International Project Finance
Executive Summary
The project for mining in the hinterland of Peru Mountains is studied as a case in the paper. The Antamina projects as it is called is studied for numerous management aspects of Industry, Finance, Human resources and other international finance aspects. The financial aspect of project completion is an important part of overall banking regulations is determined. Also the design of workforce, stakeholder dialogue in irrefutable and complex circumstances indicates the strength of community and social impact of such projects. The investment commitment is a particular emphasis as also the promulgation of management think on how to cater to commitments of organization, politics and surviving the onset of financial obligations in the coming near future.
The problems of mining projects are studied with reference to the problems of similar copper mining projects in Latin America. The product copper prices and impact of supply in the world market is studied to ascertain the importance of regulatory mechanisms to complete trade as well as determine market conditions of trade prices and supply. The following are the important conclusions drawn from the study of the Mining project Antamina in Peru;
- Antamina project was envisaged for operation in 1997 in Peru after obligations of road, relocation of farmers was completed. The country of Peru is significantly supportive of such projects with low country risk.
- Copper product global prices have been rising in the past with major upheavals. Copper prices also show break even for the low cost producers from Peru and Chile.
- The broad stakeholders of Antamina project are government, CMA and community of landowners. They provide detail of power, urgency and legitimacy of demand
- Community Catholic Church significantly impacts social life while the people struggling for workforce living standards are projected as terrorists.
- Project completion in International Finance is subject to professional condition of non recourse payment capability.
- The current state of Antamina project in Peru is one of problems in industrial relations and surviving the threat of closure.
- The international banking community rethinks on management of mining projects in Latin America for developing deeper understanding of social and financial impacts.
International Project Finance
Prepare a two-page assessment of country risk in Peru. Start with the 1998 country report prepared by a major North American bank and bring your analysis up to 2014 using the EIU country report, IMF Article IV, country ratings and any other sources you wish to incorporate. Review the ratings history for the country. Fundamentally, ask if Peru is a good country for mining investments. Consider the Antamina project, with construction from 1997 – 2001 at a cost of $3.6 billion and the Las Bambas project now under construction at a cost of ~$7 billion. Consider the Peruvian government’s position on mining and related taxes; specifically new policy in recent years. How important is the mining industry to Peru?
The Peruvian country of South America is famous for wildlife and mineral extraction. From a number of available options there is need to develop exports base, upgrade infrastructure, Instil reforms with peace treaty of Ecuador as well as have a narrow current account deficit. The economy suffers from overvalued exchange rate, dependency on commodity exports and without successor to political reforms. The statistics of economic development from 1995 to 2014 should provide a succinct part of how the economy is poised for future. Firstly, the comparison from 1995 to 1998 and a second comparison from years - 2010 to 2014.
30 million population of Peru by 2010 census is growing at a slow pace which is good for economic demography. The economic and country wide rating for Peru has been good and high by many agencies. A real GDP growth in 2013 of 5.7% and 3.3 % in 2014 provide consensus to the fact of high investment grading and reduction of vulnerabilities in exports or levelling of export base commodities and services. By 2013, the credit rating was 162 base points, ranking second-lowest in Latin America. This score is less than half of the regional average (393 points). Peru is also the third most globalized country in Latin America, according to the Globalization Index. Five elements are within this index: openness to foreign trade, capital flows, exchange of technology and ideas, international movement of workers, and cultural integration. Also, in February 2012, Bloomberg Markets reported Peru becoming third largest emerging market with the greatest international projection in 2012, based on the country's advantages, such as low share prices and their possible increase in the future. By 2013, the rate of inflation has been 2.83% which is good for economic projection and investments which have attracted the attention of large number of investors.
Considering the question of whether Peru is good for mining purposes one can study the relevant market factors. Investments in roads, utilities and projects in industry would definitely get further weakened for foreign private investments. There is sufficient evidence to show that there could be structural and social conflicts denying further progress for mining contracts. Considering the mineral output exports, these are shaped mostly by copper which could make Peru as world second largest exporter by 2017 while imports could be a lag for further GDP growth. From economists viewpoint the economy is dominated by mining though the productivity is predominantly from agro-industrial sectors with strong growth. Though the weak currency is supportive one can observe sustained growth from retail, tourism and transport sectors. Therefore, while including the export base, mining is currently important it would be facing stiff competition from other sectors in economy. If the infrastructure and currency developments hold steady the sector might survive where the sector is currently making slow progress. Projects like Antamina and Las Bambas are nevertheless the highly important ones. These projects show that the country Peru offers significant advantages in terms of elevating project development from support in governance, taxes, policies ect.
Real growth (%) 7.2 to 4.3
Unemployment rate (year avg, %) 7.1 to 7.2
Inflation rate (av consumer price)( (year avg, %) 11.1 to 8.0
Exchange rate (year avg, Sol/$US) 2.25 to 2.90
Total External Debt (US$bn) 26.3 to 27.9
International reserves (US$bn) 8.3 to 11.4
Total net external debt (US$bn) 18.0 to 16.5
Current Account (US$bn) (4.3) to (3.7)
Total net external debt to CA (4.18) to (4.46)
Part II of comparison from 2010 to 2014,
Real growth (%) 8.4 to 3.3.
Unemployment rate (year avg, %) 6.6 to 7.6
Inflation rate ( av consumer price)( % change) 1.5 to 3.2
Exchange rate (year avg, Sol/$US) 2.81 to 2.94
Total External debt(US$bn) 42.1 to 56.5
International Reserves(US$bn) 44.2 to 63.3
Total net external debt (US$bn) (2.1) to (6.8)
Current Account (US$bn) (3.5) to (10.6)
Total net external debt to CA 0.6 to 0.64
Total Net external debt = Total External debt – International reserves
Total Net external debt / Current account
Sovereign risk, country risk, convertibility risk, currency exchange risk and others are examples of the broad categories of risk inherent in subgroups of assets throughout the world’s financial system. Country risk includes financial assets of a given country constituting the signs for possible compensation premium on returns for issues on offer. Sovereign risk is not exactly country risk though it includes this as well as other risk factors. When a particular firm pushes above sovereign ceiling of bonds or assets then the sovereign risk is emergent. Following are the factors - (i) the probability of a generalized moratorium in the case of default by the central government; (ii) the amount of the debt, taking into account the guarantees given; (iii) the conditions attached to access to foreign currency on the basis of regular large-scale exports, assets held abroad, existence of a foreign owner or other sources of external support; (iv) integration with global production and supply networks and (v) the importance of the firm or firms involved with respect to the national economy and international capital markets. Even with the scenario of sovereign risk and country risk, there are other parameters which can influence the nature of risk to a country. These are the inflation rate, net external debt, and sensitivity of public debt to changes in interest rates – currency, maturity, debt servicing included. (Canuto Otaviano, et al, Macroeconomics & sovereign risk ratings)
Based on the above calculations the net external debt has increased from 18.0 $US bn to about 56.5 $US bn. This indicates the net external debt has increased over time and management of public debt has been good. The risk factor net external debt to current account has seen changes but overall became positive by 2014, 0.64 from - 4.18 in 1995.
The reason for assessing is that private external debt resides due to fact that it can exert pressure on international reserves of central bank. Higher this figure or ratio then more onerous the servicing of this debt tends to become and the greater the risk of default by the sovereign issuer. The low inflation rate recognizes structural reforms conducted in 1990s. Fiscal and monetary policies have been managed conservatively. Peru’s risk rating and country risk assessment is severely affected by political uncertainty from high external indebtedness relative to current account receipts which is 260%, lower export diversifications and high concentration on raw materials. Peru country risk is 162 base points which ranks second lowest in Latin America. It is also third most globalized country in Latin America. In early 2012 the Bloomberg Markets positioned Peru as third emerging market with international projection in 2012. The inflation rate is lowest of 2.86% in 2013. The country shows rapid economic progress and growth with external debt and low inflation with strong economic fundamentals.
(Country Risk and Investment Grade Peru )
Q2. Antamina is a copper – zinc mine; it also has silver, molybdenum and bismuth. Prepare a one page assessment of price history in the global copper market – go back to, at least, 1990. What are the cash costs of extracting copper; where do you see Copper prices in three years and ten years? At what price of copper do the large mines in Peru and Chile become uneconomic or, alternatively, fail to be low cost producers? What factors influence international demand for copper?
Ans 2. The global copper prices in the years from 1990 to 2014 have seen significant changes. Copper prices plummeted by about 41% from 1991 to 1999. The prices more than doubled between 2002 to 2005. (Jordan Pav, www.theglobeandmail.com)
Annual average of price rises from 1560 to about 3680 US$/tonne. It later reached record levels of 8000 US$ per tonne in 2006 and also in 2008 before plummeting downwards and stabilizing to a steady price in the year 2009. Cash costs of extracting copper are almost about $10000 per tonne up from $4000 to $5000 per tonne. Copper prices would increase further in long term period while in three years they would likely be posited at high level from $2.9/lb to about $3.5/lb. (Kumar Navya et al, The boom and beyond)
The breakeven point in low cost production of mines becomes uneconomic and fails to be low cost production from $1350 per thousand tonnes. (Historical Copper Prices and Price Chart) This is true for Chile and Peru as shown in the figure,
The reasons for copper prices changing are following – unexpectedly high demand, inability of short run supply to meet demand, low total capital and exploration spending, high mine utilization, low demand elasticity and financial crisis. ( Mills Richard, Global copper production under stress)
Q3. In the broadest terms, who are the stakeholders in the Antamina project and what are their demands? Discuss the power, urgency and legitimacy of the various stakeholders in managing resettlement policy – including the community development plan, and routes for transportation of materials – including pipelines and highways that may run through the Huascaran National Park. Make a clear recommendation about what should be done in order to move the project forward.
Ans. The stakeholders in the Antamina project are the government, community landowners and the CMA organization. The demands of community landowners are that the rehabilitation takes its time without much interference from hostile communities or government or CMA. The salary for new jobs promised is given as part of higher standard of living for the families and people. The government expects that the CMA organization provide proof of effective investment, community development program and other commitment to environment and sustainability. The CMA demands are that rehabilitation takes place in 90 days, the road to the extraction site and post supply is made from less cost and management completes the project on time. The structure of power, urgency and legitimacy of the stakeholders in managing resettlement policy is as given below,
Power Government> CMA> landowners
Urgency CMA> Government>Landowners
Legitimacy Government> Landowners>CMA
In order that the project moves forward and ahead there is a high cost of strategic development that needs to take place in the region. With the business development strategy the following options can be ascertained,
- A very high cost of relocation + strategy for road through National Park.
- Low cost of relocation which is inevitable without high production cost + own road constructed near by the mountains and away from National Park.
- High cost of relocation of the people with salary and jobs + own road constructed near by the mountains and away from National Park.
Amongst the given alternative strategies then the individual project must undertake the third option for better business strategy.
Q4. What is the role of community leaders such as Father Marco Arana and the Catholic Church, if any, with respect to large mining projects in Peru? What has happened to Father Marco since the release of the film, The Devil Operation?
Catholic Church role in community development has been portrayed as a protector who is responsible as also reliable, strong, steadfast and full of hope for the underprivileged in the society. With respect to large mining projects in Peru the Church has a big role. It has developed image of a partaker to the ongoing confusion and complexity of business problems and helps in solving or allaying fears and apprehensions. The church community follows the given dictats of the Catholic religion and allays doubts of secrecy or background dealings in community. The development of the church as a dominating and gravitating force which solved many issues between rival communities arising out of no known pretexts or forming opinion where there is hardly any leading to effective policy stance and dutiful obligation completions. The church has been completing the social service obligations leading to better legitimacy of the actions and a bigger larger than life image has also been seen in the given community of the people. So church has become the slayer of doubts and apprehension leading to the people becoming better off in less tension of rivalry in community. Thereupon the development of the church is again developing into characteristic benefit from the organization to community social services as a non player in the region which is witness to everything.
Father Marco Arana had been named the hero of the environment in 2009 by TIME magazine. This happened from his becoming the target of a sinister campaign of harassment and terror called the Devil Operation in 2006. Thereafter in 2012 he was beaten and arrested by a dozen police officers who were forcing to ground and dragging him by the neck. He was surrounded by riot police and refused communication to his lawyer.
Q5. At what point will the Antamina project reach “completion”. How does one define “completion” and why is the term “completion” such an important milestone for large investments and international project finance? Compare and contrast the different “completion” challenges we have encountered over the term referencing the other cases we have studied.
Ans. Completion of the project is defined in international project finance as the condition when the assured payments can be made or cash flow generated from recourse financing to non recourse financing. It is an important milestone for many organizations as the condition illustrates to authorities that necessary promised investment can physically and financially be made without hassle from the organization. This way the burden or debt of default recurring profit management, honesty on part of management and numerous aspect of the completion of project can be ascertained. The different completion challenges during the Struggle of Peruvian projects in mining like the Antamina and Las Bambas have had different problems altogether. The project for Antamina should have been better equipped to handle a period of gestation before results in form of returns developed. The winning bidder started in 1997 their operations and today the organization has still to complete their project in next five years, while the organization is already corporatized with the stakeholder partners as follows;
BHP Billiton 33.75%
Xstrata Copper 33.75%
Mitsubishi 10%
Teck Cominco 22.5%
The problem at this organization was challenge of management to adhere to set milestone for completing project with high costs and workforce. The quality of management demanded many tactful decisions, with ability to steer the organization from investment commitment at end of two years ($13.5mn x 2 years) and then the final condition of fulfilling the investment at end of five years of the promised amount which the organization made at time of bid. Though the winning bidder Rio Algom / Inmet Proceeds did their homework well with high secondary offer of $200mn and further developments, problem of failing to meet world bank guidelines, changing scenario of project completion from the policy stance of government taxations, lower quality management, ineffective planning decisions on the road and including the inability to reach out to community development program.
The problem of the Las Bambas project was of structural edifice of meeting promissory services from the bank creditors. This escalated later to crisis of augmenting the efforts of the organization challenge in meeting management demands towards the investment commitment and promise. The structural problems of the two projects were completely different than the ones which were expected in the growing opportunity of the mining developments in region. Failures to get the price in market compared to regulatory reforms indicate markedly different problems which are later turning into problem for the governance of the organizations.
Q6. What is the current state of operations at Antamina; include in your comments some assessment of the mine’s labour relations. Are the issues at Antamina much the same at other mines in Peru and Chile?
Ans. In the current state of operations at Antamina the organizational hierarchy, corporate communication internally and externally, social and cultural relations have worsened. There is an important social and political context that cannot be missed during professional management of the mining exploration and activities management. Many problems are still existent like the willingness to formulate dialogue, feature a common ground, sharing trust and goodwill are important aspects of longevity and profitability of the mining project.
The results of negotiations for a central road led to formation of alternative of the by pass road. Eventually this also led to the Mountain Institute (TMI) which is an international private voluntary organization, based in the US with international programs in major mountain countries of the world, was invited by the Peruvian Government to cooperate with since 1995. The development of HWG working group led the employees and workers to come together to recognize the potential of collaborative work and synthesis of policy dialogues implementation.
The problems being faced and solved in the Antamina project are not similar to problems of Peru and Chile countries. They would be facing issues of management overhaul frequent misuse of property, developing strains in market development or the strategic mismatch in the partner stakeholder sharing of responsibilities etc.
Q7. What is the World Bank’s position on large international mining projects, as referenced in the case? How should international banks and investors think about the management of their mining portfolios with respect to risk – holistically, and return?
ANs. In reference to the case the uidelines set by the world bank asked to compelte the project using forms of the condition related to fulfing the terms set earlier. The land should be provided as part of higher standard of living to people and rural landowners during rehabilitation or relocations. This inadvertently also implies the meeting of investment commitment by the organization as a important first step ahead. The world bank also clarified the relocation of land dwellers to higher standard of living as being very important.
The second condition by the bank was of technical and social support on all kinds of important matters which came up from the dwellers and landowners in course of maangeemnt or development of the project.
Managing of the mining projects by the bankers or investors must take cognizance of the following facts and reiterate policy on numerous matters
- The mining projects are professional
- Context of political and social support development is important
- The community development is path breaking
- Recognizing management dialogue and communication to later project completion on investment promise is elevating for organization benefit only
Holistically and in perspective of mitigating risk as it arises the bankers and investors must meet management regularly with update on progress of project, allow more time for management to take accurate decisions, keep the management on ts toes on all issues of financial and social origin. Other aspects include industrial relations and internal collaborative progress with Union and management.
These and similar other areas tend to strategically allow better measurement of choices and in times of urgent overhaul of systems leads to zero failure and well prepared response of management could save the day ahead.
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