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1
September 2008London
Markets and the Shifting Frontier:
Challenges for Juniors
Christopher GossHead, Business Development, Mining, Oil, Gas and ChemicalsInternational Finance Corporation.
Overview
1.The market context
2.The push to the frontier
3.Challenges and Responses
4.The value of a strong partner
1The Market Context
Global Demand
•Demand increases largely led by large emerging economies, in particular China.
•Credit crunch
Indications that large emerging economies now feeling the impact of global financial markets turmoil.
Delayed impact on real economy likely to hit exports.
Will these demand forecasts hold up?
0
10000
20000
30000
2002 2007 2010 2012 2018
Copper demand
Kt
China
Rest of the World
Source: Citigroup, WBG estimates
0
200
400
600
800
1000
1995 2000 2002 2004 2006 2008 2010
Seaborne iron ore demandMt
China
Rest of the
World
Global Supply
1.Under-exploration for many years has led to a dramatic increase since 2003/ 2004. Nonferrous exploration investment > US$ 10 billion in 2007.
2.Cost inflation pressure on development /expansion.
3. Junior exploration companies: account for half or more of
total exploration expenditure are heavily affected by the
turmoil in the financial markets.
0
2
4
6
8
10
12
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
US
$ B
illio
n
0%
10%
20%
30%
40%
50%
60%
70%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Majors Intermediaries Juniors Gov
% o
f to
tal e
xp
lora
tio
n in
ve
stm
en
t
Source: Metals Economics Group (MEG)
Current share price performance of AIM-listed
minersAIM-listed mining companies trading
within:
Number of companies
Total Explorers Producers
25% of 52 week high 8 5% 4 50% 4 50%
Between 25 15% 14 56% 11 44%
25% of 52 week low 133 80% 96 72% 37 28%
Total 166 114 52
69% 31%
80% of companies trading within 25% of their 52 – week lows.
The majority are explorers.
Raises issue of best time to list.
5%
80%
50% 50%
72% 28%
69% 31%
Some AIM Miners: share prices over time
0%
50%
100%
150%
J an-2007 May-2007 Oct-2007 Mar-2008 J ul-2008 Dec-2008
Ave. for 18lowestperformers
Ave. for 9 topperformers
Averagecommodityprices
Top and lowest performers vs metal prices (normalised to Jan 1 2007)
1. Low performers deteriorating since Jul / Aug 2007.
2. Top performers continued to appreciate.
3. Prices stayed strong through credit crunch - delayed impact on real economy and demand.
4. Current price deterioration.
??
Mining listings / financings on AIM
1. Credit crunch has caused a serious deterioration in share prices.
2. Listings have, however, remained relatively strong throughout 2007/ early 2008 in terms of numbers and amounts raised.
0
20
40
60
80
100
120
140
160
180
200
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008
Nu
mb
er o
f ra
isin
gs
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Ave
rag
e am
ou
nts
rai
sed
(G
BP
)
Number of raisings Average Amounts Raised (GBP)
Further raisings by mining companies on AIM
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008
No
. of
listi
ng
s
0
5
10
15
20
25
30
35
Ave
rag
e am
ou
nt
rais
ed (
Mill
ion
GB
P)
Number of listings Average Amounts Raised (Million GBP)
New listings of mining companies on AIM
Debt Syndications for Mining and Metals
0
20
40
60
80
100
120
140
160
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Number of syndications globally - Metals & Mining
•Syndications have reduced in numbers and size
•Flight to quality
•Covenants tightening and spreads widening
•Recently banks are more reluctant to work with other banks given financial sector uncertainty
0100200300400500600700800900
1000
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
US$
Million
s
Average volume of syndications globally - Metals & Mining
Market Risk Perception
0
50
100
150
200
250
300
350
400
450
18-J an-07 28-Apr-07 6-Aug-07 14-Nov-07 22-Feb-08 1-J un-08 9-Sep-08
Date
Spr
ead
(bps
)
Chile Kazakhstan Peru RussiaUkraine South Africa Turkey Average
Country Credit Default Swap spreads - selected countries
• CDS spreads are a good indication of the market risk perception “pulse”.
• Increases in many mainstream countries: China (56 – 67), Japan (6.5 – 16), UK (7.5 – 17); but Australia (21 – 20.5).
• Dramatic increases linked to financial markets’ uncertainty.
Possible Outlook:
Global supply may be more constrained than demand.
Prices likely to stay relatively strong.
Flight to quality by investors.
2. The push to the frontier
Frontier Countries
•Global resource scarcity and relative resource richness in frontier countries has drawn juniors to countries which many previously avoided.
•Since frontier countries are higher risk, raising financing can be tougher.
AIM Listed Juniors and Frontier Countries
64%
7%8%
15%
10%
19%
21%
22%
New opportunities, but also challenges and risks: 1) Governance 2) Resource nationalism3) Energy security
High income
Upper middle incomeLower middle incomeLow income
%% AIM-listed companies working in this region
% Average TI corruption index (2007)
8.0
3.7
2.36.7
2.8
9.0
3.7
2.3
64% of AIM listed
companies are active in
Africa.
3. Challenges and Responses
Host Country Governance – What can be done by Policy Makers?
Key impediments to improved governance include:
•Impatience understandable if limited benefit so far from natural resources, but unwise choices of investors/alliances and substandard agreements
•Corruption
•Lack of government capacity.
•Keys to success include:
•Build government capacity, transparency, rule of law and security/stability of investor rights
•Wise revenue distribution - spending on infrastructure and on key development constrains engagement with local communities and linkages with local business
•Fairly balanced investment agreements
•The Extractive Industry Transparency Initiative (EITI) is a critical first step
The EITI Board has approved 23 countries as “EITI candidates” – 16 in Africa.
Of these 10 have published one or more EITI Reports to date (July 2008) Azerbaijan, Cameroon, Gabon, Ghana, Guinea, Mauritania, Mongolia, Nigeria,
Kazakhstan, Kyrgyz Republic
Norway is first developed country to announce EITI adoption.
Efforts by many (EITI Board; G8; others) to engage with new investor countries (China, India, Brazil etc) on EITI.
EITI should encourage:
Clear and stable laws and regulations Rule of law in managing the sector Government capacity building Fiscal monetary and budget transparency and discipline More open dialogue and accountability between government and civil society
EITI is Making Progress
Host Country Governance – Some implications for the investor
• Frontier countries often have:
• Uncertain legal and regulatory frameworks
• Challenging and uncertain business environments
• But likely correlation between fiscal stability, security of investor tenure and avoidance of resource curse.
Common link is good governance Examples – Botswana, Chile, Ghana, South Africa
• Investor can in part mitigate national / regional governance issues by building a strong, sustainable relationship with the local community and a ‘social licence to operate’.
Examples: Guinea Alumina in Guinea and Bema Gold (now acquired by Kinross) in Far East Russia.
• Assistance in prudent government use of revenues.
• Consultation with affected communities.
• Generating sustainable community benefits by promoting economic development opportunities and supplier linkages with local businesses.
Involves:
The Sustainable Approach
‘Social License to Operate’
• The IFC Linkages program is assisting PKC in raising its standards and technical expertise.
• PKC has grown to 19 employees, half of whom are women, and is actively working to increase its production capacity.
• Seeing the benefits of a reliable local supplier, Newmont has recently awarded PKC a three year contract.
The opening of the Ahafo mine created an opportunity for Patrick Boakye’s small business (PKC) to supply Newmont
with plastic sampling bags.
Example of Supplier Development:Ahafo Gold Mine in Ghana
IFC’s Performance Standards on Social and Environmental Sustainability: Best Practice
Tools in Risk ManagementImplementing the Performance Standards Guards Against Project
Interruptions: •Strikes or protests
•Costly environmental clean ups
•Loss of investor confidence due to unfavorable media attention
Meeting the Performance Standards Helps to Improve the Bottom Line:
•Helps ensure smooth and continuous operations
•Maximizes local development benefits, improves relations with local community
•Optimizes resource management (water, energy, etc.)
•Helps to create reliable and cost effective supply chains
•Enhances company brand value to investors
Meeting the Standards = Stamp of Approval
IFC’s Performance Standards on Social and Environmental Sustainability: International Stamp
of Approval“Equator Principles” adopted by 50+ of the world’s leading
Investment Banks and based on IFC’s Performance Standards
Apply to 85% of project financing worldwide
Resource NationalismResults from:• Increased resource scarcity /rising commodity prices. May be slow to reverse if prices fall.
• Increased host country awareness of bargaining power.• Competition from new investing players, including BRIC countries and companies and emergence of qualified local mining companies.
May manifest itself as:Change in fiscal terms /review of contracts/insecurity of tenure e.g.:•Chile•Peru•DR Congo•Ecuador•Guinea•KazakhstanSeeking greater/majority local ownership e.g.:•China (for gold)•Russia (for strategic minerals)•Mongolia•Ecuador
Resource Nationalism 2.
•Focus by host governments on prices and revenue-based fiscal terms can squeeze companies as costs also rise.
•Widespread renegotiation of fiscal terms for oil and gas – recent study showed increased government take in 13 host authorities since 2005.
Could become more widespread in mining, depending on commodity price movements.
•Best defence is transparency about costs, project economics and initial terms which share fairly between host government and company.
4. The value of a strong partner
• The combination of tougher market conditions and host country challenges make it difficult for a junior company to succeed without one or more strong partner.
• May be a strategic/industry or financial partner – depends on needs. In both cases can:
1. Raise operating standards :• Strengthen management capacity: financial, technical,
environmental and social• Increase credibility / reputation
2. Help raise financing privately, through a listing, or from banks
IFC can help in all these areas.
Role of strong / value adding investors
Exploration Stage - Lydian Resources IFC came in as equity partner pre-listing in August 2007. Lydian also has partnership with Newmont,
strengthening its technical and managerial capacity.
Project Development Stage – Aricom IFC became a shareholder in Aricom in mid-2007 IFC plans to play a role in mobilising bank financing for
mines and and associated infrastucture in Amur region, Russia.
Recent examples of IFC partnerships with Juniors
Wide IFC role – and we are moving faster
Need for stable, long term equity investors. IFC is one of those, and we can bring other like minded investors in with us.
We can provide a steadying presence in volatile markets and complex political environments.
IFC has streamlined its decision-making: IFC committed on the Kupol mine financing four
months after being mandated. IFC were shareholders in Peter Hambro four
months after visiting the project.
Products ranging from early stage equity to debt
Senior Debt & Equivalents
Equity
Mezzanine / Quasi Equity
IFC Engages in Mining Projects World-Wide
Latin AmericaFSU/East EuropeAsiaAfrica
100+ country and
regional offices
worldwide
HongKong
RiodeJaneiro
IstanbulNewDelhi
Johannesburg
Washington
Paris
Moscow
Cairo
IFCHubsIFCOffices
IFC’s Global Reach
IFC ContactsWilliam BulmerAssociate Director and HeadGlobal Mining Division, Washington DCPhone: +1 202 473 0725Email: [email protected]: +1 202 974 4323
Christopher GossHead of Business Development, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8414Mobile: +44 (0)79 2006 0514Email: [email protected]: +44 207 592 8430
Sacha BackesBusiness Development Officer, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8413Mobile: +44 (0)79 1710 0720Email: [email protected]: +44 207 592 8430