FINANCING MINING PROJECTS GLOBALLY AND CONSEQUENCES FOR THE MINING SECTOR IN KAZAKHSTAN

Transcription

1 FINANCING MINING PROJECTS GLOBALLY AND CONSEQUENCES FOR THE MINING SECTOR IN KAZAKHSTAN KARSTEN FUELSTER KARSTEN FUELSTER SECTOR LEAD FOR OIL, GAS AND MINING IN EASTERN EUROPE, CENTRAL ASIA, MIDDLE EAST AND NORTHERN AFRICA

2 Weak Commodity Prices Are Impacting Profitability Structural Oversupply: o Historic & prolonged up-cycle spurred massive investment in new supply o Boom-era mines continuing to come online despite uncertain environment Slowing Economic Growth: o Moderating Chinese GDP growth impacting industrial commodity prices, particularly iron ore o Other major emerging market countries not fulfilling economic growth potential in recent years (Russia, Brazil, etc ) Uncertain Recovery of World Economies: o Developed countries, particularly in Europe, are still struggling to overcome lingering effects of financial crisis o Global fiscal stimulus will eventually need to be unwound, with uncertain implications o Emerging market growth alone no longer able to sustain meaningful global economic progress Mining Companies Imperative: Cut costs, Refocus on Core businesses and limit the pursuit of growth opportunities Challenging Capital Markets: o Equity Markets especially for non producing junior mining companies largely closed o Bank debt available for brownfield and selectively also for new projects 1

3 Creating Opportunities For Mid-Tiers & Juniors Short-Fall In Exploration Activity: o Exploration spending by Top 40 mining companies was down by another 20% in 2014 to $4.9bn per analysis by PwC. It was $12bn in o Lack of long-term investment by the majors will eventually set the stage for the next round of fears over supply shortages in certain commodities o Mid-tiers & juniors able to invest in exploration projects today could be well positioned to profit once this shift in supply-demand dynamics occurs Non-Core Geographies: o Majors have become increasingly sensitive to sovereign risk concerns, largely electing to refocus on long-life Tier 1 assets in low-risk geographies (Australia, U.S., Canada, etc ) o Very few operators are willing to pursue greenfield exploration projects, particularly in frontier or immature mining markets, despite the significant resource potential in many such geographies Survival Of The Fittest: o Given the persistent challenge of accessing capital in today s markets, only the highest quality and best capitalized juniors will be able to take advantage of these sector dynamics o Mid-tiers are especially well positioned to exploit this risk aversion exhibited by the majors, but will need shareholder support and their bankers support to execute on such long-term strategies 2

4 Kazakhstan's mining sector growth outlook remains positive Strong mining sector Long mining history Strong contribution to the country: 17% of GDP Significant undeveloped mineral reserves Vast reserves of Chrome (1), Uranium (2); Zinc, Lead and Cadmium (4); Bismuth (5); Iron Ore (6); Coal (8); Molybdenum (9), Copper & Bauxite (11 th world rank) Supportive regulatory policies New Mining Code in 1Q2015 Mining implementation regulations on its way Rule of Law, contract enforcement improving Business environment is getting stronger but only slowly Source BMI; The intersection of the vertical and horizontal lines represents the regional average. Substantial efforts made to attract FDI Constraints: limited export infrastructure, access to power in remote areas; subdued commodity prices shift in capital expenditures 3

5 Summary of Key Challenges for the Mining Sector Globally Both Hardware and Software challenges are hampering the sector s growth Mining is a long-term, capital intensive industry requiring a predictable environment Hardware challenges: Access to licenses, geological data Make discoveries Build new mines Get access to infrastructure: Funding Power, Rail, Roads, Ports Software Challenges: Political risk Bureaucracy / government capacity Underdeveloped legal / regulatory environment Corruption Lack of skilled labor force Social / community issues Optimize environmental impact 4

6 Business Environment For The Mining Industry Top 10 Business Risks Productivity Improvement 2. Capital Dilemmas 3. Social License To Operate 4. Resource Nationalism 5. Capital Projects 6. Price & Currency Volatility 7. Infrastructure Access 8. Sharing The Benefits 9. Balancing Talent Requirements 10.Access To Water & Energy 1. Skills Shortage 2. Industry Consolidation 3. Access to Infrastructure 4. Social License to operate 5. Climate Change Concerns 6. Rising costs 7. Pipeline Shrinkage 8. Resource Nationalism 9. Access to secure Energy 10. Increased Regulation Source: Ernst & Young 5

7 Such As Addressing The Infrastructure Gap Source Of Funding: o Public financing is unable to support the construction of mining-related infrastructure o Associated infrastructure costs often exceed mine development expense, significantly impairing project returns if miners must bear such costs themselves o Most projects will need to be either multi-user or multi-purpose to justify the investment Challenges: o Complex contractual setup o Lack of government capacity to plan / agree framework o Limited pool of investors Advantages: o Unlocks significant resources if a number of smaller mines share the same infrastructure o Significant development benefits Country Scale Of The Challenge (Example: Iron Ore In Africa) Number of Iron Mines Est. Cost of Infra. (US$bn) % GDP Guinea % Cameroon % Mauritania % Senegal % Republic of Congo % Gabon % Liberia % Sierra Leone % Source: IFC, RBC Capital Markets, CIA World Factbook 6

8 Better Managing Expectations Around Benefits-Sharing Engage In Transparent & Frequent Communication: o Imperative that operators clearly outline the scale and timing of project benefits to all stakeholders as early as possible in the development cycle o Unreasonable stakeholder expectations can undermine a project before it even really begins, leading to mutual distrust and widespread opposition o Being responsive to stakeholder queries and proactive in addressing expressed concerns can go a long way to building sustainable relationships Maximize Benefits & Allies: o By maximizing the number of parties poised to benefit from a successful project, operators can significantly strengthen the security of their operations o Need to ensure that benefits accrue not only to central government, but also at local & regional level Preempt Resource Nationalism: o Resource nationalism is often driven by public perception of inequity as to the distribution of project benefits and political pressure (particularly during election cycles) to correct perceived injustices o Extensive stakeholder engagement and transparent disclosure of financial information can help to retain focus on project-specific factors that determine benefits-sharing arrangements 7

9 Particularly As Stakeholder Demands Continue To Grow Governments Increased resource nationalism in many countries, particularly those in election cycles Recent examples include mandatory incountry benefication, increased taxation, and demands for greater state ownership However, others have recognized the challenges facing the sector and acted accordingly to attract additional investment Local Communities Often do not recognize length of time needed to bring project from exploration to production First to see site development but one of the last stakeholders to experience significant project benefits Longest lag time between changes in market conditions and shift in expectations NGOs Increasingly prevalent and active across the full range of project geographies Sophisticated in terms of both operation and ability to mobilize opposition by other stakeholder groups Not always fully cognizant or appreciative of changes in market dynamics Employees Rising wages in a low-price environment are impairing financial viability and may lead to mass layoffs, further raising tensions Particularly attributable to labor-intensive commodities and mature mining geographies Most prominent recent example is Lonmin s platinum operation in South Africa 8

10 Summary The Outperformers of 2015: Mongolia, Myanmar, Cambodia: benefit from supportive regulatory benefits, substantial mineral resources, and a general business environment improvement. Philippines, Thailand, Indonesia and Laos: constrained by inadequate infrastructure, depressed mineral prices, deterred investments. Kazakhstan is on the path to join the former, but it will have to make any possible effort to expand its competitive edge, assist in building the necessary infrastructure and continue to attract foreign mining capital and expertise. 9

11 THANK YOU Karsten Fuelster Principal Investment Officer Sector Lead Oil, Gas and Mining Phone: Cell: Fax: Eastern Europe, Central Asia and MENA International Finance Corporation Istanbul Office

12 Which Together Require to Form A Holistic Approach To Mining, Irrespective Of Geography IFC Recommendations Public-Private Partnerships & Shared Infrastructure Transparency & Communication Sustainability Community Engagement Strategic Partnerships Explore partnerships with government entities and other mining companies to develop core infrastructure Benefit: Reduces overall project costs, particularly in undeveloped or remote geographies, and substantially increases development multipliers Engage in transparent and frequent dialogue with host governments on key project details, particularly economics & development timeline Publicly disclose project-related information, such as contract terms and scenario analysis for revenue-sharing Benefit: Reduces political risk and helps to manage stakeholder expectations Incorporate key sustainability principles into operations Benefit: Reduces risk of unexpected incidents and externalities Build strong & sustainable relationships with local communities through active stakeholder engagement Benefit: Reduces likelihood of undue expectations and mutual suspicion Develop partnerships with reputable groups & strategic parties (e.g. majors, select NGO s and Development Finance Institutions such as IFC) Benefit: Provides stamp of approval and support if things develop differently than expected or planned 11