Partnering with IFC Addressing Challenges in Africa Richard Arkutu Principal Investment Officer June 2009
Table of Contents I. Market Trends Financial Market Activity Mining Finance Activity Observations II. III. Impact on Mining Companies Short and Long Term Challenges The Value of a Strong Partner Partnering with IFC Global Experience and Expertise Financial and Sustainability Under One Roof Addressing Challenges with IFC Illustrative Examples 2
Table of Contents I. Market Trends Financial Market Activity Mining Finance Activity Observations II. III. Impact on Mining Companies Short and Long Term Challenges The Value of a Strong Partner Partnering with IFC Global Experience and Expertise Financial and Sustainability Under One Roof Addressing Challenges with IFC Illustrative Examples 3
Market Trends Aluminum Copper Lead Nickel Tin Zinc (3 2006 Index 240 (2 January 2007 = 100) 210 180 150 120 90 60 30 0 Source: CPM Group Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Abatement of massive global deleveraging in commodities Cash is KING - mining companies cut costs, shut down unprofitable production and reduced capital expenditures to conserve cash Focus on brown-field projects, lower capital expenditure projects, projects with very competitive cash costs 4
Market Trends Financial Market Activity Spread to Maturity (By Corporate Credit Rating) Leveraged Finance Volume (US$ in Billions) YTD 2008 % of Market YTD 2009 % of Market YOY Change First-lien institutional $29.5 61% $5.4 16% -82% Second-lien institutional 1.6 3% 0.3 1% -81% Subtotal bank debt 31.1 65% 5.7 17% -82% Senior secured bonds 2.3 5% 6.1 18% 165% Senior unsecured bonds 13 27% 20.6 62% 58% Subordinated bonds 1.7 3% 1.0 3% -40% Subtotal bonds 16.98 35% 27.7 83% 63% Source: CPM Group Total $48.1 $33.4-31% Source: Standard & Poor s While spread levels in the leveraged finance market have come down in recent months, they continue to remain 100-200 bps wider than levels that prevailed before the collapse of Lehman Brothers in September 2008 The bond market has taken over traditional bank lending in the sector, up from 35% in 2008 to 83% Teck Resources US$4 billion placement in May, signaled an opening of the bond market for mining companies - 10,7 & 5 year high yield notes priced to yield between 11.625% and 11.25%, 5
Market Trends Mining Project Finance Activity Source: CPM Group In 2008, majority of transactions were closed in the first seven months, prior to increased turmoil in the financial markets, with activity reducing substantially after July. In 2009, finance activity accelerated in the middle of January, came off in February and began building momentum at the end of March. 6
Market Trends Observations While the capital markets have reopened for the mining sector, investors are targeting the most attractive issuers: Debt financings are incorporating more conservative structuring assumptions than in the past Equity investors are seeking issuers with compelling relative value and growth Frontier market challenges more acute as mining industry faces potential backlash from governments (i.e. increased risk of nationalization) and local communities (i.e. labor strikes, social unrest) 7
Table of Contents I. Market Trends Financial Market Activity Mining Finance Activity Observations II. III. Impact on Mining Companies Short and Long Term Challenges The Value of a Strong Partner Partnering with IFC Global Experience and Expertise Financial and Sustainability Under One Roof Addressing Challenges with IFC Illustrative Examples 8
Impact on Mining Companies Challenges Financial Perspective Debt becoming increasingly conservative Tighter financial covenants - aggressive amortization schedules (high excess cash flow recaptures), and hedging requirements, meaningful maintenance covenants, yield enhancements Tighter performance requirements - competitive production costs, mitigating construction risks, robust operational performance tests; Equity Investors even more selective key investment criteria include Management profile Existing production /near production with good growth prospects Commodities with strong fundamentals Relative value story in terms of cost, reserves/resources and cash flow 9
Impact on Mining Companies Challenges Frontier Country Perspective Public Governance Political stability Limited institutional capacity Transparency and revenue management Mining Codes: quality and applicability Reviews and renegotiations of mining cncessions Environmental and Social High community expectations High resettlement costs, challenging influx management, health and safety challenges Artisanal mining Biodiversity, Indigenous people Infrastructure Lack of Infrastructure power, roads, railroads, port facilities, water, sanitation 10
Impact on Mining Companies The IFC provides integrated value-added services and investments under one roof 11
Table of Contents I. Market Trends Financial Market Activity Mining Finance Activity Observations II. III. Impact on Mining Companies Short and Long Term Challenges The Value of a Strong Partner Partnering with IFC Global Experience and Expertise Financial and Sustainability Under One Roof Addressing Challenges with IFC Illustrative Examples 12
Partnering with IFC The IBRD ( World Bank ) and IFC Work Together to Promote Sustainable Mining in Developing Countries Global Mining Group World Bank Mining Policy Division IFC Mining Investment Division Works with Governments to facilitate - Investor-friendly policies Reform and modernization of Mining Sector Privatization of State-owned Assets Equitable Rent Sharing Works with Private Companies to ensure- Sound Economic fundamentals Sufficient Financial Strength Environmental Rigor Sensitivity to the Community 13
Partnering with IFC Financing and Sustainability Expertise Under One Roof IFC Mining Integrated Solutions Combining Capital and Expertise Comprehensive Product Suite Advisory Services Loans Equity Quasi-equity Structured Products Capital Markets Access and Mobilization Risk Management Political Risk Mitigation Local Supplier Development (Linkages) Community Development Municipal Capacity Building Resettlement World-class Environmental and Social Advice Access to Technical Assistance Funding 14
Partnering with IFC Addressing Financial Challenges Equity Corporate Typically 5-15% shareholding Long-term investor, typically 6-8 year holding period Not just financial investor, adding to shareholder value Mezzanine / Quasi Equity Subordinated loans Income participating loans Convertibles Other hybrid instruments Senior Debt & Equivalents Senior Debt (reserve, base lending. corporate finance, project finance) Fixed/floating rates, US$, Euro and local currencies available Commercial rates, repayment tailored to project/company needs Long maturities: 7-12 years, appropriate grace periods Range of security packages suited to project/country Managing community Mobilization expectations of funds from other throughout lenders and investors, the project through Managing community financings, expectations syndications, underwritings throughout and guarantees the project cycle is essential community engagement never ends! cycle is essential community engagement never ends! 15
Partnering with IFC Examples of Mining Projects in Africa Ghana Guinea DRC Ahafo $75,000,000 Senior Term Loan $50,000,000 Syndicated Loan Arranger 2006 Simandou/RioTinto $35,000,000 Early Stage Equity 2006 AFRICO $4,000,000 Early Stage Equity Arranger 2007 South Africa Africa Region South Africa Lonmin $100,000,000 Senior Term Loan $50,000,000 Equity Investment New Africa Mining Fund $5,000,000 Equity Investment Hernic Ferrochrome $26,000,000 Equity Investment 2006 2006 2006 16
Partnering with IFC IFC s Current Mining Portfolio Nickel 2% Iron Ore 4% Kaolin 4% Bauxite 4% Zinc 1% Chrome 8% Copper 10% By Product Eq. Fund 1% Gold 39% Aluminium 27% Africa 51.4% By Region Eastern and Central Europe 17.6% Latin America 30.7% Asia 0.2% More than half of IFC mining investments are in Africa 17
Illustrative example: South Africa Lonmin Financing US$100 million loan to expand operations and finance BEE partners US$50 million equity option View of Lonmin s Marikana operations Advisory Services US$6 million, 3 year program Building Lonmin s capacity to support workplace and community Local supplier development Workforce programs Community development Members of the community around Lonmin s operations 18
Illustrative example: South Africa Lonmin Results to Date: Local Supplier Development 13 contracts worth US$30 million awarded to locally owned firms including ore transportation, construction, and training. Northwest Supply Park Initiative First ever joint multi mine US$150m supply park development - prefeasibility study completed HIV/AIDS 7,000+ employees and community members reached in peer education sessions; over 400 people with AIDS and orphans now cared for by community members. Women in Mining 11% increase in women employed at mine since program launch; physical changes and new policies underway. Community Development Joint stakeholder planning process launched; four projects worth US$4 million planned in collaboration. Little Rock, a woman-owned construction company, won has one three contracts with Lonmin to refurbish existing single sex dormitory hostels into family units. 19
World Bank Group International Finance Corporation Oil, Gas, Mining & Chemicals Department Richard Arkutu Principal Investment Officer +221 33 859 7148 rarkutu@ifc.org Rue Aime Cesaire X Impasse FN 18 Prolongee Dakar, Senegal 20