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					Political Risk Insurance Critical for Global Mining Projects
By Mamadou Barry, Acting Head of Oil, Gas and Mining at the Multilateral Investment
Guarantee Agency (MIGA)

The mining sector is an important source of employment, revenues, and demand for local
services and goods in the countries in which the mines are located. Commercial mining
provides employment and transfers skills to workers and can also be an important source
of social services to remote communities. With properly managed environmental, social
and corporate governance, these projects can make a significant contribution to
sustainable development and poverty reduction in host countries.

Given the high price and rising demand for minerals and metals today, there is vast
potential for investors in the sector. But there are inherent risks. While resource-rich
countries present significant opportunities, they also pose challenges, not least because of
their location in parts of the world with precarious political or socio-economic situations.
Weak macroeconomic frameworks and inadequate legal and regulatory regimes often
hamper development in these countries. And poverty and growing income disparities can
fuel civil disturbances and conflict. Furthermore, tensions can develop between central
and local governments over the distribution of royalties and taxes. And failure to address
social and environmental concerns properly can exacerbate tensions with local
communities, damage the reputation of project sponsors and lenders, and result in huge
losses.

Many governments in promising mining locations are reviewing old agreements and
renegotiating contracts for a larger share of the profits. If a host government expropriates
a project without paying full and fair compensation, investors can lose massive
investments. The trend towards resource nationalism, fuelled by the boom in mineral
prices, is another risk factor for investors in the sector. Complexities of this nature fall
within the realm of political risks and present significant challenge to mining
companies. Given the large capital costs and longer time horizons associated with
projects, managing political risks should be a critical part of the global business strategy
of mining investors.

Risk Mitigation Options

While many companies have developed the ability to manage technical and commercial
risks quite well, dealing with political risks in emerging markets continues to be a major
challenge for most. Moreover, lenders have portfolio or country risk limits. The financing
prospects of projects often hinge on the ability of project promoters to mitigate real and
perceived country-specific risks to the satisfaction of participants. Political risk insurance
(PRI) is often the option that makes the most business sense when it comes to improving
the risk-return profile of a mining project, satisfying lenders and attracting partners.
A PRI Provider with a Mission

Many private and public insurers provide PRI. Among them is the Multilateral
Investment Guarantee Agency (MIGA), a member of the World Bank Group, which
provides PRI to investors in emerging markets against non-commercial risks, including
currency transfer restrictions; expropriation; war, terrorism and civil disturbance; and
breach of contract. The agency’s objective is to maximize the development impact of
projects and help improve the lives of people in developing countries.

Since inception in 1988, MIGA has issued over $1.4 billion of guarantees in the mining
sector. MIGA supports mining investors by providing PRI that protects investments
against political risks and compensates for losses arising from covered political risks;
providing information about business opportunities in emerging markets; and helping
companies to comply with established social and environmental best practices. The
agency’s support also extends to other sectors that are crucial for sustainable mining
development, such as infrastructure and manufacturing.

MIGA’s status as a World Bank Group entity and its structure as an organization with
172 countries as shareholders give it a unique ability to protect investors against
government actions. The agency has a well-established and effective working
relationship with host governments. Its dispute resolution services give investors peace of
mind in knowing that MIGA is able to facilitate a constructive dialogue and steer all
parties towards an amicable resolution in the event of a dispute between investors and
host countries.

The multilateral political risk insurer has had significant experience working with the
world’s largest mining companies to help them address key noncommercial risks. For
instance, when Marubeni LP Holding B.V. of the Netherlands embarked on a copper and
molybdenum mining project in Chile, they applied for PRI from MIGA to protect their
investment. The Minera Los Pelambres project, located approximately 200 kilometers
north of Santiago, involved the expansion of the enterprise from an underground to an
open-pit mine. MIGA’s support for the project was driven by Chile’s development needs
and the World Bank Group’s poverty reduction strategy for the region. Some 15 percent
of Chileans still live below the poverty line, with many millions precariously just above
it.

PRI Tailored for the Mining Sector
MIGA’s extensive experience in the mining sector has led to the development of
insurance specially designed to target mining-related investor concerns, such as the
revocation of leases or concessions, tariff, regulatory, and credit risks arising from a
government’s breach or repudiation of a contract, and disputes related to take-off
agreements, production sharing, and exploitation rights.
Selected MIGA Mining Projects

Project           Host Country Guarantee         Investor          Guarantee
                               Holder(s)         Country           Amount
                                                                   (US$ million)
Kupol             Russian       BEMA Gold        Canada            304.6
                  Federation    Corporation      France
                                Mitsubishi       United Kingdom
                                Corporation
                                Société
                                Générale S.A.
Kenmare Moma      Mozambique    KfW-             Germany           12.4
Mining Limited;                 Kreditanstalt
Kenmare Moma                    fur
Processing                      Wiederaufbau
Limited
Anvil Mining      Democratic    Anvil Mining     Canada, Ireland   13.6
Congo, SARL       Rep. of Congo Ltd., RMB
                                International
                                (Dublin)
                                Limited
Kahama Mining     Tanzania      Barrick Gold     Canada            56.3
Corp. Ltd.                      Corp. of
                                Canada
Omolon Gold       Russian       Kinam Gold       United States     27.4
Mining Inc.       Federation    Inc.

Omsukchansk       Russian       Standard Bank    UK                17.1
Mining &          Federation    London
Geological                      Limited; New
Company                         Arian
                                Resources
                                Corporation

Kahama Mining     Tanzania      Société          France            115.8
Corporation                     Générale, S.A.
Limited
Chambishi         Zambia        Anglovaal        South Africa      30.0
Metals Plc                      Mining Limited
Minera Los        Chile         Marubeni LP      Netherlands       31.3
Pelambres                       Holding B.V.
For more information on MIGA guarantees for investments in oil, gas and mining
projects, contact Mamadou Barry at Mbarry2@worldbank.org, t. +1202 473 3561. Visit
www.miga.org.

				
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