Outlook for Mining Projects John R. Craynon, PhD, PE Senior Mining Engineer VMA Market Outlook Workshop August 3-4, 2017
Disclaimer This presentation, particularly the comments about the domestic mining outlook, is outside the scope of Dr. Craynon s position at EXIM. Thus, the opinions, positions, and comments in this presentation represent his views alone and should not be taken as the official position of EXIM or the U.S. Government. 2
History of the Export-Import Bank of the United States o o o Founded in 1934, the Export-Import Bank was organized by Franklin D. Roosevelt under the name Export-Import Bank of Washington. The stated goal was "to aid in financing and to facilitate exports and imports and the exchange of commodities between the United States and other Nations or the agencies or nationals thereof." The Bank's first transaction was a $3.8 million loan to Cuba in 1935 for the purchase of U.S. silver ingots. The Export-Import Bank became an independent agency in 1945. The Bank s name was changed to "Export-Import Bank of the United States" in 1968. Over the years, the Export-Import Bank helped finance several historic projects including the Pan-American Highway, the Burma Road, and post-wwii reconstruction. 3
Export-Import Bank of the United States o o o The Export-Import Bank of the United States (EXIM) is the official export credit agency of the United States. EXIM is an independent, self-sustaining Executive Branch agency with a mission of supporting American jobs by facilitating the export of U.S. goods and services. When private sector lenders are unable or unwilling to provide financing, EXIM fills in the gap for American businesses by equipping them with the financing tools necessary to compete for global sales. In doing so, the Bank levels the playing field for U.S. goods and services going up against foreign competition in overseas markets, so that American companies can create more good-paying American jobs. Because it is backed by the full faith and credit of the United States, EXIM assumes credit and country risks that the private sector is unable or unwilling to accept. The Bank s charter requires that all transactions it authorizes demonstrate a reasonable assurance of repayment; the Bank consistently maintains a low default rate, and closely monitors credit and other risks in its portfolio. 4
The Role of Export Credit Agencies Promote trade and other national interests Important in infrastructure development Key in emerging markets Lower cost financing option Cover political risks and enhance relationships Project validation 5 Disincentive for default or expropriation
EXIM SECTOR EXPERTISE Mining Oyu Tolgoi - Mongolia Ex-Im Support - $367 million - Limited recourse project finance for an open-pit and underground copper mine that will produce concentrate containing copper, gold, and silver. Once developed, the mine will rank as one of the largest copper mines in the world. Roy Hill Australia Ex-Im Support - $694 million - Limited recourse project finance for an open-pit iron ore mine which included the construction and operation of an integrated supply chain spanning exploration and mining extraction activities, processing and beneficiation, rail transport and port operations. Pueblo Viejo Dominicana Corp. Dominican Republic Ex-Im Support - $375 million Limited recourse project finance for an open-pit gold mine project which also produces silver and copper. Downer EDI - Australia Ex-Im Support - $58 million - Loan guarantee for Downer EDI Mining Pty. Ltd. to support Royal Equipment s remanufacture of off-highway mining trucks. Royal Equipment was a small business exporter that was new to EXIM at the time. Oyu Tolgoi - Mongolia 6
EXIM SECTOR EXPERTISE Mining Mining - over $2.6 billion of EXIM Bank financing in past 20 years Project Mineral Country EXIM Financing ($mi l l i ons) 2013 Oyu Tolgoi LLC Copper/Gold Mongolia $367 2013 Roy Hill Holdings Pty. Ltd. Iron Australia $694 2011 Downer Edi Mining Pty Ltd. Iron Australia $58 2010 Pueblo Viejo Dominicana Corp. Gold Dominican Republic $375 2010 Minera y Metalurgica del Boleo Copper-Cobalt-Zinc Mexico $420 2010 ANZ/Leighton Holdings Ltd. Coal Australia $15 2004 Minera Argentina SA/Veladero Gold Argentina $77 1997 PT Newmont Nusa Tengarra/Batu Hijau Copper/Gold Indonesia $425 1996 Minera Alumbrera Ltd. Copper/Gold Argentina $228 TOTAL: $2,658 7
Due Diligence and Risk Reduction at EXIM Engineering and Environment Analysis Information on deposit Information on commodity - Global trade - Country and world production and demand Technical review of the operation and impacts Economic Impact Analysis Global capacity, demand, trade US capacity, demand, trade Pricing, market forecasts, historic trends 8
Due Diligence and Risk Reduction at EXIM Engineering and Environment Analysis Information on deposit Information on commodity - Global trade - Country and world production and demand Technical review of the operation and impacts Economic Impact Analysis Global capacity, demand, trade US capacity, demand, trade Pricing, market forecasts, historic trends 9
Main Messages Global mining outlook is generally optimistic o Mining executives and industry analysts have predicted an industry upturn in the next 1 to 2 years o Commodity prices have not been strong o A number of large projects and expansions will be coming online before 2020 o Exploration is growing, particularly in emerging economies o Availability of capital for expansion may be limited o Models for mine financing may be evolving Domestic mining outlook is mixed o Changes in government view of mining is seen as generally positive o Some issues in cost of production and other factors in the US o View of US on global market is cloudy due to uncertainty about trade o Participation of capital providers in US mining projects may be difficult to arrange 10
Outline of Presentation Global mining outlook Commodity price trends New projects and increased supply Capital availability and financing issues Domestic mining outlook 11
Global Mining Outlook in 2017 Many presenters at PDAC in March gave optimistic views for the next 5 years Commodity price trends may be less important than longer term supply curves, according to some SME Keynote presentation in February was upbeat and positive about domestic and international mining Lots of optimism at May SME Mine Finance conference in NYC 12
It s a great time to build mines Douglas Silver, Orion Capital 2017 SME Annual Meeting and Expo Keynote(February) (https://youtu.be/uf0qwgjix3u) 13 Share prices are up, the big companies are talking about dividends and the smaller companies are raising money for new projects again. It s a different world all together. David Harquail, CEO of Franco-Nevada Corp. 2017 Prospectors and Developers Association of Canada Meeting (May)
Commodity Price Trends Increases in early 2017 then steady erosion Trends projected to continue Projects affecting supply Market manipulation Demand side issues 14
15 GOLD PRICE TRENDS
16 COPPER PRICE TRENDS
New Projects and Increased Supply (Copper) Underground mining at Oyu Tolgoi (Mongolia), Chilean operations (e.g., Chuquicamata) and others Increased production in Africa, South America and Asia Cobre Panama and other new mines End of labor issues at some operations Improved processing and recoveries 17
Capital Availability and Financing Issues Perceived high risks Low IRRs and long timeframes Uncertainties in market, demand, etc. Lack of capability to do mining due diligence Cycle shock Lack of enthusiasm by private investors 18
Financing and Risks Impacts to Mining Several categories of risks Entity Sponsor, lenders, contractors, governments, suppliers, investors, offtakers/purchasers, multilateral financial institutions Transactional Preliminary (feasibility studies, due diligence) Engineering and construction Startup Operation 19
Financing and Risks (cont.) Financial Country/political Labor/civil Legal Environmental, regulatory Refinancing Force Majeure 20 Liability
Mining-specific Credit Attributes Considered Certain areas receive additional scrutiny: Sponsor history of building and operating similar scale projects Completion and cost overrun support Sponsor credit quality Proposed completion regime (technical, environmental, financial, operating) Mine life vs. loan life Adequate reserve tail after final repayment Mine plan impact on cash flow volatility Less volatility is good Project break-even costs including debt repayment relative to long-term historical commodity price Resource assessment quality Proven preferred over Inferred and Indicated Off-take contractual arrangements similar to loan life or mitigants. Off-taker credit quality Environmental and Social Impact Assessment and management Commodity price risk management Hedging/mandatory prepayments/sponsor support 21
Risk Mitigation through Financing Terms of financing can provide for risk mitigation Ensuring completion Monitoring and oversight of operations Readjustment for financial changes Implicit and explicit address of political and country risk Guarantees 22 Security interests and insurance
Site-specific concerns impact capital availability There are no one size fits all solutions Detailed and complete due diligence required Completion tests tailored to the operation (can be contentious) Appropriate and direct requirements for the technical, environmental, compliance, political and other risks of each operation Built on experience, but may favor new opportunities 23
US Domestic Mining Outlook 2017 Administration more favorable to mining Low grade deposits in US make mining more susceptible to commodity pricing Higher labor and compliance costs and no currency advantage Capital availability and financing issues specific to US Public distaste for mining in US Trade issue uncertainties 24
Summary and Observations Mining may be growing internationally o Industry leaders and pundits have declared that good times are here o Optimism offset by commodity price issues and capital availability o Prices may be controlled by one country o New models for mine financing may be emerging Domestic mining looks to be more questionable o While the political leadership is more positive towards mining, other factors may make the US a difficult place to mine o Several uncertainties also impact how much growth in domestic mining will occur 25
Acknowledgements References and sources for all presented information available upon request 26
John R. Craynon, PhD, PE Senior Mining Engineer 811 Vermont Ave NW Washington, DC 20571 Phone: +1 202-565-3578 Email: john.craynon@exim.gov Engineering & Environment Division 1-800-565-3946 exim.gov