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Financing in a difficult jurisdiction Mark Tyler

Finex 2012. Financing in a difficult jurisdiction Mark Tyler. What is a “difficult” jurisdiction?. A great variety of perils in mining Headline – grabbing perils are not always the worst. What is a “difficult” jurisdiction. War and insurgency Revolution and insurrection Terrorism

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Financing in a difficult jurisdiction Mark Tyler

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  1. Finex 2012 Financing in a difficult jurisdictionMark Tyler

  2. What is a “difficult” jurisdiction? A great variety of perils in mining Headline – grabbing perils are not always the worst....

  3. What is a “difficult” jurisdiction • War and insurgency • Revolution and insurrection • Terrorism • Expropriation or confiscation • Frustration of contract • Wrongful calling of guarantees • Business interruption • Changes in regulation or law • Currency inconvertibility • Inability to repatriate funds • Criminal activity • Government and administrative inefficiency • International pressure Potential perils

  4. Begin with the end in mind.... • Exploration risks are such that project financing is the least of one’s worries • What one does doing exploration is often difficult to unwind when it comes time to build the mine • Conduct exploration as if one were going to finance a mine Exploration finance is materially different from construction finance

  5. Political risk defined Source : Robert Egge

  6. Political risk defined • Political risk doesn't include • Sovereign risk – creditworthiness of host country (although this may induce political risk) • Company specific labour issues (hard to tell when it is a simple labour issue) • Environmental issues

  7. Global political risk

  8. Political risk insurance Arthur J. Gallagher & Co. » BMS Group » Craven » Union Sime Darby Limited » Heath Lambert Group » International Risk Solutions » Jardine Lloyd Thompson » RFIB Group Limited » Montgomery Moore RE » Petro-Chem Insurance Group » AON » HSBC Insurance Brokers » Marsh Inc. » BPL Global » City Brokers Ltd. » Texel Finance Ltd. » Strathearn Insurance Brokers » RattnerMacKenzie Limited » New World Insurance » Gras Savoye S.A., France » Cooper Gay & Company, Ltd. » BK International Insurance Brokers Ltd., United States » Willis » Dinçer & DinçerSigortaveReasüransBrokerliði Ltd. » Alec Finch Group Ltd. » Central Insurance Group, Ltd. » RasiniVigano Ltd. » Anika Insurance Brokers SDN BHD » Prudent Insurance Brokers Pvt. Ltd. » Worldwide Insurance Services Enterprise Ltd. » Honan Remunerator » Glenrand M-I-B » A. Forbes Risk Services UK Ltd. » Apex Global Partners » The Addis Group » Schlader Consult » Political Risk Management » ProteccionDinamicaAgente de Seguros y de Fianzas, » HKMB International Insurance Brokers » TFC Brokerage ASIA » FirstCity » Alliant Insurance Services, Inc. » Glencairn Limited, United Kingdom » Platus » International Risk Consultants » Lockton Companies International Commercial PRI Brokers

  9. Political risk insurance Asian Development Bank Bulgarian Export Insurance Agency (BAEZ) China Export & Credit Insurance Corporation (SINOSURE) Companhia de Seguro de Créditos, S.A. (COSEC) Compañía Española de Seguros de Crédito a la Exportación (CESCE) Compagnie Française d'Assurance (COFACE) Credit & Export Guarantee Fund (KREDEX) - Estonia Croatian Bank for Reconstruction & Development (HBOR) - ECICS Limited - Singapore Eximbank of Romania Export Credit Guarantee Agency - Oman Export Credit Guarantee Corporation of India Ltd (ECGC) Export Credit Guarantee Corporation of Zimbabwe (ECGC - Z) Export Credit Insurance Corporation (KUKE) - Poland Export Credit Insurance Organization - Greece Export Credits Guarantee Department (ECGD) Export Development Canada (EDC) Export Finance & Insurance Corporation (EFIC) - Australia Export Guarantee & Insurance Corporation (EGAP) - Czech Export Guarantee Fund of Iran Export-Import Bank of Thailand (Thai EXIMBANK) Export-Import Bank of the Slovak Republic Exportkreditnämnden (EKN) - Sweden Finnvera Plc - Finland Garanti-Instituttet for Eksportkreditt (GIEK) - Norway Hermes – Germany Hungarian Export Credit Insurance Ltd (MEHIB) Inter-American Development Bank Inter-Arab Investment Guarantee Corp (IAIGC) Investment Guarantee Agency (IGA) - Bosnia-Herzegovina Islamic Corporation for Insurance of Investments and Export Credit (ICIEC) Israel Export Insurance Corp Ltd (ASHRA) Istituto per i Servizi Assicurativi del Credito all'Esportazione (SACE) Jordan Loan Guarantee Corp. Ltd (JLGC) Kazakhstan State Insurance Corporation for Export Credit Korea Export Insurance Corporation Malaysian Eximbank (MEXIM) Multilateral Investment Guarantee Agency (MIGA) Nippon Export and Investment Insurance (NEXI) Oesterreichische Kontrollbank Aktiengesellschaft (OEKB) - Austria Office National du Ducroire (ONDD) - Belgium Overseas Private Investment Corporation (OPIC) - USA Serbia & Montenegro Export Credit Agency (SMECA) Slovene Export Corporation Inc (SEC) Taipei Export-Import Bank of China (TEBC) – Taiwan US Exim Uzbekinvest National Export-Import Insurance Company ECA/DFI insurers

  10. Political risk insurance ACE Underwriting Agencies Limited AEGIS Insurance Services, Inc. ATRADIUS Advent Underwriting Ltd. African Trade Insurance Agency (ATI) American International Group (AIG) Global Trade & Political Risk Amlin Underwriting Ltd. Argenta Syndicate Management Ltd. Ascot Underwriting Ltd. Atrium Underwriters Limited Beazley Furlonge Ltd Benfield Brit Syndicates Limited Catlin Underwriting Agencies Ltd. Chaucer Syndicates Limited Chubb Political Risk Credit Guarantee Insurance Corporation of Africa Ltd Eksport Kredit Fonden (EKF) Faraday Underwriting Limited Garant Hiscox Liberty Syndicate Management Limited Limit Underwriting Limited Lloyd's Managing Agency Partners Ltd. Markel International Limited Miller Insurance Services Limited Novae Syndicates Limited PwC Deutsche Revision AG Sovereign Risk Insurance Ltd (SOVEREIGN) St Paul Travelers Syndicate Management Ltd Talbot Underwriting Ltd. Watkins Syndicate Wellington Underwriting Agencies Ltd. Willis RE XL London Market Ltd. Zurich Emerging Markets Solutions (ZURICH) - USA Commercial PRI providers

  11. Gold standard license agreement • Direct agreement with the host state • Not with the government • Some countries have legislation to permit this for each license – otherwise very difficult to achieve • Should survive change in law • Agreement should be in some predictable legal system (English, New York, Ontario ...) • Preferably disputes should be settled by arbitration • Clearly spell out tenure • Include fiscal stability • Provide for off-shore proceeds accounts and ability to hold foreign currency • Spell out environmental responsibilities and rights Easy to insure

  12. Good mining code • Mineral rights are an inalienable property right (essential for royalty finance) • Conditions to be granted right to mine should be clearly defined • Approval should be the default • Stability should be guaranteed – especially tax and regulatory framework • Should have as many “gold standard agreement” terms as possible – in particular clear up transfer pricing issues • Exploration almost always in terms of a mining code, not a direct agreement Can still insure change of law but it becomes necessary to prove that changes adversely affect the licence holder

  13. Show up with the mostest... • Bilateral investment protection agreements • Multilateral institutions • Insurers • Lenders • Bilateral institutions • Insurers • Lenders • Influential lending banks • Powerful multinational partners • Influential local partners • Local government shareholding

  14. Influential lenders Multilateral lenders ADB

  15. Influential lenders Bilateral lenders EDC

  16. When all else fails.... Equity markets will price in political risk but will generally accept it Nevsun case study

  17. Special topic - corruption • Many financiers operate out of jurisdictions with laws against corruption in foreign countries • Will include prohibitions on encouraging corruption in loan agreements • Might make it difficult for the mining company to operate

  18. Special topic - corruption Source : Fraser Institute

  19. Special topic – “environmental” expropriation • Hard to insure against unscientific or arbitrary environmental rulings – new focus on social impacts makes it even worse • Bureaucratic processes can be interminable in jurisdictions where government agency rulings can be challenged in court • Really difficult jurisdictions have expropriated properties using environmental pretexts • Consider working with Equator principles in mind

  20. Special topic – international sanctions • Prohibition on doing business with a particular country • Prohibition on using (mostly US) currency in dealings with a particular country • Hard to insure • Try to spread the risks – finance from various sources, different off-takers etc

  21. Conclusions • Begin with the end in mind • Financing in a difficult jurisdiction isn't always clear cut • Have alternatives • Get a one-armed advisor with experience

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