16.10.2014, Political Risks and Trade Credit Workshop, Vlad Bobko

Prepared by Political Risk & Structured Credit | Crisis Management | Global Broking Centre

Political Risks and Trade Credit Workshop

Political Risk & Structured Credit | Crisis Management | Global Broking Centre 2

Agenda: Political Risks – Mining in Mongolia

Section 1 Introduction Section 2 The Insureds Section 3 The Cover available Section 4 Case Studies Section 5 The Insurance Market – Mongolian Mining Section 6 Tools and Country rates


Political Risks

Political risks arise from the actions or inactions of a foreign government, your own government or a third party country. These risks may: • deprive you of your assets, • prevent or restrict the performance of or payment under a contract, or • affect repayment of loans to financing banks and lenders. All political risk policies must have a ‘cross border’ element. Is generally deemed that your own government is always acting in your best interest.


Political Risk Insurance

Contracts: Government or counter-party action that frustrates a contract (i.e. prevents or restricts the performance of a contract or the ability to pay/deliver) • Exports, Imports, Bonds / SBLCs

Assets: Government action that deprives a company of all or part of its assets (i.e. interferes with a company’s ability to own & manage its investments). • Equity & Debt, Projects, Plant & Equipment, Stocks


Section 2: The Insureds

• Owners & Investors

• Banks & Lenders

• Contractors

• Corporates

• Commodity Traders & Offtakers


Owners and Investors

Their Interest: • Equity

• Inter-Company loans

• Guaranteed Loans

In the Joint Venture or subsidiary


Owners and Investors

The Risks: • Expropriation • Mining concession cancellation • Selective discrimination • Currency inconvertibility and non-transfer • Embargo • Import licence cancellation for key supplies • Export licence cancellation • Forced abandonment • Forced divestiture • Damage caused by Political violence, war and civil war


Banks and Lenders

Their Interest: • Non-Payment of scheduled loan amounts due from the Borrower The Risks: • Credit risk • Sovereign risks (if government buyer) • Lenders Interest (Not Credit cover – arising from Expropriation, PV and CI/ET) • Commercial and Performance risks • Basel II & III compliant policies • Country risk • Currency Inconvertibility and Exchange Transfer


Contractors

Their Interest: • Owned assets, or assets under their care, custody and control (eg seismic

equipment, construction equipment and test drilling)

The Risks: • Expropriation • Deprivation (Re export embargo) • Forced Abandonment • Terrorism • War • Non-Payment • Unfair calling of On Demand Bonds


Commodity Traders and Offtakers

Their Interest: • Offtake Contracts, stocks of ores and other materials The Risks: • Expropriation • Export Embargo • Political Violence damage • War • Non-Payment • Non-Delivery


Section 3: The Cover

• Definitions

• CEN – Fixed

• CEND – Mobile

• Non-Payment

• Non Delivery

• Uninsurable Risks


Definitions

Expropriation: Loss of or damage to fixed or mobile assets caused by confiscation, seizure, appropriation, expropriation, requisition for title or use or wilful destruction or damage by or under the order of Foreign Government Deprivation: Loss of use or possession of the mobile assets or stocks caused by the failure or refusal of the Foreign Government for a period of six months to permit the export of the mobile assets or stocks from the Foreign Country, or the Insured being prevented from exporting the mobile assets or stocks from the Foreign Country for a period of six months due to its inability to obtain an export licence from the appropriate authority in the Foreign Country


Definitions continued

Cancellation of concession/permit/licence: Loss or use of the asset due to cancellation of the principal ‘contract’, be it a concession, permit or licence

Currency Inconvertibility/Exchange Transfer: Non-payment of dividends or repayment of loans by or from the foreign enterprise arising out of:

Foreign exchange remittance restrictions/shortages of foreign exchange

Introduction of a law, order or decree which prevents, restricts or controls transfer of payment to the Assured's country

Political events or economic difficulties which prevent or delay payment to the Assured's country



Non-Delivery: Non-performance arising out of: (Import)

Supplier Perils: Contract termination, Non-delivery, non-repayment of an advance

Country perils: Embargo, License, War, CI/ET

Non-Payment: Non-performance arising out of: (Export)

Supplier Perils: Contract termination, insolvency, protracted default

Country perils: Embargo, License, War, CI/ET



Unfair Calling of On Demand Contract Bonds: • ‘Unfair’ Calling by the Beneficiary where Insured NOT in contractual default

• ‘Fair’ Calling where Insured is in default but only due to Political Perils such as;

• Embargo and Licence Cancellation • War and Political Violence


Permanent Assets - CEN

For Joint Ventures; 100% Subsidiaries; Projects:

• Confiscation

• Expropriation

• Nationalisation

• Forced Abandonment & Forced Divestiture

• Loss of Concession / License / Permits, Selective Discrimination

• Export Embargo

• Political Violence (war, terrorism)

• Currency Inconvertibility


Permanent Assets - CEN

100% Indemnity Policy Period up to 10 years (usually 3 – 5 years) Non-Cancellable INVESTORS • Value of Equity &/or Inter-company Loans &/or Guaranteed Bank Loans

LENDERS • Value of the Scheduled Loan Repayments


Mobile assets (CEND)

For equipment or stocks:

• Confiscation, Expropriation, Nationalisation, • Deprivation (export embargo) • Forced Abandonment • Political Violence (war, terrorism, etc.) • Non-repossesion (leased equipment)

CONTRACTORS - Value of equipment

COMMODITY TRADERS & OFFTAKERS - Value of Stocks


Non-Payment

Country risks (public and private buyers) • Import / export embargo

• Cancellation / non-renewal of licenses (non-issuance?)

• Termination through war / civil war / government interference

• Withdrawal / suspension of funding (externally funded contracts)

• Currency inconvertibility & exchange transfer


Non-Payment - continued

B. Buyer risks (public and private buyers)

• Unilateral termination / failure / refusal to comply with contractual obligations

• Failure / refusal to honour arbitration award

• Non-payment by buyer / obligor

C. Unfair Calling (on-demand bonds & guarantees)

• Fair & unfair calling


Non-Delivery/Non-Performance

Country Risks (Public & Private Suppliers) • Import/Export Embargo • Cancellation/non-renewal of licences (non- issuance?) • Termination through war/civil war/government interference • Confiscation/seizure • Non-honouring of guarantee (repayment) • Currency Inconvertibility


Non-Delivery/Non-Performance - continued

Supplier Risks (Public & Private Suppliers) • Contract termination

• Non-delivery

• Non-repayment


Uninsurable Risks

• Tariffs and Protectionism • Loss of intellectual property • Loss of title • Biased/inadequate local legal system • Punitive taxes • Infrastructural inadequacies • Corruption • Import/export tariffs/quotas • Slow/inefficient bureaucracy • Labour controls • Commodity price fluctuation and devaluation • Currency fluctuation and devaluation


Section 4: Case Studies*

• Overview

• Macmahon Holdings

• SouthGobi

• Burnstone

• Khan Resources

• Australian mine – Solomon islands * Information taken from open sources


Overview*

• Last year 106 exploration licences were revoked by the Mongolian government.

• Former licence holders were compensated for their expenditures in the tender

and exploration process

• Not potential lost revenue

* Information taken from open sources


Macmahon Holdings*

• August 2014 - Macmahon suspended activities at the Tavern Tolgoi coal mine

• This was due to the non payment of USD 22,000,000 of progress payments due

from state-owned Erdanes Tavern Tolgoi



SouthGobi Sands*

• Attempted 2012 transfer of Ovoot Tolgoi coal mine to Chinese (Chalco)

• Mongolia suspend SouthGobi’s mining and exploration licences

• The government passed a bill declaring that the sale of any asset deemed to be

of ‘strategic importance’ required approval from the khural

• Chalco withdrew bid



Burnstone – South Africa*

• Operations at Burnstone were suspended due to the company not being able to afford the mine’s required working capital

• Mine defaults on payments to banks



Khan Resources*

• In July 2009, the Mongolian government suspended Khan’s licence at the Dornot uranium mine.

• Passed the Nuclear Energy Act, that sought to seize 51% of Dornod at no cost to the government

• Prime Minster announced the Dornod Joint Venture consisting of Monatom (Mongolian) and ARMZ (Russian) to develop the Dornod deposit

• Khan is seeking over USD 350 million in damages at arbitration



Section 4: The Market

• The Political Risk market in London

• London Market Capacity

• Benchmark Pricing


Political Risk – London Market

• 30 Lloyds Syndicates

• 28 Corporate Insurers

• 7 Multilaterals including MIGA (The World Bank)


Capacity – USD (Millions)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

1994 1997 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cap

acity

in U

SD M

illio

n

Contract Frustration

Investment Insurance

Single Credit


Average pricing and capacity per transaction


Section 5: Country rates

• Current Mongolian mining sector rates



Thank you for your time and attention

Any questions?

Vlad Bobko Head of Crisis Management (Terrorism, K&R, Political Risks, Contingency & Agri) Aon Risk Solutions | Global Broking Centre | London Chief Broking Officer, Director Large Accounts and Specialty Aon CEE, CIS and Mongolia t. +44 (0)207 0864834 | [email protected]

mailto:[email protected]

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16.10.2014, Political Risks and Trade Credit Workshop, Vlad Bobko

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