Mining Weekly By: Loni Prinsloo
28th August 2009
Africa is a continent with significant and impressive mining reserves and resources, but is, unfortunately, also associated with a great degree of investor risk.
Africa’s only multilateral trade and political risk insurer, the African Trade Insurance Agency (ATI), tells Mining Weekly how it recently assisted mining projects and contractors to mitigate some of these risks.
ATI acting CEO Stewart Kinloch says that the financial crisis has impacted on a large number of investment projects on the continent.”A number of mining projects have been mothballed or slowed down, owing to low commodity prices impacting all of our member states to a greater or lesser degree.”
“Foreign direct investment in Africa is down by 18% in 2009, and restoring confidence in the continent will be critical to reversing that trend,” he says.
In addition, banks tend to be more risk aware during challenging economic times. “Banks are increasingly considering other sources of risk mitigation, even for strong projects,” says Kinloch.
Other concerns include the Democratic Republic of Congo’s (DRC’s) mining review, which has caused some concern in the financial community. Financiers that stood behind some of the mining projects in the DRC have now looked to ATI for support.
Kinloch says that a South African company wishing to invest in a major mining project in the DRC approached ATI to provide it with political risk insurance. The political risk insurance covered the company against three types of perils.
The first is war and insurrection. In the event that the mine was completely destroyed by war, ATI would pay out 100% compensation for the investment.
ATI further covers the company against expropriation, which is in the event of government seizing the mine, and not paying for it or paying for the mine in a currency that is not freely convertible. Kinloch notes that the agency would pay out 100% compensation for such a loss.
The third peril that ATI covers is inconvertibility. “In the event that the loan was to be repaid and the local currency could not be con- verted to dollars, we would pay the company out 100% in dollars, and take the local currency.”
The agency supplied the company with cover using its own balance sheet, as well as reinsurance sourced from Lloyds of London, for this particular transaction. He reports that this transaction was successfully handled and the project is now in its construction phase.
A smaller project covered by ATI in the DRC was related to artisanal miners. Earlier this year, the DRC government announced that it was no longer going to allow the export of unprocessed ore, says Kinloch.
“The problem is that the artisanal miners do not have easy access to smelting facilities. A UK company decided to install a small smelter for this purpose.
“However, to access financing from the UK, they needed political risk insurance, which is why they turned to ATI. ATI provided the insurance for the facility, and the project is now under way. “The project will enable smaller mining entities to smelt and process ore,” he explains.
Further, ATI supplied haulage contractor companies responsible for the transport of the ore with default credit risk insurance.
“ATI had to overcome a number of hurdles to conclude the transactions. For each investment project, an independent environmental study was carried out to ensure that there would be no adverse environmental effects. Also, the agency does not engage in any form of corrupt practices and fraudulent activity.”
Kinloch says that ATI has a mandate to promote and facilitate trade and investments into and from Africa. The agency provides credit and political-risk insurance products to foreign investors and African Business.
To date, ATI has supported over $1,2-billion in trade and investments across Africa in different sectors.
