Extraction's risk factor

An aerial view of the OZ Minerals’ Prominent Hill open pit mine in South Australia. Bloomberg

via CAAI

Friday, 10 September 2010 15:01 Nguon Sovan

THE Kingdom’s mining sector may be evolving but domestic banks as yet have no appetite to lend to the nascent industry, because of high risk levels and environmental considerations.

Mining enterprises in Cambodia are gaining pace, as domestic and international firms – such as Australian giants Oz Minerals and Southern Gold – attempt to tap into the Kingdom’s inventory of mineral resources that include gold, rubies, titanium, oil and gas.

But according to the National Bank of Cambodia’s latest banking supervision report, in 2009 mining and quarrying made up the smallest proportion of credit concentration of any sector, just 0.1 percent nationally. Out of US$2.5 billion lent by banks last year, just $2.5 million went to mining.

In Channy, president and CEO of ACLEDA bank, said that although a number of miners had approached the bank for loans this year, none had been granted.

He said that although ACLEDA lent to all sectors with potential, the bank had to be certain that companies could profit without having an adverse impact on the environment.

“We have enough capital to lend even in mining sector, but firms must comply with the laws. From our stance, protecting environment is important. We also think about the health of our customers first because our portfolio is the customers’ deposits,” he said.

Risk levels were also of prime importance at Canadia bank. Last year, its loans to the mining and quarrying sector were just $600,000 or 0.15 percent of the bank’s total.

Dieter Billmeier, Canadia’s vice president, said that any reputable bank should look careful into a sector before lending, as research is a necessary element for a responsible institution with well-established credit-risk management.

“We are also prudent with environmental issues concerning this sector,” he said.

But how important are domestic loans to the mining sector, which has seen a clutch of global giants enter the Kingdom?

In Channy said that many foreign firms bring capital from their home countries.

Stephen Higgins, CEO of ANZ Royal Bank, said it was more appropriate for them to be funded by equity rather than debt when they are at the ‘extraction’ rather than ‘exploitation’ stage of mining.

ANZ, he said, was one of the leading banks for the resources sector globally but has yes to lend to the Cambodian industry.

While bankers are hesitant to lend to miners operating in Cambodia, which have to date yet to extract anything in the Kingdom, research has suggested that globally lenders attitudes to extraction loans have changed over the course of the financial crisis.

A report from the former chief economist of Rio Tinto, David Humphries, published by the World Bank last year, suggested changing considerations have affected small and mid-size miners in emerging economies.

During the commodity boom of 2003 to 2008, he wrote, the financial position of emerging market miners improved. Most new financing, he reported, was in the form of bank borrowing and bond loans.

“The maturing of a banking systems and stock markets of many emerging markets ... had also been increasing the availability of funding for emerging economies, most notably for smaller and mid-cap [mining] companies” he said.

“Thus, Hong Kong emerged as a significant source of equity finance for mining in Asia.”

However, with the credit crunch that position changed, presenting “additional challenges” for the sector.

“The first and more immediate of these is financial. The flight from risk ... has impacted particularly heavily in emerging markets. For smaller companies, particularly those not yet in production, the sources of funding have pretty much dried up completely.”

But some bankers believe that as understanding of the mining industry improves in Cambodia, financing may also adapt.

Dieter Billmeier said that banks preferred to disperse loans using land titles as collateral. But in the future, banks could use smaller and easier-to-access financial leases, in which a bank buys machinery, warehouses or equipment for a company and leases it back to them – to aid miners.

Officials also hope that links between miners and banks will grow.

Cheam Yeap, chairman of the National Assembly’s commission on economy, banking, finance and audit, said yesterday that banks would play an important role in financing mining companies in the future as mineral exploitation arrives.

“Some banks are partnered with foreign investors, so they would have a lot of possibilities to lend the sector,” he said.

Miners already have a strategy to open credit markets. Cambodian Association of Mining and Exploration Companies president Richard Stanger said miners need the correct licences, to have completed exploration, have a resource base, and conducted bankable and environmental feasibility studies, to access loans.

Even if those steps were taken, he said, many miners would turn to specialist off-shore banks for loans, as “interest rates are very high here”.

That viewpoint was shared by chief executive officer of mining firm United Khmer Group, Chea Chet.

Nevertheless, Cambodia’s extractive industries are still in their infancy and some financiers are looking forward to their development.

Bank of India’s chief executive in Phnom Penh, Ramesh Chandra Baliarsingh, said: “We are very positive in financing the mining sector – if the proposal is bankable.”

But, for the meantime, that seems a big if. ADDITIONAL REPORTING ELLIE DYER