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Project Group:
Eduardo Carvalho
Irem Yerdelen
Jose Manuel Mariategui-Salazar
Onur Tanit

1. Introduction…….......…………………………………………………………………..….3

2. Potential Areas of Goal Conflict Between BHP and Zimbabwe…………………….…….4

3. Political Risk Forecast…..…………………………………………………………….…...7

4. Strategies to Reduce Risk Exposure of BHP……….…………………………………….12

5. Crisis Management of BHP against Political Unrests……………………………………14

6. Conclusion………………………………………………………………………………..17

7. Bibliography……………………………………………………………………………...18


This paper has the main purpose to give the board of executives of BHP insights and
detailed knowledge about the main aspects concerning potential political risks of investing in a
mining project in Zimbabwe. Due to its delicate political history and not perfect international
relationship, any decision in starting commercial talks with Zimbabwe need to be deeply stressed
in the way of finding possible risky outcomes that could derail the investment.

Before going through the content of this study, we would like to start giving an overview of
the key facts in the country’s political history. Beyond the economic situation, that includes
extraordinary inflation and a priceless currency, Zimbabwe has faced in the last few years a tense
and violent relationship between the government and opposition. This led in the last years to
economic and social isolation of the country. However, things are getting better due to both, the
efforts of South Africa to bring a peace agreement and cooperation between the leaders of
Zimbabwe and a power-sharing deal is in place even though it’s not fully implemented. The
International Monetary Fund (IMF) is helping as well by assisting the government on economic
issues. According to the IMF, the government has broadly adhered to cash budgeting, achieved a
significant improvement in budget revenue, and established a multi-currency system, largely
liberalized prices and the exchange system.

The first issue to be addressed is the potential areas of goal conflict between BHP and
Zimbabwe which includes political, economic and social instability. Later on a political risks’
forecast will be presented including possible events that a foreign mining company could face in
Zimbabwe. After that we will recommend operational strategies such as marketing, production,
finance and organizational initiatives from BHP to mitigate all risks presented. Finally, a crisis
plan is presented which contains not only an exit plan but also contingency decisions to avoid
business interruption and other further consequences following an event.


Zimbabwe recently held their last presidential elections in the country, fact that made the
political outcome very uncertain by June 2008. A power sharing agreement was put in place in
order to reduce this uncertainty by September of the same year and hence Morgan Tsvangirai
from the opposition party, Movement for Democratic Change (T) was appointed Prime Minister.
There are serious concerns over ZANU-PF’s (President Robert Mugabe’s Official Party:
Zimbabwe African National Union Patriotic Front) commitment to the power sharing agreement.

White owned farms are still being targeted and political prisoners, including several close
allies of Morgan Tsvangirai remain incarcerated and power struggles continue. There were
rumours that he actually won the previous elections in March 2008. Moreover, via this
transitional power sharing agreement, Zimbabwe hopes to obtain internal political reform and
economic recovery while rehabilitating country’s status in the world at large. In this sense, they
expect to broaden their relationship with the EU, UK and USA due to a refusal to support the
conduct of the governments land redistribution program.

On the other hand, there is an “Indigenization and Empowerment Act” in place, passed by
the parliament in September 2007 which requires black Zimbabweans to hold a 51% stake of
foreign-owned businesses, case of BHP. The opposition sees the legislation as little more than an
attempt by ruling party officials to exploit Zimbabwe’s political uncertainty by seizing assets.
Shortly after the introduction of the Act, the “Mines and Minerals Amendment Bill” (it was not
accepted and hence not passed as law), required that the government be granted 25% of the 51%

majority shareholding; proof of the political instability which the country faced and is still facing
in rather less impact. This issue in particular can be one of great influence for BHP to go ahead
with their intention of investing in a platinum mining company in the country.

As part of our analysis, we have observed certain economic factors as a particular concern
for BHP. Though the efforts of the government to improve the economic situation such as
export regulations, 12-month short-term emergency recovery program (STERP) and the
important sources of foreign exchange earnings in mining, there are still some issues to consider.
For instance, Zimbabwe still needs to secure external financing of US$10 billion to support the
country’s STERP, though it has already received a US$950 million loan facility from China, sign
of good relationship. Another issue is that, foreign investments or import earnings have to be
retained in foreign currency accounts with Zimbabwean banks. The holders of corporate foreign
currency accounts are obliged by the Reserve Bank to sell 32% of the funds held in these
accounts at the official rate to their bankers.

Even though the Real GDP growth has been declining since 1999, it is important to mention
that currently 15.5% of Zimbabwe’s GDP comes from the mining industry. Almost all of the
mining in Zimbabwe is exported to its main export destinations - South Africa, China, Zambia
and Japan. It is expected that the unofficial dollarization and the short-term recovery program
will make this year’s GDP grow about 2-3%.

Source: AXCO 2009, Insurance Market Report, Zimbabwe and HIS Global Insight Inc. (Country Intelligence)
The production of platinum continues to rise, with an 8% rise anticipated for 2007. In total,
mining generates a significant proportion of export revenues, due to the export regulation which
allows the minerals extracted to be exported and create profit in the foreign exchange markets.
The graph below shows the uptrend of platinum price since 1995 and its standard deviation
through the years. During the past 10 years, world platinum demand created by the growth of
developing countries has exceeded world supply. However, supply and demand were matched in

Although the current trend and future prices are being commercialized at around USD
1400/ounces, BHP cannot be hostage of its variation and should use financial instruments to
avoid such a risk. A hedging against falling platinum prices would be the best recommendation,
by taking a short hedge and locking future selling price for the production.

Lastly, the instability of the social aspect in Zimbabwe is a major player in our analysis in
terms of Human Capital. Only 1% of the population is white, holding more than 25% of the
farmland in Zimbabwe. Besides, the economic decline in the near past has had serious social
consequences such as high rates of unemployment (currently over 80%), escalating HIV/Aids
pandemic and severe food shortages in some areas. There appears little likelihood of any
imminent recovery given concerns over governance, the rule of law, human rights and poverty
As a result of all these concerns; confidence, discouraging on investments as well as
promoting capital flight and emigration have severely been damaged in Zimbabwe. Hereon
below, there is a potential risk identification map for BHP’s investments in Zimbabwe.

Financial Risks Strategic Risks

External Factors
Financial market risks Customer/ industry
Credit default
Currency/FX Market demand
Internal Factors
Research & Expropriation
Inconvertibility Liquidity, cash development
flow issues

Property damage Information Regulatory

General liability/ systems environment
legal risks

Natural disasters Supply chain

Business interruption

Political Violence/ Terrorism

Hazards Risks Operational Risks


According to World Economic Forum Global Risk Report 2009, on the African continent,
Somalia, Sudan and Zimbabwe have the unenviable distinction of being the states “most at risk of
failure” as they fill the top three positions of Foreign Policy’s Failed States Index. Zimbabwe has
also stated its intent to re-nationalise mines. Besides, political risk is expected to pose a
considerably threat to trade and investments over the next years. This is particularly true for
emerging markets in Zimbabwe where risk can often be seen as an investment constraint. General
risk profile of Zimbabwe and specifically, political risk forecast of the country are shown in
numbers on the below graphs.

General Risk Profile of Zimbabwe; Source: Global Insight 2009 Country Risk Ratings

Political Risk Forecast of Zimbabwe; Source: Global Insight 2009 Country Risk Ratings

Pursuing business opportunities in Zimbabwe can be extremely rewarding, but it comes with
an added element of risk from the potential political and economic instability. The political
environment is a constant change and potentially harmful to business operations. As an important
industry in Zimbabwe, mining has historically been exposed to political pressures and instability.
Significant start-up costs, relative inability to withdraw quickly from a troubled situation, and
political sensitivity of natural resources in Zimbabwe make mining operations vulnerable to two
categories of risk: acts of a government and political violence.
 Acts of a government includes: seizure of assets where a series of steps eventually deprive
investors of the benefit in their investment; prohibitive tax increases that target foreign-
owned businesses; forced sale or abandonment of investments; default on payment
obligations; currency restrictions that block the transfer of funds; frustration of contracts
or lease agreements with international buyers and suppliers; and absence of an adequate
dispute resolution procedure or forum.
 Political violence that halts production or causes damage to equipment includes: civil war;
terrorism and sabotage; revolution and rebellion; and strikes, riots, and civil commotion.
These kind of political risks have a direct impact on financing options and on the balance
sheet of the company when a loss occurs.

Political and Economic Risk Ratings of Zimbabwe; Source: JLT World Risk Review, 2009

In additionally, potential political risk factors that BHP could face in Zimbabwe are stated
on below chart. Nowadays, foreign investors are increasingly aware of the need to integrate
political risk insurance as a vital risk management component to facilitate and protect their
investments on Zimbabwe.

Potential Political Risk Issues of Zimbabwe; Source: MARSH Political Risk Report, 2008

The past several years have been punctuated by a series of high-profile political risk
events in mining. Among them: the forced abandonment of a precious metal mine in the Solomon
Islands in 2000, the loss of a gold mine in Colombia due to threats from insurgents in 2001, and
terrorist threats and incidents at a nickel mine in Indonesia in 2004. Besides, several governments
in resource-rich countries have made statements indicating they expect to receive a larger share
of the benefits from rising commodity prices. Suppliers of mining equipment and services face
the same array of risks.

Also, business leaders concern to prevent companies from investment opportunities like;
65% have cancelled planned investments because of political risk; 26% cancelled existing
investments, fewer than half perform ongoing risk assessment. Political risk is a very significant
in context of operations: stability of political regime (60%), bribery and corruption (58%),
changes in policy; economic stability (each 57%), failure to honour contracts; legal and
regulatory risk (each 55%), terrorism, war, major social unrest (each 43%).

On summary, through a way of all these examples, BHP has to be aware of the possible
political threats in Zimbabwe and manage the potential risks as an important tool to mitigate
short-, medium- and long- term contractual exposures with both private and government obligors.
Expectedly, BHP could experience fewer cases of expropriation, government payment default,
import/export licence rules or currency restrictions in the beginning phase of its mining

BHP’sRisk Map – Mininginvestment in Zimbabwe

Risk ExplosureDrivers
1. Political Violence Losscaused by political violence such
as war, revolution, strikes, sabotage
and terrorism.

2. Nationalisation Actsby the host government which

High interfere in fundamental ownership
rightsof the investors.
3. Breachof Contract Default of an arbitration award
obtained under the terms and
9 7 1 conditions of a project agreement.
4 4. Business Interruption
Business operations interrupted by
n co

politivcal violence.

5. CurrencyInconvertibility Delayor inabilityof a foreign

enterprise to exchange local currency

or to repatriate funds.
2 6. Environmental
5 3 Past and ongoing activitiesin mining

areasthat results in pollution and


legal issues(license to operate).

6 7. Forcedabondonment
Host government forcesinvestors to
leave thecountry byeither legal or
extreme actions.
8. Regulatory and Legal
Adverse or discriminatory legal or
9. SoverignCredit
Government defaut on its payments
Low Probability High or deliveryobligations.

Estimatedprobable maximumlossfor an identifiedRisk. Trendof probabilityand severityoncost

Trend Analısys: Rısks related to the polıtıcal

reduced due to the ınternantıonal colaborat


Best Place for Mining: The Great Dyke that bisects Zimbabwe in a north-south direction has a
length of about 550kilometres and this place is considered as the best place for platinum mining
by expert geologists. It hosts the most efficient mines (Mimosa and Zimplats) which are operated
by the biggest platinum producers in the world. (Anglo and Implats) In general, the platinum
mines are in the southern part of the Great Dyke, (east of Bulawayo) and in the south-west of
Harare (the north of Ngezi).

Regarding BHP’s failed investment in 1999 (Hartley Platinum Mine), unstable ground conditions
in the mine caused safety problems, loss of reserves and unacceptable dilution of the ore
compared to the original feasibility study. Therefore, it is important to start with a good analysis
phase of the soil as long as the geological studies proved that the Grate Dyke is commercially
Hiring Policies: Zimbabwe has one of the highest unemployment rates in the world. Most
probably, hiring these people could affect the company seriously because they are uneducated
and don’t have sufficient skills about mining. Therefore, BHP must create a “training
programme” for employees as well as the local communities which will require budgeting in the
financial forecasts.

Good Relationship with Government: In order to run a successful and secure business in
Zimbabwe, BHP has to make an agreement with the government like Impala Platinum Holdings
did. According to their “Mineral Resource and Mineral Reserve Statement 2009”, a portion of
land was released to the Zimbabwean government in exchange for a combination of cash and
empowerment credits and a guarantee that all remaining claims for land retained for long term
expansion be incorporated into the special mining leases that apply to Zimplats’ current
operations. Hopefully, the government agrees that foreign investments should be attracted due to
the development of economic situation.

On the other hand, corruption is an issue against law that has to be considered by a foreign
investor. Corruption generates economic distortions in the public sector by diverting public
investment into capital projects. Zimbabwe’s fixed and unsound foreign exchange rate policy aids
corruption and in turn feeds the hyperinflation.

Other operational strategies are:

• Be aware of latest political and economic risk factors of Zimbabwe
• Engage local communities and non-governmental organizations
• Operational hedging (e.g. setting up multiple plants to spread risk)
• Audit by third-party consultants and create the worst case scenario plan


Potential Markets:
• To make an arrangement with developed countries in advance to be put in place
once the unity government works properly.
• To set up an effective relationship with platinum processor countries

Social Responsibility:
• To donate schools in Zimbabwe.
• To support training programs about health issues.
• To be the sponsor of some food donation programmes.
Environmental Projects:
• To reforest the agricultural areas damaged during the last years.
• To support the governmental acts about environmental protection.


Capital: Be aware of the impossibility on borrowing credit from Zimbabwean banks and be ready
to even self funding the investment or have a partnership with local companies.

Platinum Prices: In case of increasing platinum prices in the world, the company can buy
commodity contracts to hedge its future earnings.

Foreign Exchange Rate:

a) Dollarization: If the unofficial dollarization remains in the country, then an agreement to
sell the ore at an agreed exchange rate (ie. ZWD vs. USD) to their main importers must be
put in place with Zimbabwean government. This is to establish a fair value by taking a
short hedge with the government. (marketing by government)
b) Non-dollarization: In case they put in the market ZWD again, a “not to hedge” strategy
would be ideal because of the high volatility (ZWD is expected to strengthen against
USD) which will be of benefit in the sale of platinum ore. Not to mention the operating
expenses will have to be paid in ZWD.

Hyperinflation: To prevent the risk of hyperinflation in Zimbabwean RAD, observe the

government’s monetary policy closely.

Interest Rates: To prevent high fluctuations, which can affect the company’s costs and liquidity,
invest the money outside Zimbabwe.

Insurance: Agree on a tailor made insurance programme which covers all potential risk about the
business and interruption of the business.


Electricity: In order to prevent shortfalls in production due to electricity shortages, create

contracts with the state owned “Electricity Company” based on the forecasted usage of MgW.
Use of green energy would be another alternative, for instance wind farms and/or solar energy.

Latest Technology: Use machines with the latest technology in order to compete to rivals.

Business Interruption: To provide the permanence of the business, there must be substitute
machines and an efficient maintenance process for each machine.

Workers’ Health & Welfare:

• To have workers’ compensation and health insurance policies.
• To create a secure working area.
• To build emergency centre in the mining area or coordinate with clinics around.
• To train employees about the safety issues and epidemic diseases like HIV/AIDS.
• To construct mass housing for employees which includes full service such as
entertainment, shopping, etc.


There are number of risk management and insurance solutions available to protect your
business against terrorism and political violence. Your crisis response and insurance programs
ensure you sufficiently to mitigate these risks. As a foreign investor, BHP needs to know
“Business Continuity Management” and “Crisis Management” which are crucial elements with
the primary objective of providing the shortest recovery time possible to stabilise and protect life,
property, the environment, reputation, economic viability, brand identity and consumer trust. A
structured crisis response programme for BHP should have three primary phases:

Before an Event
• Review your company’s crisis readiness - analyse the current capabilities, organisational
needs and emerging risks, both internal and external.
• Establish crisis management structure and protocols - design, deploy and enhance
reputational risk, crisis management and strategic communications programs around a
broad set of contingencies

During an Event
• Set up real-time crisis support - 24/7 expert guidance and support to manage corporate
response, while protecting brand and reputation, and working with the Product Risk and
Supply Chain practices.

After an Event
• Have a post-incident review - how have you performed in the crisis? What are the
stakeholders saying?
• Repair and recover - rebuild and strengthen relationships with stakeholders.

However, as a basic beginning point, “Political Risk Insurance” policy can be specifically
tailored to address many specific risks that characterized the country granting the concession;
expropriatory actions; damage to or abandonment of assets resulting from politically motivated
violence, including war, civil war, civil strike, terrorism, or sabotage; business interruption; and
currency inconvertibility.
Lastly, some alternative solutions could be concerned as an addition to single insurance
program. For instance, a possible solution is to develop a self-insurance scheme among mining
companies; if one major local mine suffers a disaster and is out of action, then the shortfall in
platinum output may result in increased prices. Other mines would benefit increased profitability
as a result and would pay the affected mine a percentage of such increases to cover losses. As
another alternative, all mining companies would agree to support a common fund in Zimbabwe to
cover future potential losses.

Crisis Plan for BHP s Main Risks in Zimbabwe

Risk Worst Case Solution

M onitor the political development of
War Zimbabwe and be ready to shut-down and/ or
hold on the operations
Political Violence Prepare an Emergency Plan against terrorist
Keep good relationship with the workers
Strikes, Riots and Civil Commotions
and/ or community
Nationalization / Breach of
Actively manage the relationship with the
contract / Forced Nullification of licenses
Unity Government
Break down of key pieces of machinary,
Business Interruption Contingency plan for substitution of parts
plant and/ or equipment
Currency inconvertibilityIntroduction of Zimbabwean RAD againInvest earnings overseas
Proactive attitute towards environmental
Systemic air and soil pollution
Environmental Risk issues
Loss of reputation Create an environmental crisis plan


According to our entire risk assessment the general result is Zimbabwe, which has the
second largest reserves of platinum, is forecast to lift platinum output this year (expected rise
10.000 ounces) despite the political and economic crisis and the difficult but challenging
operating environment. Although, there are power shortages, a lack of enough skilled labour and
high costs of inputs, Zimbabwe’s platinum sector is seen as a “Blue Sky Opportunity”.
Zimbabwe’s leading foreign mining investors such as Impala, Anglo and Aquarius are expanding
their operations in the country.

Government knows that Zimbabwe is an alternative to South Africa with its important
geological platinum formation and a developed mining industry could be an exit for suffering
Zimbabweans. Therefore, promised improvements on mining act and the unity government’s
stability have been planning to effectuate in order to attract new foreign investors.

In long term, expanding BHP’s production into the agriculture in Zimbabwe would not be
an efficient investment since the industry has been having some rough times with land
confiscations, low levels of productivity and substantial surplus for export. Albeit, agriculture
was being the backbone of Zimbabwe’s economy and major foreign exchange earner, white
farmers were ordered off their land by the government and all this have contributed to massive
food shortages and imminent starvation for thousands of Zimbabweans. Moreover, the fact of
increasing floods and bushfires in the wet and dry season should be considered respectively the
drastic climate warming going on in the world. Therefore, in order to have a good reputation as a
citizen in Zimbabwe, BHP could be more involved in the agriculture industry’s problems and
help the NGO’s or community to rescue the inefficient lands.


Briefings, Journals and Magazines:

AXCO, 2009, Insurance Market Report, Zimbabwe: Non-Life (P&C).

Hiscox, July 2008, War, Terror and Political Violence Briefing.

Marsh, 1Q 2009, Political Risk Briefing.

AON, 2009, Political Risk Map.

World Economic Forum, 2009, Global Risk Report 2009.

Jardine Lloyd Thompson – JLT, November 2009, World Risk Review.

Internet Resources:

Zimbabwe, Wikipedia – The free encyclopedia.


BHP Billiton, Wikipedia – The free encyclopedia.


Investors & Media – News 1999 “Sale of BHP’s Platinum Interests in Zimbabwe”, BHP Billiton.

BHP Billiton Annual Report 2008, BHP Billiton.


BHP Billiton Annual Report 2009, BHP Billiton.


Anglo American Financial Reports – Investors, Anglo American.


Implats Financial Results – Investor & Media, Implats – Distinctly Platinum.


Risk Management, Implats – Risk Management (.pdf).


Zimbabwe hosts the second largest platinum reserves,PR-Inside.


Mining, Metals and Minerals, Marsh.
Marsh Political Risks, Marsh.

Marsh Political Risk Issues for Contracts Overseas, Marsh.


CIA, The World Factbook – Zimbabwe, Central Intelligence Agency – CIA.


Crisis Zimbabwe, Crisis Zimbabwe.


Platinum Futures Trading Basics, The Option Guide.


World Economic Outlook, International Monetary Fund – IMF.



IHS Global Insight: Zimbabwe (Country Intelligence)


Thomson Reuters.
Precious Metals and Minerals, Reuters.
Investing News, Reuters.
Basic Materials Sector, Reuters.