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September 2008 London

September 2008 London. Markets and the Shifting Frontier: Challenges for Juniors. Christopher Goss Head, Business Development, Mining, Oil, Gas and Chemicals International Finance Corporation. Overview. The market context The push to the frontier Challenges and Responses

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September 2008 London

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  1. September 2008London Markets and the Shifting Frontier: Challenges for Juniors Christopher GossHead, Business Development, Mining, Oil, Gas and ChemicalsInternational Finance Corporation.

  2. Overview • The market context • The push to the frontier • Challenges and Responses • The value of a strong partner

  3. 1The Market Context

  4. Global Demand Copper demand • Demand increases largely led by large emerging economies, in particular China. • Credit crunch • Indications that large emerging economies now feeling the impact of global financial markets turmoil. • Delayed impact on real economy likely to hit exports. • Will these demand forecasts hold up? Kt Rest of the World China Seaborne iron ore demand Mt Rest of the World China Source: Citigroup, WBG estimates

  5. Global Supply • Under-exploration for many years has led to a dramatic increase since 2003/ 2004. Nonferrous exploration investment > US$ 10 billion in 2007. • Cost inflation pressure on development /expansion. • Junior exploration companies: • account for half or more of total exploration expenditure • are heavily affected by the turmoil in the financial markets. Source: Metals Economics Group (MEG)

  6. Current share price performance of AIM-listed miners 5% 50% 50% 80% 72% 28% 31% 69% 80% of companies trading within 25% of their 52 – week lows. The majority are explorers. Raises issue of best time to list.

  7. Some AIM Miners: share prices over time • Low performers deteriorating since Jul / Aug 2007. • Top performers continued to appreciate. • Prices stayed strong through credit crunch - delayed impact on real economy and demand. • Current price deterioration. ??

  8. Mining listings / financings on AIM • Credit crunch has caused a serious deterioration in share prices. • Listings have, however, remained relatively strong throughout 2007/ early 2008 in terms of numbers and amounts raised.

  9. Debt Syndications for Mining and Metals Syndications have reduced in numbers and size Flight to quality Covenants tightening and spreads widening Recently banks are more reluctant to work with other banks given financial sector uncertainty

  10. Market Risk Perception • CDS spreads are a good indication of the market risk perception “pulse”. • Increases in many mainstream countries: China (56 – 67), Japan (6.5 – 16), UK (7.5 – 17); but Australia (21 – 20.5). • Dramatic increases linked to financial markets’ uncertainty.

  11. Possible Outlook:Global supply may be more constrained than demand.Prices likely to stay relatively strong.Flight to quality by investors.

  12. 2. The push to the frontier

  13. Frontier Countries • Global resource scarcity and relative resource richness in frontier countries has drawn juniors to countries which many previously avoided. • Since frontier countries are higher risk, raising financing can be tougher.

  14. High income Upper middle income Lower middle income Low income AIM Listed Juniors and Frontier Countries New opportunities, but also challenges and risks: 1) Governance 2) Resource nationalism 3) Energy security 7% 8% 21% 2.3 8.0 6.7 10% 22% 2.3 3.7 64% 19% 2.8 3.7 64% of AIM listed companies are active in Africa. 15% 9.0 % % AIM-listed companies working in this region % Average TI corruption index (2007)

  15. 3. Challenges and Responses

  16. Host Country Governance – What can be done by Policy Makers? Key impediments to improved governance include: • Impatience • understandable if limited benefit so far from natural resources, but • unwise choices of investors/alliances and substandard agreements • Corruption • Lack of government capacity. • Keys to success include: • Build government capacity, transparency, rule of law and security/stability of investor rights • Wise revenue distribution - spending on infrastructure and on key development constrains engagement with local communities and linkages with local business • Fairly balanced investment agreements • The Extractive Industry Transparency Initiative (EITI) is a critical first step

  17. EITI is Making Progress The EITI Board has approved 23 countries as “EITI candidates” – 16 in Africa. Of these 10 have published one or more EITI Reports to date (July 2008) • Azerbaijan, Cameroon, Gabon, Ghana, Guinea, Mauritania, Mongolia, Nigeria, Kazakhstan, Kyrgyz Republic Norway is first developed country to announce EITI adoption. Efforts by many (EITI Board; G8; others) to engage with new investor countries (China, India, Brazil etc) on EITI. EITI should encourage: • Clear and stable laws and regulations • Rule of law in managing the sector • Government capacity building • Fiscal monetary and budget transparency and discipline • More open dialogue and accountability between government and civil society

  18. Host Country Governance – Some implications for the investor • Frontier countries often have: • Uncertain legal and regulatory frameworks • Challenging and uncertain business environments • But likely correlation between fiscal stability, security of investor tenure and avoidance of resource curse. • Common link is good governance • Examples – Botswana, Chile, Ghana, South Africa • Investor can in part mitigate national / regional governance issues by building a strong, sustainable relationship with the local community and a ‘social licence to operate’. • Examples: Guinea Alumina in Guinea and Bema Gold (now acquired by Kinross) in Far East Russia.

  19. Involves: ‘Social License to Operate’ • Assistance in prudent government use of revenues. • Consultation with affected communities. • Generating sustainable community benefits by promoting economic development opportunities and supplier linkages with local businesses. The Sustainable Approach

  20. Example of Supplier Development:Ahafo Gold Mine in Ghana The opening of the Ahafo mine created an opportunity for Patrick Boakye’s small business (PKC) to supply Newmont with plastic sampling bags. The IFC Linkages program is assisting PKC in raising its standards and technical expertise. PKC has grown to 19 employees, half of whom are women, and is actively working to increase its production capacity. Seeing the benefits of a reliable local supplier, Newmont has recently awarded PKC a three year contract.

  21. IFC’s Performance Standards on Social and Environmental Sustainability: Best Practice Tools in Risk Management Implementing the Performance Standards Guards Against Project Interruptions: Strikes or protests Costly environmental clean ups Loss of investor confidence due to unfavorable media attention Meeting the Performance Standards Helps to Improve the Bottom Line: Helps ensure smooth and continuous operations Maximizes local development benefits, improves relations with local community Optimizes resource management (water, energy, etc.) Helps to create reliable and cost effective supply chains Enhances company brand value to investors Meeting the Standards = Stamp of Approval

  22. IFC’s Performance Standards on Social and Environmental Sustainability: International Stamp of Approval “Equator Principles” adopted by 50+ of the world’s leadingInvestment Banks and based on IFC’s Performance Standards Apply to 85% of project financing worldwide

  23. Resource Nationalism Results from: • Increased resource scarcity /rising commodity prices. May be slow to reverse if prices fall. • Increased host country awareness of bargaining power. • Competition from new investing players, including BRIC countries and companies and emergence of qualified local mining companies. May manifest itself as: Change in fiscal terms /review of contracts/insecurity of tenure e.g.: • Chile • Peru • DR Congo • Ecuador • Guinea • Kazakhstan Seeking greater/majority local ownership e.g.: • China (for gold) • Russia (for strategic minerals) • Mongolia • Ecuador

  24. Resource Nationalism 2. • Focus by host governments on prices and revenue-based fiscal terms can squeeze companies as costs also rise. • Widespread renegotiation of fiscal terms for oil and gas – recent study showed increased government take in 13 host authorities since 2005. • Could become more widespread in mining, depending on commodity price movements. • Best defence is transparency about costs, project economics and initial terms which share fairly between host government and company.

  25. 4. The value of a strong partner

  26. Role of strong / value adding investors • The combination of tougher market conditions and host country challenges make it difficult for a junior company to succeed without one or more strong partner. • May be a strategic/industry or financial partner – depends on needs. In both cases can: • Raise operating standards : • Strengthen management capacity: financial, technical, environmental and social • Increase credibility / reputation • Help raise financing privately, through a listing, or from banks IFC can help in all these areas.

  27. Recent examples of IFC partnerships with Juniors Exploration Stage -Lydian Resources • IFC came in as equity partner pre-listing in August 2007. • Lydian also has partnership with Newmont, strengthening its technical and managerial capacity. Project Development Stage – Aricom • IFC became a shareholder in Aricom in mid-2007 • IFC plans to play a role in mobilising bank financing for mines and and associated infrastucture in Amur region, Russia.

  28. Wide IFC role – and we are moving faster Need for stable, long term equity investors. IFC is one of those, and we can bring other like minded investors in with us. We can provide a steadying presence in volatile markets and complex political environments. IFC has streamlined its decision-making: • IFC committed on the Kupol mine financing four months after being mandated. • IFC were shareholders in Peter Hambro four months after visiting the project.

  29. Products ranging from early stage equity to debt Equity Mezzanine / Quasi Equity Senior Debt & Equivalents

  30. FSU/East Europe IFC Engages in Mining Projects World-Wide Africa Asia Latin America 100+ country and regional offices worldwide

  31. IFC’s Global Reach

  32. IFC Contacts William Bulmer Associate Director and Head Global Mining Division, Washington DC Phone: +1 202 473 0725 Email: WBulmer@ifc.org Fax: +1 202 974 4323 Christopher Goss Head of Business Development, London Oil, Gas, Mining and Chemicals Department Phone: +44 (0)20 7592 8414 Mobile: +44 (0)79 2006 0514 Email: CGoss@ifc.org Fax: +44 207 592 8430 Sacha Backes Business Development Officer, London Oil, Gas, Mining and Chemicals Department Phone: +44 (0)20 7592 8413 Mobile: +44 (0)79 1710 0720 Email: SBackes@ifc.org Fax: +44 207 592 8430

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