & Investment 3240 SECAL Closed 140

The Economic Recovery and Investment Promotion Credit supported a reform programme that included the following components: (a) macroeconomicstabilisation, with emphasis on continued restraint on and increased effectiveness of public expenditures (including protection of social sector allocations)and remaining trade and tax reforms; (b) selected financial sector reforms aimed at improving the mobilisation and allocation of term funds, especially byinsurance companies and pension funds; (c) social security reforms to establish a new basic pension system and to ensure the sustainability of contractualsaving institutions; and (d) mining sector policy reforms to update and improve the legal, fiscal and environmental frameworks to attract newinvestors, particularly to copper mining, and the prerequisite preparatory work to privatise Zambia Consolidated Copper Mines, Ltd. (ZCCM)

Total IBRD/IDA Commitment US$ Million (FY 1990 - 2001): 3552.7

Source: The World Bank

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Appendix D

Mining projects sponsored by the Multilateral Investment Guarantee Agency (MIGA)

MIGA Extractive Industry: Active Guarantee Contracts FY90-01 as of September 30, 2001

Project enterprise Guarantee Holder Host country Sector FiscalYear

MaximumAggregate

Liability(USD)

Omai Gold Mines Ltd. Cambior Inc. (EDC) Guyana Mining 1992 36,720,000Cambior Inc. (EDC) Guyana Mining 1992 13,158,000

Kasese Cobalt Company Limited La Source Compagnie Miniere S.A.S. Uganda Mining 1993 5,000,000La Source/Mine Or S.A./Barclays Metals Ltd. Uganda Mining 1993 5,000,000La Source Uganda Mining 1996 3,600,000Banff Resources Ltd. Uganda Mining 1998 1,908,020Banff Resources Ltd. & LaSource SAS Uganda Mining 1998 47,480,000

Newmont-Zarafshan Joint Venture Newmont Gold Company Uzbekistan Mining 1994 40,000,000Newmont Gold Company Uzbekistan Mining 1995 10,000,000

Kumtor Gold Company Cameco Corporation (EDC) Kyrgyz Rep. Mining 1996 45,000,000Cameco Corporation (EDC) Kyrgyz Rep. Mining 2001 39,330,000

Bajo de la Alumbrera Copper and GoldMining Corporation (EFIC) Minera Alumbrera Ltd. Argentina Mining 1997 12,000,000

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Minera Alumbrera Limited (ArgentinaBranch) Rio Algom Limited Argentina Mining 1997 2,000,000

Companias Asociadas Petroleras S.A. El Paso Energy International Company Argentina Oil & Gas 1998 22,580,000El Paso Energy International Company Argentina Oil & Gas 1998 17,617,500

ICV-Inertes de Cabo Verde, Lda. Secil-Companhia Geral De Cal e Cimento, S.A Cape Verde Mining 1998 540,000Secil-Companhia Geral De Cal e Cimento, S.A Cape Verde Mining 1998 660,000Sociedade de Empreitadas Adriano,S.A. Cape Verde Mining 1998 540,000Sociedade de Empreitadas Adriano,S.A. Cape Verde Mining 1998 660,000

Compania Minera Antamina S.A. Citicorp Peru Mining 1999 60,702,000Noranda Inc. Peru Mining 1999 2,550,000Rio Algom Limited Peru Mining 1999 2,550,000Teck Corporation Peru Mining 1999 1,700,000Mitsubishi Corporation Peru Mining 2000 16,250,047Mitsubishi Corporation Peru Mining 2000 23,709,953

Omolon Gold Mining Inc. Kinam Gold, Inc Russia Mining 2000 27,420,000

Chambishi Metals PLC Anglovaal Mining Limited Zambia Mining 2000 30,000,000

Kahama Mining Corporation Limited Societe Generale Tanzania Mining 2000 115,830,000Barrick Gold Corporation Tanzania Mining 2001 56,250,000

Omsukchansk Mining & Geolocial Company New Arian Resources Corporation Russia Mining 2000 2,250,000Standard Bank London Limited Russia Mining 2000 14,900,000

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Barracuda & Caratinga Leasing Company,B.V. Itochu Corporation, Mitsubishi Corporation Brazil Oil & Gas 2001 12,000,000

Deutsche Bank AG New York Branch Brazil Oil & Gas 2001 60,000,000

ZAO Stimul Victory Oil B.V. Russia Oil & Gas 2001 100,000,000

Total 829,905,520

Source: MIGA

79

Appendix E

Mining projects sponsored by the International Finance Corporation (IFC)

IFC Mining Investment Approvals FY1993- 2001

Region Country IFC Project ShortName

Date ofApproval

FYBrief Project Description Project Status

ProjectSize

US$m

IFC GrossInvestment

US$m

IFC NetInvestment

US$m

Africa Africa Region MACS 2001 Contract mining services, Australiancompany

Active 100.00 74.00 34.00

Africa Burkina Faso AEF FasoMine 1999 Small gold mine, French investor Active 4.60 1.52 1.52

Africa Ghana BOGOSU (V)-RESTR 1993 Gold mine, Foreign companies Active 0.00 0.00 0.00

Africa Ghana GAGL III 1996 Gold mine, Australian company Active 11.50 10.06 10.06

Africa Ghana GAGL IV 1996 Gold mine, Australian company Active 13.50 4.50 4.50

Africa Ghana GAGL IV-Restr 2000 Gold mine, Australian company Active 13.50 0.54 0.54

Africa Mali Randgold RI 1999 Gold mine, South African company Active 34.80 2.28 2.28

Africa Mali Randgold SomisyCapex

1997 Gold mine, South African company Active 63.80 35.00 10.00

Africa Mali Sadiola Gold 1995 Gold mine, Anglo American Active 246.20 64.80 39.80

Africa Senegal Tolsa-Thies 1998 Special clays, Spanish company Dropped 9.60 3.90 3.90

Africa Sierra Leone Sierra Restr 1998 Rutile mine, Australian company Active 0.00 0.00 0.00

80

Africa Tunisia MINIERE BGRN-RI 1994 Copper mine, local company Closed 7.70 0.85 0.85

Africa Uganda Kasese Cobalt 1996 Cobalt extraction, French/othercompany

Active 110.00 24.58 19.58

Africa Zambia KCM 2000 Copper mine , Anglo American Active 334.80 30.00 30.00

Africa Zimbabwe WANKIE COLLIERY2 1993 Coal mine, local company Closed 28.00 10.00 10.00

Asia China Daning AACI 2001 Coal mine, US company Active 2.00 2.00 2.00

Asia China Daning Coal 2001 Coal mine, US company Active 75.00 30.00 15.00

Asia India Sarshatali Coal 1999 Coal mine , local company Active 148.60 35.00 35.00

Asia Indonesia Dianlia 2001 Mining services, local company Active 10.40 5.00 5.00

Asia Indonesia PT Petrosea 2000 Mining services, local/Australiancompany

Active 83.00 25.00 25.00

Europe Turkey Cayeli Expansion 1996 Zinc mine, Canadian company Dropped 30.00 15.00 15.00

Ex-FSU KyrgyzRepub

KUMTOR GOLD 1995 Gold mine, Cameco, Canadiancompany

Active 335.00 40.00 40.00

Ex-FSU Russian Fed. Bema Gold 2001 Gold mine, Canadian company Active 1.00 1.00 1.00

Ex-FSU Russian Fed. Dukat Silver 2000 Silver mine, US Company Closed 92.50 54.40 21.40

Ex-FSU Russian Fed. Julietta 2001 Gold mine, Canadian company Active 76.50 10.00 10.00

Ex-FSU Russian Fed. Pan American 2000 Silver mine, US Company Active 12.50 12.50 12.50

Ex-FSU Russian Fed. Pokrovskiy Mine 1997 Gold project, Local company Dropped 66.60 48.30 16.00

Ex-FSU Russian Fed. Zoloto Mining 1997 Gold project, Local company Dropped 11.00 4.00 4.00

Ex-FSU Tajikistan Nelson Gold 1997 Gold project, Canadian company Active 0.00 2.05 2.05

81

Ex-FSU Tajikistan Zeravshan Gold 1997 Gold project, Canadian company Active 127.00 7.50 7.50

Ex-FSU Tajikistan Zeravshan-Jilau 1998 Gold project, Canadian company Active 14.70 3.00 3.00

Ex-FSU Tajikistan Zeravshan-NGC 1998 Gold project, Canadian company Active 9.00 3.00 3.00

Ex-FSU Uzbekistan AMANTAYTAU GOLD 1994 Gold mine appraisal, Lonrho (UK) Closed 6.40 1.20 1.20

Ex-FSU Uzbekistan Amantaytau II 1996 Gold mine appraisal, Lonrho (UK) Dropped 355.00 143.80 58.80

Latin America Bolivia COMSUR (II) 1994 Zinc mine, Bolivian company Active 55.50 12.30 12.30

Latin America Bolivia COMSUR III 1996 Zinc mine, Bolivian company Active 22.00 13.34 8.34

Latin America Bolivia COMSUR V 2000 Zinc mine, Bolivian company Active 22.70 10.00 10.00

Latin America Brazil MBR LTDP 1999 Iron ore, Brazilian company Active 342.00 140.00 25.00

Latin America Brazil MBR Swap 1996 Iron ore, Brazilian company Dropped 4.00 4.00 4.00

Latin America Brazil PARA PIGMENTOS 1994 Kaolin project, local company Active 183.00 74.00 34.00

Latin America Brazil Samarco 1997 Iron ore, Brazilian company Active 44.80 39.00 23.00

Latin America Chile Escondida RI 1999 Copper mine, RTZ, BHP, others Active 25.00 25.00 25.00

Latin America Chile Refimet 1995 Copper smelter, local/N. Americancompany

Closed 91.20 79.00 20.00

Latin America Chile Refimet (Rev) 1996 Copper smelter, local company Closed 6.00 5.00 5.00

Latin America Mexico La Colorada 2001 Silver mine, local company Active 50.80 28.60 10.30

Latin America Mexico MEDIMSA – SWAP 1996 Copper mine, local company Dropped 5.00 5.00 5.00

Latin America Mexico MEXCOBRE SX/EW 1994 Copper mine, local company Closed 75.00 60.00 25.00

82

Latin America Mexico MEXCOBRE-EXPN 1995 Copper mine, local company Closed 115.00 35.00 25.00

Latin America Mexico PanAme-La Colora 2001 Silver mine, local company Active 1.20 1.20 1.20

Latin America Peru BUENAVENTURA IV 1993 Mining Development, local company Active 105.80 0.65 0.65

Latin America Peru QUELLAVECO 1993 Copper mine appraisal, AngloAmerican

Active 31.00 6.22 6.22

Latin America Peru QUELLAVECO – RI 2000 Copper mine appraisal, AngloAmerican

Active 3.00 0.60 0.60

Latin America Peru QUELLAVECO – RI 1996 Copper mine appraisal, AngloAmerican

Active 26.60 5.30 5.30

Latin America Peru Quellaveco Pre-empt. 2001 Copper mine appraisal, AngloAmerican

Active 3.80 0.75 0.75

Latin America Peru Regina Restr II 1998 Tungsten, UK company Active 0.00 0.00 0.00

Latin America Peru YANACOCHA 1993 Yanacocha Gold mine Newmont(US), Buenaventure (local)

Active 45.00 24.67 12.67

Latin America Peru Yanacocha III 1999 Yanacocha Gold mine Newmont (US),Buenaventure (local)

Active 121.00 110.00 30.00

Latin America Peru Yanacocha MAQUIMAQUI

1994 Yanacocha Gold mine Newmont (US),Buenaventure (local)

Active 53.80 15.94 10.94

Latin America Peru YANACOCHA-RIGHTS 1995 Yanacocha Gold mine Newmont (US),Buenaventure (local)

Dropped 0.10 0.12 0.12

Latin America Venezuela Loma de Niquel 1997 Nickel mine and smelter, AngloAmerican

Active 430.00 124.50 74.50

Latin America Venezuela Minera Loma RI 2000 Nickel mine and smelter, AngloAmerican

Active 98.40 0.30 0.30

TOTAL 819.67

Source: IFC

Appendix F

Feasibility Study ReportsThe following provides a checklist of the main sections of feasibility studyreports:52

Structure

Part A - IntroductionPart B - SummaryPart C - GeologyPart D - MiningPart E - Process FacilityPart F - Project InfrastructurePart G - Offsite InfrastructurePart H - EnvironmentalPart I - ImplementationPart J - Capital and Operating CostsPart K - MarketingPart L - Financial

These sections should cover:

Part A - Introduction

§ Scope of the report§ Simple introduction to the project covering its location, topography, climate,

land use and access to the area.

Part B - Summary

§ Summary description of the key points of the project§ Areas of predevelopment requiring further investigation or evaluation§ The anticipated project financial situation§ Summary of the reports conclusions§ Recommendation of whether or not to proceed with the development of the

project§ Summary of the risks and advantages of the recommendations.

Part C - Geology

§ Brief history of previous exploration and production in the immediate projectarea

§ Exploration carried out including geophysical and geochemical surveys,drilling, sampling, logging

§ Regional and detailed deposit geology and deposit mineralogy, together withsupporting diagrams and maps

52 Cost Estimation Handbook for the Australian Mining Industry, AUSIMM, 1993 (Appendix 11.1. byN. Cusworth)

§ Mineral resources including a summary of the evaluation methodology§ Ore reserves including proposed mining methods and general economic

parameters assumed in mine planning.

Part D - Mining

§ Mining conditions and methods§ Mine design criteria including recovery and dilution§ Geotechnical considerations§ Access§ Development schedule§ Mine plan and schedule§ Equipment including support for selection and availability§ Mine services - water, power, communications, explosives, compressed air,

ventilation.

Part D - Process Facility

§ Process selection and route§ Test work performed§ Facility capacity criteria§ Facility design and quality criteria§ Process design and operational features§ Layout§ Equipment sizes and specifications§ Facility control§ Services - power, water, sewerage, communications, fire, waste disposal§ Materials - foundations and construction material sources.

Part E - Project Infrastructure

§ Roads§ Drainage§ Sewerage disposal§ Water supply§ Power supply§ Communications§ Transport§ Warehousing§ Mobile Equipment§ Spare Parts§ Maintenance Equipment§ Administration Buildings§ Laboratory§ Temporary Services§ Temporary accommodation.

Part F - Offsite Infrastructure

§ Roads§ Rail§ Air§ Power§ Communications§ Water§ Work force accommodation§ Export facility§ Logistics and transport.

Part G – Environmental

§ Climate and meteorology§ Terrain§ Flora§ Fauna§ Surface water§ Ground water§ Acoustic§ Air§ Land use§ Impact assessment§ Mitigation proposals§ Socio-economic impacts.

Part H - Implementation

§ Operationso Structureo Workforce - size, type and sourceo Rosterso Employee relationso Recruitment and selectiono Administrationo Accommodationo Trainingo Availabilityo Cost rates.

§ Implementationo Contracting strategyo Project structure and organisationo Staffingo Location procedureso Scheduleo Industrial relations and site awardo Safety.

Part J - Cost Estimates: Capital and Operating

§ Work breakdown structure§ Methodologies§ Contingency and accuracy.

o Capital Costso Basiso Exchange rateso Owner costs to establisho Engineering, procurement and construction supervisiono Equipment building materials.

§ Construction labouro Transporto Indirect costso Government fees and chargeso Administrationo Owner project direct and indirect costso Insurances.

§ Operating Costso Basiso Commissioningo First fillo Spareso Labouro Consumableso Working capitalo Replacement capitalo Government royalties and levieso Administrationo Marketingo Transport Agent feeso Insuranceso Rehabilitation.

Part K- Marketing

§ Commodity specification§ Current market demand and sources§ Supply demand and price forecasts§ Quality control and criteria§ Market strategy and implementation§ Revenue forecasts.

Part L - Financial

§ Basis of evaluation§ Economic evaluation and model§ Sensitivity factors§ Cash flow§ Asset control

ABOUT UNEPUNEP’s mission is to provide leadership and encourage partnership in caring for theenvironment by inspiring, informing, and enabling nations and peoples to improve theirquality of life without compromising that of future generations.

UNEP works closely with stakeholders to provide a common information and knowledgebase which assists government and industry in making environmentally sound decisions.

ABOUT THE UNEP DIVISIONOF TECHNOLOGY, INDUSTRY AND ECONOMICS

The mission of the UNEP Division of Technology, Industry and Economics (UNEPDTIE), is to help decision-makers in government, local authorities, and industry developand adopt policies and practices that:

• are cleaner and safer;• make efficient use of natural resources;• ensure adequate management of chemicals;• incorporate environmental costs; and• reduce pollution and risks for humans and the environment.

UNEP DTIE activities focus on raising awareness, improving the transfer of information,building capacity, fostering technology cooperation, partnerships and transfer, improvingunderstanding of environmental impacts of trade issues, promoting integration ofenvironmental considerations into economic policies, and catalysing global chemicalsafety.

ABOUT ANDREW ZEMEKAndrew P Zemek is a London-based consultant on mining and metal issues. He has over20 years of industry experience in metal trading and worked for many years for one of theworld’s largest copper mining companies. Most recently closely associated with theMining Journal Group, he worked on assignments for UNEP, UNCTAD, the World BankGroup, McKinsey & Co and many other companies. He is also the author of acommercial software for managing commodity hedging positions on the London MetalsExchange. Andrew holds an MA in Economics from the Warsaw School of Economics(SGPiS).

The author can be contacted by e-mail at: [email protected]

www.unep.orgUnited Nations Environment Programme

P.O. Box 30552 Nairobi, KenyaTel. (254 2) 621234Fax. (254 2) 623927

E-mail: [email protected]: www.unep.org

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This Report is printed with the assistance of theStandard Bank London Limited.

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