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Fostering greenfield mining-associated shared transport infrastructure through PPPs: Challenges and Solutions for sub-Saharan Africa International Finance Corporation Cape Town, February 2013 1. Multi-client/user infrastructure: a particularly relevant topic in SSA Rapid economic growth in newly industrialized nations has fuelled a mineral “supercycle” Iron Ore (mm tonnes) 1,400 1,200 1,000 800 Consumption - China Consumption - RoW Seaborne Imports - China Seaborne Imports - RoW 1,070 898 1,263 1,249 688 600 400 1,396 275 326 2005 2006 628 629 2009 2010 444 384 200 - 2007 2008 Source: RBC Capital Markets, … And stimulating global trade 180 160 140 120 100 80 60 40 20 0 Iron Ore Source: Taylor DeJongh Consumption - China Seaborne Imports - China 1,482 1,462 Top Iron Ore Exporters and Importers (mm tonnes, 2011) 138** 222* 1,600 1,400 706 79 331 466 53 Exporter Importer Coal, Australian thermal But for how long? Iron Ore (mm tonnes) 1,600 … pushing commodity prices to record highs until 2010 Iron Ore & Coal (USD/metric ton) Economic growth has stimulated demand for minerals 1,429 Consumption - RoW Seaborne Imports - RoW 1,393 1,369 1,200 1,000 800 706 771 836 927 901 600 400 200 * Asia excl. China, ** Europe Source: ISSB - 2011 2012 Source: RBC Capital Markets, 2013 2014 2015 2 1. Multi-client/user infrastructure: a particularly relevant topic in SSA This super cycle is making Africa’s landlocked mineral resources, on paper, bankable • Historically, non existent transport infrastructure and the scarcity of risk capital and investment funds have limited exploration & mining development • Unlocking Africa’s vast mineral resources – a straightforward problematic – or is it?: High volumes High prices Long distances Iron Ore / Coal: Need for heavy rail and port infrastructure • Who is going to finance the mining transport infrastructure needed? • For known iron ore projects alone, the financing needs are estimated to be in excess of US$50 billion (4,000 km of new railways, new ports, etc..). • Uneven size of deposits, long distances from export location facilities strongly suggest a need for coordination between Governments and mining companies to develop affordable and bankable logistics solutions. 3 1. Multi-client/user infrastructure: a particularly relevant topic in SSA Iron ore projects logistics challenges in West and Central Africa – a textbook case Legend Existing railway New railway Existing port New port Iron ore project <25 25-100 >100 <2.5 2.5-5 >5 Nkout – Cameroon Core Mining Estimated production (mtpa) Estimated cost of related infra (US$ bn) El Agareb – Maurit. ArcelorMittal, SNIM Mbalam – Cameroon Sundance Resources Topa – CAR Ferrum Resources (Exploration) (Exploration) CAR Faleme – Senegal ArcelorMittal, Sen. Nouadhibou MAURITANIA SEN. Douala Mamelles EQ. GUINEA Western Africa Kalia – Guinea Bellzone CAMEROON MALI Simandou – Guinea Rio, Chinalco, Guinea Gvt, IFC Dakar Libreville Nadeba – Rep. of Congo Sundance Resources (Exploration) REP. CONGO Central Africa GABON Port-Gentil Mnt Avima – Rep. of Congo Core Mining DRC Pointe-Noire Simandou II – Guinea GUINEA Conakry SL Pepel Freetown Monrovia Buchanan Tonkolili– Sierra L. LIBERIA Afr. Minerals, Shandong Iron & Steel Belinga – Gabon China Ntnl Mach. & Eqpmt + Gabon COTE D’IVOIRE Mnt Nimba – Guinea/Liberia/CI Putu – Liberia Severstal, Afr. Aura Mayoko – Rep. of Congo African Iron Zanaga – Rep. of Congo Zanaga Iron Ore Kango – Gabon Core Mining Sources: IFC, RBC Capital Markets 4 1. Multi-client/user infrastructure: a particularly relevant topic in SSA Public financing of Africa’s mining export logistics solutions is not a credible option # of iron ore mines # of railways # new ports Est. Cost of Infra US$bn % GDP % Ntnl. Budget Guinea 2 2 1 10.4 to13.6 91-118% 850-1100% Cameroon 2 2 1 6.6 to 8.5 14-18% 120-160% Mauritania 3 2 0 3.8 to 4.9 53-69% 260-340% Senegal 1 1 0 3.8 to 4.9 15-19% 90-120% Rep. of Congo 3 3 0 3.3 to 4.2 18-23% 90-110% Gabon 2 2 0 2.9 to 3.8 12-15% 65-85% Liberia 2 2 0 1.9 to 2.5 80-103% 440-570% Sierra Leone 3 3 0 1.6 to 2.1 24-31% 250-330% Country Source: IFC, RBC Capital Markets, CIA World Factbook Conclusions: 1) Greenfield multi-users/clients infrastructure can only be financed by the private sector either (i) directly by the mining company as sole user of the infrastructure or (ii) by a third party vehicle under a PrivatePublic Partnership (PPP) scheme. 2) Public sector’s role is limited to the award and regulation of transport concessions to private sector operators. Role can extend back to infrastructure financing once first movers projects have been successfully implemented and have created the “fiscal space” expected from them. 5 2. Significant challenges and limited global experience to date There is a wide array of theoretical multi-client, multi-user and multi-usage options • Options for shared-use of greenfield mining-related infrastructure assets are virtually unlimited, in theory: Two ownership models: Vertical integration (Mining Company) or Partial Integration (1/3 party company) Multiple combination of users and usage: One single operator providing transport services to a single or multiple mining clients; One single operator providing transport services to mining client(s) but also to general freight and/or passenger client(s); and Multiple operators providing transport services to single or multiple mining, general freight and/or passenger client(s). Different timing of shared use for all combination of users and usage: known or not known at the time of financing of transport infrastructure. • However, there is no successful example of shared use greenfield railways worldwide. All known successful examples are of brownfield projects (Public sector availed the infrastructure to private operators) High bankability, low complexity Single-use infrastructure (backed by one anchor mine) Multi-user/client infrastructure with users known at Financial Close Multi-user/client infrastructure with users unknown at Financial Close Multi-purpose infrastructure with users known at Financial Close Multi-purpose infrastructure with users unknown at Financial Close Low bankability, high complexity 6 2. Significant challenges and limited global experience to date Mines and infrastructure are radically different asset types which further raises the bar of greenfield PPP bankability Mine Mine-associated rail Conclusion Liquidity High – tradable asset Low Mining assets are more tradable Co-Dependency Medium - The existence of the infrastructure increases the value of the mine, but the underlying value of the deposit depends on the quality and volume of the resource High – the value of the rail is highly dependent on the volume the mine can produce. Mining assets have higher intrinsic value Scalability High - Can be partially exploited Low - Has to be built for highest expected demand Mining operations are highly scalable Easily manageable and clearly defined mining area Significant right-of-way over hundreds of km with little control over outside incursions Mining site is easier to secure/control Physical Control 7 2. Significant challenges and limited global experience to date …And mega-projects are difficult to implement in a risky political environment Sovereign Credit Rating (S&P) Political risk (EIU) % of natural resource rents in GDP (2010, World Bank) A- A 5% Namibia BBB BBB 1% Gabon BB- B 50% Mozambique B+ BB 9% Cameroon B CCC 9% DRC Non rated Non rated 30% Guinea Non rated Non rated 21% Liberia Non rated Non rated 15% Mauritania Non rated Non rated 54% Congo Non rated Non rated 64% Botswana Lower Overall project finance risk level Higher Existing mining powerhouses South Africa BBB BBB 5% Brazil BBB BBB 5% Australia AAA AA 8% 8 3. A realistic outcome: an anchor investor with a shared-use regime A creditworthy large anchor mine is the key starting point to making greenfield multi-use projects feasible in SSA • Because of the fortunate co-location of resources, once the infra is built for the anchor mine, it can then become the transport backbone for the rest of the country/region. •The Majors are likely to remain the key infrastructure investors and the key anchor clients in sub-Saharan Africa for the foreseeable future. # of identified iron ore projects •The presence of a large mine upon which the entire infrastructure project can be underwritten is a sine qua non condition to successfully project financing greenfield mining-related infrastructure PPPs. Number and size of identified iron ore projects in West and Central Africa 11 7 First mover projects that will enable smaller ones to become feasible 1 < 25 25-50 50-10 1 Production Target > 100 (mtpa) 9 3. A realistic outcome: an anchor investor with a shared-use regime Key contractual arrangements can improve project’s bankability for both investors and lenders 2 1 Tariff-setting flexibility Tariffs should allow investors to recoup capex, cover opex and make a return. 3 Long term take or pay contracts Take-or-pay contracts provide the most security for investors, though also are harder to achieve with small users without Government support. 4 Managing capacity expansion Addressing capacity expansion in the contract documentation is particularly important for greenfield shareduse projects. Regulation and dispute resolution Contract should address operator’s right to challenge access requests and clients/users’ right to access. This type of contractual arrangements is designed to address the needs of mining companies for: a) tariff fairness and visibility, b) equal access to transport services, d) secured transport capacity, e) limited cross subsidies among clients/users, and f) transparent and equitable appeal process. 10 4. Concluding remarks and topics for discussion Main conclusions (1/2) 1. The opportunity: • High commodity prices are unlocking new opportunities • Exploiting these resources depends on having the infrastructure to export them • Government financing is simply not an option in SSA Developing greenfield multi-user infrastructure to support mining operations through public-private partnership schemes seems to be the only credible solution to unlocking Africa’s untapped mineral resources. 2. The challenges: • Can mining companies deliver on the infrastructure? • Bankability of mining-related transport assets is difficult to achieve There are a limited number of financing solutions available for structuring a greenfield multi-use project. • Transport assets present fundamental differences with mining assets from a project finance standpoint • Sub-Sahara African countries present Sponsors with unique and often misunderstood political economy challenges 11 4. Concluding remarks and topics for discussion Main conclusions (2/2) 3. The models which could work: • A greenfield shared-use PPP will have to rely on an anchor mine • Majors are best equipped to support greenfield shared-use PPP models • Two distinct access models to consider are the access regime, where the Concessionaire provides access to the infrastructure (e.g., tracks) to other users who use their own equipment to transport their own goods or a haulage regime, where the principal operator acts as the sole transport service provider for other mines or clients. • Needs and pressures have to be anticipated and acknowledged upfront within the PPP’s contractual arrangements: A balance needs to be sought between protecting the private investors while enabling third party access. Additional transport capacity needs to be anticipated and incentivized. 12 Comments, questions? Contact the Africa Infrastructure Department at IFC: Pierre Pozzo di Borgo, Principal Investment Officer, [email protected] 13