Mining, trade and project finance in the current financial crisis

Transcription

1 Mining, trade and project finance in the current financial crisis International Nickel Study Group Meetings 24-April Lisboa, Portugal Mariana Abrantes de Sousa Financial Consultant - PPP Lusofonia May 2011 Mariana ABRANTES de Sousa April 2012

2 Presenter background Mariana ABRANTES de Sousa Independent Financial Consultant and PPP Specialist in advisory, training and evaluation of PPP projects and programs, and in credit and banking Member of the Board and credit committee of Infrastructure Crisis Facility, AUM 500mln (PIDG/KfW) Member of the Supervisory Board of FLO CERT GmbH Former Financial Controller in the Ministries of Transport and Health reporting to the Minister of Finance, Portugal Former international banker with ABN AMRO Bank (Portugal), European Investment Bank and The Chase Manhattan Bank, in Lisbon, Luxembourg, New York and Mexico City Economist with BA -UC Berkeley and MPA - Princeton University May 2011 Mariana ABRANTES de Sousa - 2

3 Contents The minerals trade cycle and project finance, expansion and contraction Testing the limits of diverging trade performances Is this financial crisis different Implications of the international crisis for - big net exporters - little net importers, like Portugal May 2011 Mariana ABRANTES de Sousa - 3

4 Some commodity cycles are more pronounced - Relatively inelastic supply, marginal producers Pro-cyclical investment Long lead times - Demand swings, stockpiling - High risk, high reward May 2011 Mariana ABRANTES de Sousa - 4

5 Mining projects benefit from higher minerals prices and easier credit May 2011 Mariana ABRANTES de Sousa - 5

6 MOMA Titanium Nampula Mozambique Kenmare Resources shareholder equity Insurance Reserves, assayer República de Moçambique Mineral license royalties Kenmare Moma Mining Ltd Kenmare Moma Processing Ltd Environmental license EPC contractor turn-key lump-sum contract, dredging, jetty and barge Customers Off takers Price - Volume MIGA coverage political risk Mining of mineral sands and separation of ilmenite, rutile and zircon t/y Capex USD 450 mln, 2004, debt USD 270 mln 2001 study, 2004 financing, 2007 first shipment Project Security Senior debt EIB, AfDB, FMO, KfW Subordinated debt EIB and others May 2011 Mariana ABRANTES de Sousa - 6

7 Some mine development project risks are more intractable than others Commodity price risk, volatiliy ( rising exponentially ) Sales volume risk Country, political risk Mining license Royalties Regulation Ore reserves Production technology risk Implementation, management risk Construction, completion risk Infrastrucure transportation risk Environmental risks, water Social, stakeholders Financial risks, FX, transfer, risks interest rate, funding availability Reputation, governance May 2011 Mariana ABRANTES de Sousa - 7

8 Commodity price cycle or super-cycle LME Copper price May 2011 Mariana ABRANTES de Sousa - 8

9 Major Chinese mining investments in Africa (2009) Source: AUC-UNECA Building a sustainable future for Africa s extractive industry, Dec 2011 May 2011 Mariana ABRANTES de Sousa April 2012

10 Where do all the metals go China PULL China has become the prime driver of world mineral prices China PUSH what comes in must go out May 2011 Mariana ABRANTES de Sousa April 2012

11 IT TAKES TWO TO TRADE China PULL The challenge of recycling petrodollars, XXI century version China PUSH Net imports have to be financed by borrowing from the exporter May 2011 Mariana ABRANTES de Sousa

12 Testing the limits of diverging trade performances in the Eurozone May 2011 Mariana ABRANTES de Sousa

13 Trade divergence feeds credit booms May 2011 Mariana ABRANTES de Sousa

14 This financial crisis is (not) different Balance-of-Payments imbalances - crisis with multiple manifestations Sovereign debt crisis, due to excessive external debt Banking crisis, as banks intermediate and take excessive credit risks, poor prudential regulation Growth crisis, economic dislocation due to high import penetration and shifting trade patterns Surplus countries accumulate reserves, which their banks recycle, overextending credit to the net importing countries, which become overleveraged with excessive external debt, leading to sovereign ratings collapse High net imports (X-M) become unsustainable provoking growth recessions, first in net importing countries, and eventually, in the net exporting countries May 2011 Mariana ABRANTES de Sousa

15 External Debt >>> Public Debt % GDP Divida Pública Directa 2009 Divida Externa Bruta Divida Externa Liquida Espanha 55% 168% 81% Irlanda 65% 979% 75% Portugal 77% 233% 89% Grecia 113% 168% 81% Italia 115% 118% 88% Fonte: R Cabral, 8-Maio-2010 May 2011 Mariana ABRANTES de Sousa

16 The B-o-P adjustment will be different One-armed midget economies External adjustment tools key to BoP adjustment are missing o FX policy o Tariffs and trade policies o Monetary policy o Capital controls Over-reliance on domestic tools Fiscal, tax, budget policies Incomes policy wage and pension cuts of 20%+ Some policy tools ignored Credit and banking policies Structural reforms necessary but not sufficient May 2011 Mariana ABRANTES de Sousa

17 Cumulative challenges for Portugal: unilateral adjustments will not be enough Structural Business Financial Low returns to invesment due to poor investment decisions and weak X-M, trade deterioration Des-economies of scale in trade with the big boys (Krugman) Persistently high CAB current account deficit, propensity to import Big cuts in domestic demand to get negligible import reductions Shifting stimulus to export sector Low competitiveness, weak international marketing and sales Liquidity shrinking, credit re-allocation lagging Excessive leverage Low bargaining power with external creditors Low savings and high dependency of external funding May 2011 Mariana ABRANTES de Sousa

18 What is different this time: pseudo-devaluation Real FX devaluation - Changes the relative prices of all goods and services in both trading partners - Changes the relative values of all assets and liabilities - Corrects price signals and risk/return ratios Unilateral fiscal devaluation - Net importers increase consumption taxes (ex VAT), reduce labor taxes, costs (SS) - Net exporters should decrease consumption taxes (VAT), increase labor taxes (SS) May 2011 Mariana ABRANTES de Sousa

19 Real debt workout What is different this time: pseudo sovereign debt workout - Debt service stand-still - Borrower undertakes austerity - Creditor shares sacrifice - Restructuring with longer tenors, lower interest rates - New debt need assured, revolving export finance - Haircut to reduce external debt to sustainable levels - Domestic creditors favoured to promote local savings - Banks recapitalized Debt workout Eurozone - Bailout allows shift of exposures from private to official creditors - BCE, EFSFacility - EFSMechanism - TARGET2 Central Banks - Little net debt relief to borrowers - Emergency funding mostly ST - No provisions for export finance - Haircut tripples the threat to local savers, feeds capital flight - Banking recapitalization through low cost official funding May 2011 Mariana ABRANTES de Sousa

20 Evolution of mining projects in the credit expansion and contraction phases Mining projects benefit from high commodity prices and easier credit More investors looking for higher returns, higher price risk Longer financing tenors Lower credit spreads Easier credit conditions, covenants Mining projects suffered from credit contraction Fewer banks, less debt, more equity, new investors G2G Shorter tenors, rising spreads Tighter covenants, higher collateral requirements Repayment-in-kind, commodity linked loans, gold loans, China Inc commodities-for-infrastructure barter Angola model Weaker returns due to contraction of trade, lower prices May 2011 Mariana ABRANTES de Sousa

21 In conclusion The mining boom and the excessive Portuguese external debt are two faces of the same macro problem: unsustainable international trade imbalances Eurozone still Testing the Limites of Divergence Net importers, big or small, cannot undertake the whole burden of Balance-of-Payments adjustment unilaterally; exporters must raise export prices The adjustment by net exporters may be delayed, but is inevitable. Meanwhile, cash is king May 2011 Mariana ABRANTES de Sousa

22 não há mal que sempre dure nem bem que nunca acabe, or what goes up must come down Obrigada! Mariana Abrantes de Sousa PPP Lusofonia, PORTUGAL May 2011 Mariana ABRANTES de Sousa

23 23 May 2011 Mariana ABRANTES de Sousa

24 May 2011 Mariana ABRANTES de Sousa