Risk Management in Mining Projects

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Chhitiz Kumar Phone +91-9711013990 E-mail : chhitiz@yahoo.com Risk Management in Mining Projects

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6. Local Issues 2. Market & Currency Fluctuation 7. Environment Impact 5. Govt. Policies 3. Financial 4. Execution Capability Risk Management – Source of Risk 8. Country/Political Stability 1. Geology

1. Geology : 

1. Geology Man can see stars millions of miles away, but can’t say what lies a yard beneath Risk Geology is all about probability and confidence level never 100% sure ! Initial cash flow is negative and un-certain for long period (5-10 yr) as mineral grade and quantity is being established. Key Mitigates Better Technology and Experienced People

2. Market & Currency Fluctuation : 

2. Market & Currency Fluctuation Risk High degree of fluctuation in commodity prices and currency exchange rates Commodity pricing (Iron Ore, Coal, Bauxite etc) closely linked to end product pricing (such as Steel, Power, Aluminum prices) Key Mitigates Long Term Pricing Contracts, Currency Hedging, Forward Contracts etc Thermal Coal Prices Source : IMF Data

3. Financials : 

3. Financials Risk Project underwriting challenges High uncertainty of cash-flows - geological reasons and uniqueness of each project Commodity prices linked to end user industry (steel, copper, power etc.) Third party reports on Mine Plan – limited credible players International price movement for commodities and its possible/closest substitutes Financing Contract Mining Players is equally challenging Typically, large Capex and debt required for size of balance sheet of the borrower Overleveraged (High D:E & D:EBIDTA ratio), with no cushion for underperformance /downturn Aggravates with aggressive bidding and thin margins Usually, no comfort or balance sheet support from the Principal (for whom the Mining Contractor is working for) Limited expertise in Banking/Financing Industry in financing mining projects, hence conservative approach Key Mitigates Onward sale contracts - Unconditional , Take/Pay, Date/Sum certain Assign Mining rights / Step-in rights

4. Execution Capability : 

4. Execution Capability Risk Mining is dominated by Govt run organisations in India. For example - Since Nationalisation in1973, Coal Mining in India is dominated by CIL and SCCL (90% plus of Coal Production) Execution capability of the most of the private players is still to be proven over long term Limited number of Indian mining contractors and players Have not handled large scale projects especially for coal production Usually overleveraged and stretched financial position Lack mining expertise / technical manpower International players need and want to step in BUT Most operations too small to attract large players Not comfortable with overall Indian Mining Industry Policies/ Structure / Processes / Delay India is now in trying to catch up by Invest and adopt technology – Eg. Surge of PPP for Longwall Mining projects in CIL. Develop and build talent in mining Liberalizing its mining policies to attract private players and investments in Mining

5. Govt Policy : 

5. Govt Policy Risk In India, approvals for Mining required from both the Central and State governments – making it long and tedious process Restrictions on entry of Global Players Challenges in Captive Coal Mining Blocks Allocated to Private players Multiple users (sometimes non-serious) players allocated captive coal blocks Difficulty in getting multiple user blocks to a common agreement No exit option and flexibility for lenders as - Mining lease is not assignable / transferable – even in case of default by borrower - Bar on outside/free market sale – so depend on transfer pricing of captive produce and revenues from such sale Dispute resolution mechanism? Logistics and other infrastructure issues are still not resolved. Eg – Railway tracks for transporting coal from Mine to plant is delayed/pending approval

6. Local issues : 

6. Local issues Risk Land acquisition – alternative livelihood Recent land acquisitions for industry/SEZ have been fraught with issues Regional political and social groups as well as active NGOs play a very important role. Pace of socio-cultural change is uncomfortable and disruptive to local population Lack of pro-active and focused R&R Policy Law & Order Issue Mineral Belt in India overlaps with Rebel/Naxalite affected belt Key Mitigates Understand and Involve local Invest in local infrastructure – physical and social - Eg. Schools, Training Institutes, Hospitals etc Better R&R Policy and Spend Cultural challenges: Tribesman and mining truck

7. Environment : 

7. Environment Risk Benefits from mining vs. damage to environment – Is sustainable development possible? Increased awareness / activism / NGOs Liability & claims could be disruptive and severe Timing, quantification and provisioning for any such liability/claim in the balance sheet is difficult. Key Mitigates Understand Environment Impact Assessment (EIA) report during the Planning Stage Mine Closure Planning an integral part of Mine Planning - Conceptual closure planning (Project Phase) - Closure planning (Operations Phase) Plan accrual of money during the production life, for proper mine closure

8. Country/Political Stability : 

8. Country/Political Stability Risk In search of resources, companies go outside their national boundaries for minerals, without completely understanding the political/country risk. Key Mitigates Understand the country history/ political system / regulations / norms etc Insurance against disruptions – though expensive Tibetan protestors against Chinese mining in Tibet Rebels blow up an oil pipeline in the Niger Delta

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Behre Dolbear - “Mining Investment”

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Summary Completely Understand, Allocate, Manage and Price the ”RISK” associated with the project. Advisory / Financial Institutions need to focus and build expertise in mining sector as more private players will be active in future. To meet its aggressive growth targets, India WILL have to improve its “Attractiveness” for domestic and international players in mining industry.