1 September 2008 London Markets and the Shifting Frontier: Challenges for Juniors Christopher Goss Head, Business Development, Mining, Oil, Gas and Chemicals.

1

September 2008London

Markets and the Shifting Frontier:

Challenges for Juniors

Christopher GossHead, Business Development, Mining, Oil, Gas and ChemicalsInternational Finance Corporation.

Overview

1.The market context

2.The push to the frontier

3.Challenges and Responses

4.The value of a strong partner

1The Market Context

Global 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?

0

10000

20000

30000

2002 2007 2010 2012 2018

Copper demand

Kt

China

Rest of the World

Source: Citigroup, WBG estimates

0

200

400

600

800

1000

1995 2000 2002 2004 2006 2008 2010

Seaborne iron ore demandMt

China

Rest of the

World

Global Supply

1.Under-exploration for many years has led to a dramatic increase since 2003/ 2004. Nonferrous exploration investment > US$ 10 billion in 2007.

2.Cost inflation pressure on development /expansion.

3. Junior exploration companies: account for half or more of

total exploration expenditure are heavily affected by the

turmoil in the financial markets.

0

2

4

6

8

10

12

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

US

$ B

illio

n

0%

10%

20%

30%

40%

50%

60%

70%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Majors Intermediaries Juniors Gov

% o

f to

tal e

xp

lora

tio

n in

ve

stm

en

t

Source: Metals Economics Group (MEG)

Current share price performance of AIM-listed

minersAIM-listed mining companies trading

within:

Number of companies

Total Explorers Producers

25% of 52 week high 8 5% 4 50% 4 50%

Between 25 15% 14 56% 11 44%

25% of 52 week low 133 80% 96 72% 37 28%

Total 166 114 52

69% 31%

80% of companies trading within 25% of their 52 – week lows.

The majority are explorers.

Raises issue of best time to list.

5%

80%

50% 50%

72% 28%

69% 31%

Some AIM Miners: share prices over time

0%

50%

100%

150%

J an-2007 May-2007 Oct-2007 Mar-2008 J ul-2008 Dec-2008

Ave. for 18lowestperformers

Ave. for 9 topperformers

Averagecommodityprices

Top and lowest performers vs metal prices (normalised to Jan 1 2007)

1. Low performers deteriorating since Jul / Aug 2007.

2. Top performers continued to appreciate.

3. Prices stayed strong through credit crunch - delayed impact on real economy and demand.

4. Current price deterioration.

??

Mining listings / financings on AIM

1. Credit crunch has caused a serious deterioration in share prices.

2. Listings have, however, remained relatively strong throughout 2007/ early 2008 in terms of numbers and amounts raised.

0

20

40

60

80

100

120

140

160

180

200

Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

Nu

mb

er o

f ra

isin

gs

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Ave

rag

e am

ou

nts

rai

sed

(G

BP

)

Number of raisings Average Amounts Raised (GBP)

Further raisings by mining companies on AIM

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

No

. of

listi

ng

s

0

5

10

15

20

25

30

35

Ave

rag

e am

ou

nt

rais

ed (

Mill

ion

GB

P)

Number of listings Average Amounts Raised (Million GBP)

New listings of mining companies on AIM

Debt Syndications for Mining and Metals

0

20

40

60

80

100

120

140

160

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Number of syndications globally - Metals & Mining

•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

0100200300400500600700800900

1000

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

US$

Million

s

Average volume of syndications globally - Metals & Mining

Market Risk Perception

0

50

100

150

200

250

300

350

400

450

18-J an-07 28-Apr-07 6-Aug-07 14-Nov-07 22-Feb-08 1-J un-08 9-Sep-08

Date

Spr

ead

(bps

)

Chile Kazakhstan Peru RussiaUkraine South Africa Turkey Average

Country Credit Default Swap spreads - selected countries

• 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.

Possible Outlook:

Global supply may be more constrained than demand.

Prices likely to stay relatively strong.

Flight to quality by investors.

2. The push to the frontier

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.

AIM Listed Juniors and Frontier Countries

64%

7%8%

15%

10%

19%

21%

22%

New opportunities, but also challenges and risks: 1) Governance 2) Resource nationalism3) Energy security

High income

Upper middle incomeLower middle incomeLow income

%% AIM-listed companies working in this region

% Average TI corruption index (2007)

8.0

3.7

2.36.7

2.8

9.0

3.7

2.3

64% of AIM listed

companies are active in

Africa.

3. Challenges and Responses

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

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

EITI is Making Progress

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.

• 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.

Involves:

The Sustainable Approach

‘Social License to Operate’

• 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.

The opening of the Ahafo mine created an opportunity for Patrick Boakye’s small business (PKC) to supply Newmont

with plastic sampling bags.

Example of Supplier Development:Ahafo Gold Mine in Ghana

IFC’s Performance Standards on Social and Environmental Sustainability: Best Practice

Tools in Risk ManagementImplementing 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

IFC’s Performance Standards on Social and Environmental Sustainability: International Stamp

of Approval“Equator Principles” adopted by 50+ of the world’s leading

Investment Banks and based on IFC’s Performance Standards

Apply to 85% of project financing worldwide

Resource NationalismResults 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•KazakhstanSeeking greater/majority local ownership e.g.:•China (for gold)•Russia (for strategic minerals)•Mongolia•Ecuador

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.

4. The value of a strong partner

• 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:

1. Raise operating standards :• Strengthen management capacity: financial, technical,

environmental and social• Increase credibility / reputation

2. Help raise financing privately, through a listing, or from banks

IFC can help in all these areas.

Role of strong / value adding investors

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.

Recent examples of IFC partnerships with Juniors

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.

Products ranging from early stage equity to debt

Senior Debt & Equivalents

Equity

Mezzanine / Quasi Equity

IFC Engages in Mining Projects World-Wide

Latin AmericaFSU/East EuropeAsiaAfrica

100+ country and

regional offices

worldwide

HongKong

RiodeJaneiro

IstanbulNewDelhi

Johannesburg

Washington

Paris

Moscow

Cairo

IFCHubsIFCOffices

IFC’s Global Reach

IFC ContactsWilliam BulmerAssociate Director and HeadGlobal Mining Division, Washington DCPhone: +1 202 473 0725Email: [email protected]: +1 202 974 4323

Christopher GossHead of Business Development, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8414Mobile: +44 (0)79 2006 0514Email: [email protected]: +44 207 592 8430

Sacha BackesBusiness Development Officer, LondonOil, Gas, Mining and Chemicals DepartmentPhone: +44 (0)20 7592 8413Mobile: +44 (0)79 1710 0720Email: [email protected]: +44 207 592 8430