POLITICAL RISK ASSESMENT

ZIMBABWE vs. BHP

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

..3 2.. Potential Areas of Goal Conflict Between BHP and Zimbabwe……………………. Bibliography……………………………………………………………………………. Political Risk Forecast….……...18 2 . Introduction……. Strategies to Reduce Risk Exposure of BHP……….….…………………………………….12 5...…………………………………………………………….………………………………………………………………….17 7.Onur Tanit Index 1.…..... Crisis Management of BHP against Political Unrests……………………………………14 6...7 4. Conclusion……………………………………………………………………………….4 3.

This led in the last years to economic and social isolation of the country. 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.I. Due to its delicate political history and not perfect international relationship. 3 . that includes extraordinary inflation and a priceless currency. and established a multi-currency system. things are getting better due to both. largely liberalized prices and the exchange system. According to the IMF. Zimbabwe has faced in the last few years a tense and violent relationship between the government and opposition. 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. However. we would like to start giving an overview of the key facts in the country’s political history. INTRODUCTION 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. The International Monetary Fund (IMF) is helping as well by assisting the government on economic issues. the government has broadly adhered to cash budgeting. Beyond the economic situation. Before going through the content of this study. achieved a significant improvement in budget revenue.

UK and USA due to a refusal to support the conduct of the governments land redistribution program. II. case of BHP. White owned farms are still being targeted and political prisoners. Moreover. POTENTIAL AREAS OF GOAL CONFLICT BETWEEN BHP AND ZIMBABWE Zimbabwe recently held their last presidential elections in the country. The opposition sees the legislation as little more than an attempt by ruling party officials to exploit Zimbabwe’s political uncertainty by seizing assets. Zimbabwe hopes to obtain internal political reform and economic recovery while rehabilitating country’s status in the world at large. 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. Shortly after the introduction of the Act. 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. Later on a political risks’ forecast will be presented including possible events that a foreign mining company could face in Zimbabwe. the “Mines and Minerals Amendment Bill” (it was not accepted and hence not passed as law). Movement for Democratic Change (T) was appointed Prime Minister. they expect to broaden their relationship with the EU.The first issue to be addressed is the potential areas of goal conflict between BHP and Zimbabwe which includes political. 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. Finally. finance and organizational initiatives from BHP to mitigate all risks presented. In this sense. via this transitional power sharing agreement. After that we will recommend operational strategies such as marketing. fact that made the political outcome very uncertain by June 2008. including several close allies of Morgan Tsvangirai remain incarcerated and power struggles continue. On the other hand. There were rumours that he actually won the previous elections in March 2008. required that the government be granted 25% of the 51% 4 . passed by the parliament in September 2007 which requires black Zimbabweans to hold a 51% stake of foreign-owned businesses. economic and social instability. production. there is an “Indigenization and Empowerment Act” in place.

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.South Africa. 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. foreign investments or import earnings have to be retained in foreign currency accounts with Zimbabwean banks. Almost all of the mining in Zimbabwe is exported to its main export destinations . China.majority shareholding. Though the efforts of the government to improve the economic situation such as export regulations. Zimbabwe still needs to secure external financing of US$10 billion to support the country’s STERP. As part of our analysis.5% of Zimbabwe’s GDP comes from the mining industry. It is expected that the unofficial dollarization and the short-term recovery program will make this year’s GDP grow about 2-3%. Another issue is that. it is important to mention that currently 15. 5 . Zambia and Japan. sign of good relationship. Even though the Real GDP growth has been declining since 1999. though it has already received a US$950 million loan facility from China. proof of the political instability which the country faced and is still facing in rather less impact. 12-month short-term emergency recovery program (STERP) and the important sources of foreign exchange earnings in mining. For instance. we have observed certain economic factors as a particular concern for BHP. there are still some issues to consider.

Zimbabwe and HIS Global Insight Inc. Lastly. However.Source: AXCO 2009. There appears little likelihood of any imminent recovery given concerns over governance. A hedging against falling platinum prices would be the best recommendation. the rule of law. 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. supply and demand were matched in 2006. Although the current trend and future prices are being commercialized at around USD 1400/ounces. by taking a short hedge and locking future selling price for the production. holding more than 25% of the farmland in Zimbabwe. world platinum demand created by the growth of developing countries has exceeded world supply. Only 1% of the population is white. escalating HIV/Aids pandemic and severe food shortages in some areas. (Country Intelligence) The production of platinum continues to rise. with an 8% rise anticipated for 2007. human rights and poverty 6 . mining generates a significant proportion of export revenues. In total. the economic decline in the near past has had serious social consequences such as high rates of unemployment (currently over 80%). the instability of the social aspect in Zimbabwe is a major player in our analysis in terms of Human Capital. BHP cannot be hostage of its variation and should use financial instruments to avoid such a risk. Insurance Market Report. Besides.

on the African continent. Zimbabwe has also stated its intent to re-nationalise mines. 7 . cash flow issues Research & development Information systems Regulatory environment Supply chain Business interruption Political Violence/ Terrorism Hazards Risks Operational Risks III. As a result of all these concerns. 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. Hereon below. This is particularly true for emerging markets in Zimbabwe where risk can often be seen as an investment constraint. Financial Risks External Factors Financial market risks Credit default Currency/FX Fluctuations Inconvertibility Property damage General liability/ legal risks Natural disasters Strategic Risks Customer/ industry changes Market demand Expropriation Internal Factors Liquidity. Besides. Somalia. POLITICAL RISK FORECAST According to World Economic Forum Global Risk Report 2009. confidence. political risk forecast of the country are shown in numbers on the below graphs. General risk profile of Zimbabwe and specifically. discouraging on investments as well as promoting capital flight and emigration have severely been damaged in Zimbabwe.rights. there is a potential risk identification map for BHP’s investments in Zimbabwe. political risk is expected to pose a considerably threat to trade and investments over the next years.

General Risk Profile of Zimbabwe. As an important industry in Zimbabwe. currency restrictions that block the transfer of funds. Source: Global Insight 2009 Country Risk Ratings Pursuing business opportunities in Zimbabwe can be extremely rewarding. prohibitive tax increases that target foreignowned businesses. 8 . Source: Global Insight 2009 Country Risk Ratings Political Risk Forecast of Zimbabwe. forced sale or abandonment of investments. and political sensitivity of natural resources in Zimbabwe make mining operations vulnerable to two categories of risk: acts of a government and political violence. relative inability to withdraw quickly from a troubled situation. The political environment is a constant change and potentially harmful to business operations. mining has historically been exposed to political pressures and instability.  Acts of a government includes: seizure of assets where a series of steps eventually deprive investors of the benefit in their investment. frustration of contracts or lease agreements with international buyers and suppliers. Significant start-up costs. but it comes with an added element of risk from the potential political and economic instability. and absence of an adequate dispute resolution procedure or forum. default on payment obligations.

2008 9 . Political and Economic Risk Ratings of Zimbabwe. 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. Nowadays. and civil commotion. 2009 In additionally. Source: MARSH Political Risk Report. Source: JLT World Risk Review. These kind of political risks have a direct impact on financing options and on the balance sheet of the company when a loss occurs. Potential Political Risk Issues of Zimbabwe. Political violence that halts production or causes damage to equipment includes: civil war. terrorism and sabotage. riots. potential political risk factors that BHP could face in Zimbabwe are stated on below chart. and strikes. revolution and rebellion.

war. BHP could experience fewer cases of expropriation.term contractual exposures with both private and government obligors. 26% cancelled existing investments. 10 . Besides. Expectedly. Also. economic stability (each 57%). 65% have cancelled planned investments because of political risk. and terrorist threats and incidents at a nickel mine in Indonesia in 2004. terrorism. On summary. through a way of all these examples. changes in policy.and long. BHP has to be aware of the possible political threats in Zimbabwe and manage the potential risks as an important tool to mitigate short-.The past several years have been punctuated by a series of high-profile political risk events in mining. several governments in resource-rich countries have made statements indicating they expect to receive a larger share of the benefits from rising commodity prices. import/export licence rules or currency restrictions in the beginning phase of its mining investment. legal and regulatory risk (each 55%). medium. government payment default. Among them: the forced abandonment of a precious metal mine in the Solomon Islands in 2000. Political risk is a very significant in context of operations: stability of political regime (60%). failure to honour contracts. Suppliers of mining equipment and services face the same array of risks. the loss of a gold mine in Colombia due to threats from insurgents in 2001. bribery and corruption (58%). fewer than half perform ongoing risk assessment. major social unrest (each 43%). business leaders concern to prevent companies from investment opportunities like.

BHP’sRisk Map – Mininginvestment in Z imbabwe Risk 1. 6. Default of an arbitration award obtained under the terms and conditions of a project agreement. strik sabotage es. H h ig 5. Trendof probabilityand severityoncost Trend Analısys: Rısks related to the polıtıcal reduced due to the ınternantıonal colaborat 11 . Regulatory and Legal Adverse or discriminatory legal or regulatorydecisions. Actsby the host government which interfere in fundamental ownership rightsof the investors. and terrorism. 8. 7. H h ig 9 n s o co t 7 4 8 2 1 4. 9. revolution. Environmental Past and ongoing activitiesin mining areasthat results in pollution and legal issues(license to operate). S overignCredit Government defaut on its payments or deliveryobligations. Breachof Contract ExplosureDrivers Losscaused by political violence such as war. CurrencyInconvertibility Delayor inabilityof a foreign enterprise to exchange local currency or to repatriate funds. Business operations interrupted by politivcal violence. Forcedabondonment Host government forcesinvestors to leave thecountry byeither legal or extreme actions. Political Violence 2. Nationalisation 3. Business Interruption r v e S y t i 5 6 3 L ow P ab rob ility Estimatedprobable maximumlossfor an identifiedRisk.

(east of Bulawayo) and in the south-west of Harare (the north of Ngezi). STRATEGIES TO REDUCE RISK EXPOSURE OF BHP a) ORGANIZATIONAL STRATEGIES 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.IV. Regarding BHP’s failed investment in 1999 (Hartley Platinum Mine). 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 viable. (Anglo and Implats) In general. It hosts the most efficient mines (Mimosa and Zimplats) which are operated by the biggest platinum producers in the world. loss of reserves and unacceptable dilution of the ore compared to the original feasibility study. unstable ground conditions in the mine caused safety problems. Therefore. the platinum mines are in the southern part of the Great Dyke. .

the government agrees that foreign investments should be attracted due to the development of economic situation. Good Relationship with Government: In order to run a successful and secure business in Zimbabwe.g. 13 . corruption is an issue against law that has to be considered by a foreign investor. BHP has to make an agreement with the government like Impala Platinum Holdings did. Most probably. Corruption generates economic distortions in the public sector by diverting public investment into capital projects. 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.Hiring Policies: Zimbabwe has one of the highest unemployment rates in the world. Zimbabwe’s fixed and unsound foreign exchange rate policy aids corruption and in turn feeds the hyperinflation. On the other hand. • To set up an effective relationship with platinum processor countries Social Responsibility: • To donate schools in Zimbabwe. Hopefully. • To support training programs about health issues. hiring these people could affect the company seriously because they are uneducated and don’t have sufficient skills about mining. BHP must create a “training programme” for employees as well as the local communities which will require budgeting in the financial forecasts. Therefore. According to their “Mineral Resource and Mineral Reserve Statement 2009”. setting up multiple plants to spread risk) Audit by third-party consultants and create the worst case scenario plan b) MARKETING STRATEGIES Potential Markets: • To make an arrangement with developed countries in advance to be put in place once the unity government works properly. 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.

which can affect the company’s costs and liquidity. 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. observe the government’s monetary policy closely. invest the money outside Zimbabwe. (marketing by government) b) Non-dollarization: In case they put in the market ZWD again. d) PRODUCTION STRATEGIES Electricity: In order to prevent shortfalls in production due to electricity shortages. • To support the governmental acts about environmental protection. there must be substitute machines and an efficient maintenance process for each machine. 14 • . the company can buy commodity contracts to hedge its future earnings. Business Interruption: To provide the permanence of the business. create contracts with the state owned “Electricity Company” based on the forecasted usage of MgW. This is to establish a fair value by taking a short hedge with the government. Hyperinflation: To prevent the risk of hyperinflation in Zimbabwean RAD. Platinum Prices: In case of increasing platinum prices in the world. Insurance: Agree on a tailor made insurance programme which covers all potential risk about the business and interruption of the business. then an agreement to sell the ore at an agreed exchange rate (ie. Environmental Projects: • To reforest the agricultural areas damaged during the last years. USD) to their main importers must be put in place with Zimbabwean government. ZWD vs. c) FINANCE STRATEGIES 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. Foreign Exchange Rate: a) Dollarization: If the unofficial dollarization remains in the country. for instance wind farms and/or solar energy. Not to mention the operating expenses will have to be paid in ZWD. Workers’ Health & Welfare: • To have workers’ compensation and health insurance policies.To be the sponsor of some food donation programmes. Use of green energy would be another alternative. Latest Technology: Use machines with the latest technology in order to compete to rivals. Interest Rates: To prevent high fluctuations.

both internal and external. organisational needs and emerging risks. and working with the Product Risk and Supply Chain practices. including war. To construct mass housing for employees which includes full service such as entertainment. civil strike.24/7 expert guidance and support to manage corporate response. or sabotage. reputation. A structured crisis response programme for BHP should have three primary phases: Before an Event • Review your company’s crisis readiness . 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. However. terrorism. etc. expropriatory actions. business interruption. property. damage to or abandonment of assets resulting from politically motivated violence. After an Event • Have a post-incident review . • Establish crisis management structure and protocols . V. as a basic beginning point. and currency inconvertibility. while protecting brand and reputation. As a foreign investor. deploy and enhance reputational risk.analyse the current capabilities. To build emergency centre in the mining area or coordinate with clinics around. CRISIS MANAGEMENT OF BHP AGAINST POLITICAL UNRESTS 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.how have you performed in the crisis? What are the stakeholders saying? • Repair and recover . crisis management and strategic communications programs around a broad set of contingencies During an Event • Set up real-time crisis support .• • • • To create a secure working area.design. economic viability. “Political Risk Insurance” policy can be specifically tailored to address many specific risks that characterized the country granting the concession.rebuild and strengthen relationships with stakeholders. civil war. 15 . shopping. To train employees about the safety issues and epidemic diseases like HIV/AIDS. brand identity and consumer trust. the environment.

a possible solution is to develop a self-insurance scheme among mining companies. Riots and Civil Commotions Worst Case Solution M onitor the political development of Zimbabwe and be ready to shut-down and/ or hold on the operations Prepare an Emergency Plan against terrorist attacks Keep good relationship with the workers and/ or community Nationalization / Breach of Actively manage the relationship with the contract / Forced Nullification of licenses Unity Government Abandonment Break down of key pieces of machinary. some alternative solutions could be concerned as an addition to single insurance program.Lastly. Other mines would benefit increased profitability as a result and would pay the affected mine a percentage of such increases to cover losses. then the shortfall in platinum output may result in increased prices. For instance. Crisis Plan for BHP s Main Risks in Zimbabwe Risk War Political Violence Terrorism Strikes. if one major local mine suffers a disaster and is out of action. As another alternative. Business Interruption Contingency plan for substitution of parts plant and/ or equipment Currency inconvertibility Introduction of Zimbabwean RAD again Invest earnings overseas Proactive attitute towards environmental Systemic air and soil pollution Environmental Risk issues Loss of reputation Create an environmental crisis plan 16 . all mining companies would agree to support a common fund in Zimbabwe to cover future potential losses.

CONCLUSION According to our entire risk assessment the general result is Zimbabwe. BHP could be more involved in the agriculture industry’s problems and help the NGO’s or community to rescue the inefficient lands. in order to have a good reputation as a citizen in Zimbabwe. 17 . 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. 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. there are power shortages.000 ounces) despite the political and economic crisis and the difficult but challenging operating environment. is forecast to lift platinum output this year (expected rise 10.VI. In long term. Although. low levels of productivity and substantial surplus for export. Moreover. 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. 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. promised improvements on mining act and the unity government’s stability have been planning to effectuate in order to attract new foreign investors. agriculture was being the backbone of Zimbabwe’s economy and major foreign exchange earner. Therefore. Albeit. Anglo and Aquarius are expanding their operations in the country. a lack of enough skilled labour and high costs of inputs. which has the second largest reserves of platinum. Zimbabwe’s leading foreign mining investors such as Impala. Zimbabwe’s platinum sector is seen as a “Blue Sky Opportunity”. Therefore.

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