CHAPTER 7 POLITICAL RISK CASE STUDY

• Jurisdiction: United States

International Resources Law II: A Blueprint for Mineral Development
(Feb 1995)
CHAPTER 7
POLITICAL RISK CASE STUDY
Peter Freeman
Warrior International Inc.
Chicago, Illinois and London, England
Frederic C. Rich
Sullivan & Cromwell
New York, New York

OUTLINE

1. THE CASES: ARGENTINA AND KYRGYZSTAN

2. AN INTEGRATED APPROACH TO POLITICAL RISK MANAGEMENT

3. IDENTIFICATION OF POLITICAL RISK

4. MITIGATION OF POLITICAL RISK

5. ALLOCATION OF POLITICAL RISK

• OBJECTIVES AND ALTERNATIVES

• SOURCES OF POLITICAL RISK ABSORBING FINANCE

• ARGENTINA CASE

• KYRGYZSTAN CASE

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1. THE CASES

EXAMPLES OF MINING PROJECTS WHERE POLITICAL RISK WAS OR WILL BE A MAJOR FINANCING ISSUE:

• ALUMBRERA (ARGENTINA, COPPER/GOLD)

• CERRO COLORADO (CHILE, COPPER)

• EL ABRA (CHILE, COPPER)

• JEROOY (KYRGYZSTAN, GOLD)

• KUMTOR (KYRGYZSTAN, GOLD)

• LIHIR (PAPUA NEW GUINEA, GOLD)

• PT INCO (INDONESIA, NICKEL)

• TINTAYA (PERU, COPPER)

• ZALDIVAR (CHILE, COPPER)

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THE SELECTED CASES:

• BOTH HYPOTHETICAL EXPORT PROJECTS

• ALL ELEMENTS DRAWN FROM ONE OR MORE ACTUAL PROJECTS

ARGENTINA	KYRGYZSTAN
PROJECT	LARGE MEDIUM-GRADE COPPER	LARGE HIGH-GRADE GOLD
MINE LIFE	15 YEARS	5 YEARS
CAPITAL COST	US$400 MILLION	US$400 MILLION
SPONSORS	MAJOR INTERNATIONAL MINING COMPANY	33% MAJOR INTERNATIONAL MINING COMPANY (OPERATOR)
66% GOVERNMENT
FINANCING PLAN	60% PROJECT DEBT	60% PROJECT DEBT
40% EQUITY	40% EQUITY
OBJECTIVES	LAY OFF ALL POLITICAL RISK ON DEBT (PRE- AND POST-COMPLETION)	LAY OFF ALL POLITICAL RISK ON DEBT AND EQUITY
LAY OFF ALL POST-COMPLETION COMMERCIAL RISK ON DEBT	LAY OFF POST-COMPLETION COMMERCIAL RISK ON DEBT AS MUCH AS POSSIBLE

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2. AN INTEGRATED APPROACH TO POLITICAL RISK MANAGEMENT

ANALYTIC METHOD: • IDENTIFY POLITICAL RISK

• MITIGATE POLITICAL RISK

• ALLOCATE POLITICAL RISK

KEY POINTS: • INTEGRATE POLITICAL RISK MANAGEMENT WITH PROJECT DEVELOPMENT

• START EARLY ENOUGH TO AFFECT

• ARRANGEMENTS WITH PARTNERS

• PROJECT DESIGN

• PROCUREMENT DECISIONS

• MARKETING PLAN

• ANTICIPATE LENDER REQUIREMENTS

• OFF SHORE ACCOUNT

• ENVIRONMENTAL

• ASSIGNMENT/COLLATERAL

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LESSONS FROM THE CASES

ARGENTINA

• USE PERIOD OF MAXIMUM NEGOTIATING LEVERAGE WITH GOVERNMENT TO OBTAIN COMFORT ON TRANSFER AND CONVERTIBILITY ISSUES

• COMPLETE PROCUREMENT ANALYSIS IN ORDER TO BE ABLE TO APPRAISE AVAILABILITY OF PRI

• PROJECT SPECIFIC FOREIGN INVESTMENT AGREEMENT NOT ESSENTIAL

KYRGYZSTAN

• NEGOTIATE PROJECT SPECIFIC AGREEMENT TAKING ACCOUNT OF LENDER NEEDS BEFORE GOING TO BANKS

• IDENTIFY AND SOLVE EARLY KEY POLITICAL RISK ISSUES (e.g. POWER, INFRASTRUCTURE, AMBIGUOUS LAW/REGULATIONS)

• ANTICIPATE AND ADDRESS LENDERS' CONCERNS RE LEGAL AND POLITICAL UNCERTAINTIES

• EXPECT CLOSE SCRUTINY ON ENVIRONMENTAL ISSUES FROM MULTILATERALS AND AGENCIES

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3. IDENTIFICATION OF POLITICAL RISK

"CLASSIC" OR "CAPITAL 'P'" POLITICAL RISKS

PRI COVER AVAILABLE FOR DEBT?
ARGENTINA	KYRGYZSTAN
• EXPROPRIATION	YES	YES
• POLITICAL VIOLENCE	YES	YES
• CONVERTIBILITY/TRANSFER	YES	NO (EXCEPT UNDER EXPROPRIATION)
• CONTRACT ABROGATION	?	?

NOTE:

• LABOR AND STUDENT VIOLENCE TRADITIONALLY EXCLUDED

• PROBLEM OF DEALING WITH LAND/ABORIGINAL CLAIMS

• NEWEST ISSUE: EXCLUSION OF "ENVIRONMENTAL VIOLENCE"

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"SMALL 'P'" OR UNCOVERED POLITICAL RISKS

DEGREE OF RISK IN
ARGENTINA	KYRGYZSTAN
• PERMITTING AND APPROVALS	**	***
• NATIONAL/REGIONAL/LOCAL CONFLICT	*	*
• TAXATION	*	***
• CORRUPTION	*	**
• UNCERTAINTY OF LEGAL REGIME	*	***

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4. MITIGATION OF POLITICAL RISK

GOALS: • CREATE "BANKABLE" OR "INSURABLE" POLITICAL RISK PROFILE FOR DEBT

• MITIGATE RISK FOR EQUITY

TOOLS • NEGOTIATE A FAVORABLE AND DURABLE (I.E. NOT TOO FAVORABLE) FOREIGN INVESTMENT OR CONCESSION AGREEMENT

• POLITICALLY SENSITIVE DECISIONS REGARDING PROJECT ORGANIZATION, DESIGN AND TAXATION

• AS APPROPRIATE, GOVERNMENT (INCLUDING LOCAL) OR LANDOWNER EQUITY PARTICIPATION

• AS APPROPRIATE, DIRECT CONTACT WITH THE MAIN POLITICAL FORCES, INCLUDING THOSE NOT IN POWER

• A FINANCING PACKAGE THAT NOT ONLY ALLOCATES RISK, BUT MITIGATES IT BY INCREASING THE NUMBER AND DIVERSITY OF PARTIES THAT WOULD BE HURT BY FUTURE ADVERSE POLITICAL ACTION AGAINST THE PROJECT

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TOPICS TYPICALLY COVERED IN FOREIGN INVESTMENT/CONCESSION CONTRACTS

• AUTHORITY TO INVEST/CONCESSION

• ISSUANCE OF GOVERNMENTAL CONSENT AND APPROVALS

• CURRENCY AND EXCHANGE MATTERS

• RIGHT TO IMPORT

• REMITTANCE OF PROFITS AND CAPITAL

• INCURRENCE AND PAYMENT OF EXTERNAL DEBT

• ACCESS TO LOCAL CAPITAL MARKET

• OFFSHORE ACCOUNTS

• EXPATRIATE COMPENSATION

• TAXATION (STABILITY, RATE, RELIEF FROM DUTIES, ETC.)

• ENVIRONMENTAL MATTERS

• GOVERNMENT PARTICIPATION

• LOCAL DEVELOPMENT OBLIGATIONS

• LEGAL MATTERS (NON-DISCRIMINATION, MFN, EXPROPRIATION, DISPUTE RESOLUTION, ETC.)

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ARGENTINA	KYRGYZSTAN
• NO FIA PERMITTED	• FIA PERMITTED BY LAW
• NO EXCHANGE CONTROLS, NO PROTECTION IN EVENT OF REIMPOSITION	• OFF-SHORE ACCOUNT BY CONTRACT
• STANDARD FOR EXPROPRIATION COMPENSATION
• TAX HOLIDAY
• ROYALTY TO PROVINCE	• LEGAL RISK MITIGATION
• REGULAR TAXATION	— WHOLE CABINET SIGNS
• FINANCING

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