COMMENTARY — Taking precautions overseas

.BT.J. O’Connor

The global mining industry has undergone a major change over the past two decades, as improved political and economic conditions in mineral-rich developing countries have opened up new mining opportunities. But while business climates in these countries have brightened up, considerable risk remains. This is where Export Development Corporation (EDC) comes in.

A financially self-sustaining Crown corporation, EDC has been providing world-class financial and risk management services to Canadian mining exporters and investors for more than 50 years.

In 1997, EDC provided more than $2.5 billion in support to mining projects in Latin America, Africa, Asia and the United States. EDC’s expertise and knowledge of political and commercial risk have enabled it to be a key player in major mining projects such as Alumbrera, Lihir, Collahuasi and Cajamarquilla.

EDC supports every step in the life cycle of a mine, from the exploration stage through to mine closure. Services include project financing, insurance to cover political risks, support for contract bonds, as well as credit insurance and financing for sales of minerals, services and equipment.

As Canada’s official export credit agency (ECA), EDC has considerable experience in working with other official agencies, including institutions such as the World Bank. EDC has also worked with the top international banks and advisory firms, as well as private-sector political risk insurers.

International contracts often require that bonds and guarantees secure bids, performance or advances received from a customer. EDC can protect the exporter against wrongful calls by a buyer. In addition, a separate insurance policy can provide an exporter’s bank with coverage against the guarantee it issues on the company’s behalf. This allows use of EDC’s coverage as collateral, eliminating the need to commit the company’s financial resources.

Whether a sale is financed or is paid by letter of credit or on open-account terms, Canadian mining companies are exposed to risks that can result in losses. EDC’s credit insurance covers losses due to a wide range of commercial and political risks. Knowing these risks are being managed, their customers are able to increase export opportunities — to enter new markets, expand existing ones and accept larger orders. As an additional benefit, the claims proceeds of the insurance policy can be assigned to the bank as collateral to secure working capital.

Companies that make an investment in another country are betting on that country’s political stability. EDC’s Political Risk Insurance (PRI) provides coverage against the political risks of transfer, inconvertibility, expropriation and political violence, in support of investments and loans, including gold loans.

One of the latest developments is EDC’s ability to cover political risks for an exploration program. As this option is new, coverage is currently very selective. Innovations such as this illustrate EDC’s ongoing efforts and commitment to meet customers’ needs, as well as EDC’s appetite to assume and mitigate risk.

PRI can also be extended to banks providing financing for the transaction.

Eligible structures to access PRI include loans to Canadian-sponsored projects; project loans involving non-Canadian investors which will benefit Canadians; and loans for Canadian export sales unrelated to specific projects.

EDC’s approach — tailoring policies to fit the deal — provides the necessary flexibility to allow a project to be structured in a way that makes good business sense.

EDC has been actively pursuing mining deals on a limited recourse basis around the world. Since the establishment of a Project Finance Team in 1995, EDC has sharpened its focus and expanded its experience in supporting Canadian sponsors, equipment manufacturers and services providers.

Typically, EDC provides a direct loan to the project company, accepting both political and commercial risks during the pre- and post-completion phases of the project.

Sponsors are finding that, due to the complexities and risks of many mining deals (which are increasingly being developed in emerging markets), there is a greater need to work with a combination of multilateral institutions, commercial banks and ECAs. By having EDC as a lender of record, all parties are often able to streamline legal documentation and enjoy the benefits of EDC’s status as an ECA.

— The author is communications advisor for Ottawa-based Export Development Corporation.