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THE ANTAMINA COPPER-ZINC PROJECT: POLITICAL RISK INSURANCE Professor Stephen Sapp prepared this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2002, Ivey Management Services Version: (A) 2005-09-19 INTRODUCTION It was July 15, 1998, and the finance committee of Compañía Minera Antamina S.A. (CMA) had just finished hearing a presentation of the engineering consultants’ ore reserve report on CMA’s proposed mining project, Antamina, in north central Peru. The report had been commissioned by CMA to provide an external assessment of the size and quality of the copper and zinc deposit at this site. The report confirmed what their own engineers had reported earlier: the ore reserve was very large and the grades were relatively high. This report provided the final piece required before the committee could formally start raising the capital necessary to develop and exploit the site. Based on the initial feasibility study, it was believed that the cost of developing the site, constructing the processing facilities and building the infrastructure necessary to transport and ship the mineral concentrates to be produced from the ore would be in the neighbourhood of US$2.3 billion. The operating cost per pound of copper was projected to be about US$0.35. This would place it among the lowest cost producers in the world. As a result of this cost advantage, CMA was eager to start work on the site. The finance committee needed to carefully consider the best way to raise the necessary capital at an acceptable cost. If the funding could not be attracted and

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development started quickly, CMA would have to return the development rights for the site to the Peruvian government or risk substantial penalties. From past experience in developing mining projects of this magnitude, the committee knew that 30 per cent to 40 per cent of the cost of the project would have to be raised in the form of equity from the corporate sponsors and/or subordinated debt, with the remaining cost raised through senior debt. The finance committee was considering two alternatives for raising the necessary senior debt: 1) raising the debt with the sponsors fully guaranteeing the loans, and 2) use debt financing principally secured by CMA’s assets and cash flow (i.e., project financing). Both alternatives obviously had their advantages and disadvantages. Talking to the possible investors, it was clear that the conditions on the project financing loans would be more restrictive and at higher interest rates than those on loans guaranteed by the sponsors. These added conditions and costs were the result of the risks faced by the lenders being exposed to only CMA without the financial support of the sponsors post-construction. By using project financing, the sponsors would assume many of the risks related to completion of the construction, but the lenders would take on the post-construction risk. The most serious of the post-construction risks was the business risk resulting from the highly volatile copper and zinc markets and the technical and environmental risks of such a large project in such an environmentally delicate area, as well as the political risks from doing business in an emerging market with a history of political and social unrest, such as Peru. Exposure to these risks would naturally influence the value of the sponsors’ equity stake as well as the interest rates required on the loans. To understand the magnitude of these risks and their impact on CMA and its sponsors, the finance committee had to develop background material on all aspects of this project. This would allow them to determine what financing alternatives would provide a reasonable return for the sponsors at an acceptable level of risk. PERU Political Situation As the birthplace of the Inca Empire, Peru was one of the most important centres of pre-Hispanic civilization in the Americas. Drawn by the rumors of great wealth, the first Spanish soldiers arrived in Peru in 1532, and swiftly conquered the Incas. Peru officially declared its independence from Spain on July 28, 1821. The Peruvian governments had generally been democratic, but in the 1970s, a military dictatorship ousted the elected president and nationalized many foreign-owned mining and energy companies.

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In 1980 democracy returned to Peru, but a world recession, the foreign debt crisis and climatic disaster marred the initial attempts to reform. These problems set the stage for Alan Garcia Perez to take power in 1985. His economic policies initially generated high GDP growth and a sharp increase in purchasing power, but this was short-lived. Economic mismanagement led to hyperinflation and widespread strikes through the late 1980s. Maoist and Marxist terrorist groups were rampant, killing thousands of people and disrupting the country by bombing infrastructure. By 1990 Peru was on the verge of economic and social collapse. The elections in 1990 gave power to the relatively unknown Alberto Fujimori. Although Fujimori had neither a party nor a formal program, he ran under the platform of hard work, honesty and technology. Gradually he developed a system that concentrated on delivering tangible results. For a time, his popularity remained high because he provided results. He has been credited with controlling inflation and the terrorist movements that had previously plagued Peru. Not even the “self-coup” in 1992, in which Fujimori closed down Congress and suspended the judiciary, decreased his popularity. Fujimori’s autocratic tendencies were highlighted by the constitution he drafted in 1993 in which he reduced the power of the legislature and concentrated power in the presidency. Among the terrorist movements that his counter-terrorist operations have severely affected are the Movimiento Revolucionario Tupac Amaru (MRTA) and the Sendero Luminoso (Shining Path). Despite the success of government counter-terrorism activities in the 1990s, MRTA has continued bombing, kidnapping, ambushes and assassinations, especially against U.S. targets. Most recently, in December 1996, a MRTA group took over the Japanese ambassador’s residence in Lima during a diplomatic reception, capturing hundreds of hostages. On April 22, 1997, the Peruvian special forces launched a raid on the embassy compound, liberating the 72 hostages and killing the MRTA terrorists, which included their leadership. This event more or less ended the MRTA threat. The Senderos had earlier been routed following the capture and imprisonment of their leader, Abimael Guzman. The continued occurrence of Sendero attacks is of concern because this group has historically been active near the Antamina site. Of further concern are the negative economic reports that have been emerging since early 1996 and the continuing questions about the role of some of Fujimori’s ministers in the protection of drug traffickers connected to terrorist organizations. As the economic situation has been weakening, opposition has been increasing to the privatization of many state-owned industries, in particular the state-owned petroleum company, PetroPeru, and a refinery at La Pampilla. The population is concerned about the loss of jobs and the loss of national control of natural resources resulting from these privatizations. These factors, combined with an increasingly credible opposition after several years of unopposed power, were starting to erode Fujimori’s popularity. A final

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concern for the future of the Fujimori-led government was the opposition’s collecting of signatures to challenge Fujimori’s right to run for a third term when the elections come around in 2000 — a component of the constitution he drafted in 1993. Economy Peru has a dual economy. There is a relatively modern sector on the coasts and a subsistence sector in the mountains of central Peru. Services account for about 45 per cent of gross domestic product (GDP), industry (including mining) accounts for about 33 per cent, and agriculture for about 12 per cent. Mining is especially important for the balance of payments because it provides almost half of the country’s export earnings. Recent economic policies have been relatively liberal with an eye toward increasing foreign trade, especially exports. Restrictions on capital flows have been removed, a currency board has been imposed to stabilize the value of the currency, and agreements were signed with the IMF in 1993 to increase Peru’s integration with the world financial community. Although it appears that Peru will remain a highly indebted country for some time to come, the rescheduling of its debt through the agreement with the IMF is expected to continue to strengthen the government’s ability to service its debt. In general the economic outlook for Peru is “weakly positive.” Since Peru is a highly dollarized economy with two-thirds of its loans and deposits denominated in dollars, the risks of hyperinflation and devaluation are relatively low. Peru has one of the most liberal foreign investment regimes in Latin America, which both Fujimori and his political challengers are expected to maintain. These include laws allowing exporters and importers to conduct their foreign exchange operations using offshore accounts. The transfer of funds in order to make payments of interest and principal on foreign loans is unrestricted as long as the loans have been registered at the central bank. Despite slightly lower corporate income taxes in Peru, the effective marginal tax rate for CMA was projected to be about 36 per cent. This is similar to the marginal tax rates in countries such as Canada (35 per cent) and the United States. (32 per cent). The positive impact of Fujimori’s policies on the economy can be seen by looking at some key macroeconomic indicators for Peru over the past 10 years (see Exhibit 1). In the early 1990s, Peru was leading Latin America in economic growth — peaking at 13.1 per cent in 1994. By 1996, the country’s exchange rate was starting to stabilize and the importance of trade, especially its dependence on exports, was increasing (as illustrated in Figures 1, 2 and 3).

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Comparative Country Risk Measures The improvements in the economy seen in Exhibit 1 are mirrored by a decline in the perceived level of risk faced by investors in Peru since Fujimori took power in 1990. Exhibit 2 compares the level of a composite measure of country risk, as well as the level of political, financial and economic risk for Canada, Peru and Venezuela. Looking at the values for Peru, we see a rapid improvement in the level of each of these risks since 1990, especially from 1993 onward. Comparing Peru to Venezuela, we see that Peru started as a country that was significantly riskier from a business perspective in the 1980s to being only slightly riskier by 1996. Although doing business in Peru is still significantly riskier than doing business in Canada, these ratings demonstrate the improvement in the level of risk in Peru over the past few years. Despite this apparent improvement in Peru’s risk profile, its credit rating and its weak projected future economic performance are still troublesome and continue to plague its ability to raise funds in international financial markets. Mineral Markets — Copper and Zinc Predicting commodity prices with any level of certainty for mining projects with a very long life is always a challenge. In the case of Antamina, predictions were that copper and zinc markets were expected to remain soft through much of the latter part of the 1990s. Declining demand from Japan and Asia would extend the oversupply situation in copper and zinc for at least the next few years. Prior to the recent economic troubles, Asia had accounted for about 39 per cent of global copper demand and one-third of zinc demand. Slumping auto sales and declining construction activity in the region have weakened demand for both metals. Overall demand for refined copper from 1997 to 2010 is forecast to grow by about 3.4 per cent per annum, up from the 2.4 per cent seen over the 1988 to 1997 period. This reflects the expectation that Western growth will be roughly three per cent and will be augmented by higher copper consumption from Eastern Europe, China and Russia. Excess supply peaked in 1999 with a balanced copper market forecast by 2002 — when the Antamina mine would be expected to enter production. Demand for refined zinc was expected to grow by 2.2 per cent over the 1997 to 2015 period. Analysts have revised their copper prices for the near term downwards. Most forecasted a price of about US$0.65 to US$0.68 per pound by 1999 versus a recent spot price of US$0.74 per pound. (Note: all prices are quoted in 1996 dollars). Copper prices are expected to remain below the US$0.80 per pound level until about 2002 when the market levels off and possibly peak in 2005 at over US$1 per

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pound. The price is expected to average about US$0.95 per pound over the life of the project. Zinc prices also look weak until about 2002 going down to about US$0.49 per pound versus a current spot price of US$0.52 per pound. By 2002 the supply imbalance was expected to have corrected itself and prices should average to about US$0.50 per pound over the life of the project. The current and forecasted prices for both of these ores are presented in Exhibit 3. COMPAÑÍA MINERA ANTAMINA S.A. (CMA) Compañía Minera Antamina S.A. was established as the commercial entity to undertake the exploration and development of the Antamina site in north central Peru. This property was originally owned and explored by Cerro de Pasco Corporation, a U.S. company. The property came into government hands when Cerro de Pasco was expropriated by the military government in the 1970s. It was then transferred to the state-owned corporation Centromin, which auctioned the property in 1996. CMA was the winning bidder. Because of the significant increase in the projected cost of developing the property, one of the two original members of the CMA consortium had sold its stake, and the other had reduced its stake. Currently CMA is owned by three major Canadian mining companies: Noranda Inc., Rio Algom Limited and Teck Corporation. The ownership structure is Noranda (37.5 per cent), Rio Algom (37.5 per cent) and Teck (25 per cent).1 Each of these firms joined the consortium because of their extensive experience and interest in developing major international mining projects and their expertise in the copper and zinc markets. SPONSORING COMPANIES Noranda Noranda was a publicly owned Canadian company with a market capitalization of about Cdn$6 billion as of December 31, 1997. Noranda was in the business of discovering, developing and marketing natural resources internationally in three major business segments: mining and metals, forest products, and oil and gas. It was one of the world’s largest producers of zinc and nickel as well as a significant producer of copper, aluminum, lead, silver and gold. It had major operations in Canada, Chile, Europe and the United States as well as exploration sites in almost 20 other countries.

1Discussions with a fourth potential party, Mitsubishi Corp., had been held since 1997 and were continuing in the summer of 1998. Eventually, in October 1999, Mitsubishi Corp. officially joined the project, which resulted in the following new ownership structure: Noranda (33.75%), Rio Algom (33.75%), Teck (22.5%) and Mitsubishi (10%).

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In 1997 Noranda had sales and net income of Cdn$6.4 billion and Cdn$261 million respectively. Its total assets as of December 31, 1997, were approximately $16.5 billion with about $2.8 billion in long-term debt and a market value of equity of just over $6 billion. Its debt rating by Standard and Poors (S&P) was BBB. Rio Algom Rio Algom was an international mining, mineral exploration and metals distribution company with headquarters in Canada. It produced copper, molybdenum, uranium and coal from mines in Canada, the United States and Chile and it was currently developing large copper sites in Argentina. As of December 31, 1997, Rio Algom had sales and net income of Cdn$1.8 billion and Cdn$83 million respectively. Its total assets in 1997 were Cdn$2.1 billion with about $291 million in long-term debt. Its equity value was Cdn$1.5 billion, and its debt rating was BBB by S&P. Teck Teck was an integrated natural resource group whose principal activities were mining, smelting and refining. The group currently mined zinc, copper, molybdenum, gold and metallurgical coal in Canada, the United States, Australia, Mexico and Chile, among others. As of December 31, 1997, Teck had sales and net income before unusual items of Cdn$720 million and Cdn$50 million respectively. Total assets were Cdn$2.4 billion and about $400 million in long-term debt. Its equity value was Cdn$1.3 billion and it was rated BBB by S&P. THE ANTAMINA PROJECT In July 1996, CMA was informed it had won the auction for the concession on the Antamina site. Even though the preliminary evidence suggested that this was a significant ore reserve, much more work was required to determine the feasibility of profitably extracting this ore. As a result, CMA started the necessary exploration and development at this time. These would allow a decision to be made regarding the value of developing the site. Under the terms of the contract, pursuant to which CMA had acquired the mining concessions from Centromin, the first two years were defined as an evaluation period. If, after this evaluation period, it was not believed the site was viable for development and commercial exploitation, CMA would have the option to return the mining concession to Centromin and therefore the Peruvian government. After

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the two-year evaluation period, if CMA decided to develop the site it would have to promise to make significant investments in the project over the subsequent three years ($2.5 billion in the aggregate over the five year period) or pay large penalties to the Peruvian government (30 per cent of the difference between the $2.5 billion investment commitment and the amount actual spent during the five year period). Antamina was to be developed as a conventional open-pit mine. Facilities would include a large fleet of mining equipment, a crusher, conveyors, grinding mills, flotation plan, tailings dam, access road, electrical transmission lines and substations, concentrate transport, and port (including filter, storage and ship-loading facilities). Upon completion, the mine was expected to process about 70,000 tons of ore per day and be among the seven largest copper mines and the three largest zinc mines in the world. The projected cost of extracting the copper would be about US$0.35 per pound after taking into account zinc credits (credit for the zinc obtained as a by-product of the copper extraction), in the lowest quintile of copper producers. The projected cost to extract zinc from the large zinc deposits is also projected to be US$0.35/pound. The technology to be used in the mine was proven, conventional mining and processing technologies, so it was not expected that there would be any problems with the extraction and processing of the ore. The main operational risk was a result of the planned single grinding line in the concentrator, one SAG mill followed by three ball mills. The SAG mill would be the second largest ever built, and the three ball mills would be the largest. Several contingency plans were being devised to decrease the risk related to having a single, large grinding line processing all of the ore. Although the original plans involved having the ore concentrate transported by trucks to the coast for shipment abroad, this was being revisited. The original plan required transporting the concentrate through a UNESCO-designated Natural World Heritage Site, a World Biosphere Reserve, the Huascarán National Park, and environmental organizations had expressed concern about this proposal. The most recent proposal incorporated the use of a pipeline going around this environmentally sensitive site. This approach would result in higher capital costs, but lower operating costs. If the financing could be secured at reasonable rates and under acceptable conditions to the sponsors of CMA within the month, CMA would go ahead with the project. The completion of the mine and the necessary infrastructure would allow the start of mining by the end of 2001 or early 2002. Over the projected 20-year life of the mine, Antamina would exploit an estimated 470 million tons of proven and probable reserves. The projected amount of ore to be mined each year is presented in Exhibit 4. The key concerns for the viability of the project were: 1) the volatility and uncertainty of future copper and zinc prices, 2) the reliability of agreements with the government and the stability of its regulations, 3) the ability to comply with

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Peruvian and World Bank environmental standards, and 4) the proximity of the mine to the Huascarán National Park. To minimize the impact of these risks on the project, CMA was doing several things. First, its projections for the future copper and zinc prices used to value the project were conservative. Under the agreement with Centromin, CMA was promising to make significant investments in the country — it would provide jobs, a solid infrastructure and considerable tax revenue. CMA was also negotiating with the government stability guarantees that would ensure the durability of various items such as the tax regime and the convertibility and transferability of funds. The project would also help the government by providing a significant source of foreign currency and technology since Antamina would be one of the largest and highest profile foreign-owned projects in Peru. To address the environmental impact of this project, all aspects of the project were being designed to meet the more stringent of Peruvian, North American and World Bank standards. CMA also engaged local communities and non-governmental organizations to understand and address these stakeholders’ concerns. PROPOSED FINANCING One of the first decisions that had to be made was the senior debt-equity/subordinated debt choice. For the senior lenders to be willing to invest in the project, a senior debt ratio of, at most, 65 per cent to 70 per cent was required. Further, it was necessary to ensure that the projected revenues from the project would be able to adequately cover the costs of servicing the senior debt. The finance committee determined that the project would support 60 per cent senior debt using metal prices that senior lenders would regard as conservative. As a result, it was projected that each of the companies in the consortium would provide or cause to be provided a pro rata portion of about US$1 billion of equity and subordinated debt financing. Although this was a considerable amount of capital for each of these firms, it was felt this would be acceptable to the management and shareholders of each of the companies because it was within industry norms. This equity and subordinated debt financing would also demonstrate the firms’ commitment to the project and provide an element of comfort to the external providers of capital. Further, it would allow the sponsors to benefit from the future profitability of the project. This would leave about US$1.3 billion to be raised using long-term senior debt financing. If the sponsoring companies in the consortium were to guarantee the long-term debt, it was determined that the companies would be able to borrow the pro rata portion of the financing at the prevailing interest rates for firms with their credit ratings (see Exhibit 5). Although the banks were very concerned about the risks

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associated with this project, the diversified operations and financial stability of each of the sponsoring companies provided the necessary security for the loans. For the project financing alternative in which the loans were secured by the assets and cash flow of CMA and not the sponsors, the banks and other potential investors had many concerns. Specifically, they were concerned about the combined exposure to the highly volatile prices for metals and other commercial risks and the technological and environmental risks of setting up a site of this size in an environmentally sensitive area. They were concerned as well with political risks associated with investing in an emerging market such as Peru. For instance, might the Peruvian government slowly try to take effective control of the mine once it was operational? Could various forms of civil disturbances prevent CMA from shipping the ore out of the country? What if restrictions were imposed on CMA with regards to the transfer and/or conversion of funds? Such political events could seriously jeopardize the ability of CMA to repay its loans. Due to the size of the debt, commercial banks in Peru were able to provide, at most, only a small portion of the necessary financing; therefore international commercial lenders were required. The finance committee believed that commercial banks would be willing to lend a large portion of the required amount. Specifically, they felt the commercial banks would be willing to handle about US$400 million to US$600 million of debt exposed to Peruvian political risk and the business risks and in total about US$600 million to US$800 million if it were exposed only to the business risks. As a result, it was estimated that half the principal raised from commercial banks would have to be covered by some form of political risk insurance (PRI).2 PRI would protect the banks in the event CMA’s ability to repay the loan was impaired as a result of the occurrence of defined political events. Tentatively, it was estimated that the interest rates would be about eight per cent on the debt covered by PRI and 9.6 per cent on the uninsured portion.3 The finance committee had also approached several public financial institutions that support foreign trade and development between developed and emerging countries and have historically invested in large international mining operations. The purchasing of machinery and equipment, and the supply of copper and zinc concentrates permitted the project to satisfy the foreign trade mandates of many of these agencies. The finance committee estimated that these agencies would be willing to provide from US$600 million to US$800 million in funding. Because these agencies supported investment in emerging markets such as Peru, they were either able to accept political risks for their own account or were, in some cases, able to obtain guarantees from their national governments or other national 2Note: for a detailed discussion of political risk insurance, see Appendix A. 3Note: The interest rates quoted on loans for this type of project are based on the U.S. dollar LIBOR rates. The most recent LIBOR rate for 12 months was 6.0 per cent and it had been stable over the past several months.

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agencies. They would, however, demand a higher interest rate to compensate them for this extra risk. Based on past experience and discussions with these agencies, it was estimated that the cost of these funds would be about 9.4 per cent. Political Risk Insurance Because the firms in the CMA consortium were based in Canada and it was projected that a large PRI policy would be required, the finance committee approached the Export Development Corporation (EDC).4 These firms, as well as many of the commercial banks to which CMA had spoken, had worked with EDC in the past, so it was felt that EDC would be a logical supplier of the requested political risk insurance. Accordingly, EDC was asked by the sponsors to examine the possibility of arranging a single-policy PRI facility for a covered tranche of commercial loans for a total amount of about US$400 million. At the same time, EDC was asked to provide direct funding related to the project’s procurement of Canadian goods and services. Political risk insurance would insure covered loans against the inability to make payments caused by specific political events: the inconvertibility or non-transfer of funds, expropriation or political violence. (For more details on political risk and political risk insurance see Appendix A.) In the case of any of these political factors impairing CMA’s ability to make its loan payments, EDC would make the payments on the insured loans. Arranging a political risk insurance policy of this size would require EDC to bring together numerous insurers (both private and public, which would be a first) in order to provide the requested coverage. This would likely have to be done on a co-insurance basis, where each insurer is responsible to pay its portion of any claim, but not that of other insurers.5 Bringing together numerous parties would also mean that the final policy to be issued would be a heavily negotiated policy, since individual insurer issues would have to be addressed. As an indication, EDC told the sponsors that an annual premium rate of 1.5 per cent would apply for the requested PRI coverage. DECISION Now that the finance committee had all the necessary information in hand, it had some hard choices to make. Although the project appeared promising, it was not clear how CMA’s stakeholders would react to the different alternatives.

4EDC was renamed Export Development Canada in December 2001. EDC is a Canadian, government-owned financial institution devoted to providing finance services to support Canadian exporters and investors. You can visit this organization’s Web site at www.edc.ca. 5This is different from reinsurance, whereby one lead insurer accepts to have the obligation to pay on behalf of all insurers, whether or not these insurers agree or are able to pay.

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The first concern was: how much risk were the investors (debt and equity holders) willing to bear and at what price? The sponsoring companies were used to the business risk involved, but what about the political risks of investing in Peru? The commercial banks made it clear they had a limited appetite for the political risk in Peru and even the other organizations which offered debt financing suggested that they had limits to their tolerance for this risk as well. The finance committee had to decide how to balance these concerns and raise the capital before the end of the evaluation period. The two alternatives under consideration were: 1) using senior debt guaranteed by the sponsors, or 2) using project finance where the sponsors guarantee the loans until the mine is completed, and CMA (the project) is solely responsible for the debt repayment. The costs and benefits to the sponsoring companies were very different for each alternative. One of the tools at the disposal of the finance committee was PRI; the committee needed to determine how PRI would affect the value of this project and its attractiveness to the different stakeholders. What value would PRI provide to the equity holders? To the debt-holders? What would be the impact of not using PRI if everything went as planned? If not? To simplify its analysis, the finance committee assumed that all costs and revenues were in U.S. dollars. Further, the US$2.3 billion in capital expenditures was all assumed to be made before the mine started producing in 2001. The interest payments were assumed to start after production began in 2001 as well. After 2001, it was assumed that the net depreciation (depreciation less capital expenditures) was the original US$2.1 billion cost depreciated over the 20-year expected life of the project. The net working capital was assumed to be about $200 million and would remain the same throughout the life of the project. Using these projections, the finance committee had to determine the value of the project to the sponsors for each alternative. The finance committee also needed to consider the value of the project to its stakeholders in a “worst case” scenario. Some current financial market data can be found in Exhibits 5 and 6.

The Richard Ivey School of Business gratefully acknowledges the generous support of Export Development Canada in the development of these learning materials.

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Exhibit 1

SELECTED MACROECONOMIC DATA FOR PERU (1987 TO 1997)

Source: Datastream

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

GDP (in constant terms) 4,350 3,970 3,505 3,377 3,475 3,414 3,633 4,108 4,410 4,514 4,8278% -9% -12% -4% 3% -2% 6% 13% 7% 2% 7%

Exports 2,555 2,692 3,488 3,276 3,318 3,484 3,481 4,555 5,575 5,896 6,8012% 5% 30% -6% 1% 5% 0% 31% 22% 6% 15%

Imports 2,960 2,320 2,520 3,172 2,724 4,051 4,103 5,651 7,687 7,895 8,56037% -22% 9% 26% -14% 49% 1% 38% 36% 3% 8%

Current Account Balance N/A N/A N/A -1,092 -1,283 -1,697 -1,646 -2,101 -4,298 -3,626 -3,40817% 32% -3% 28% 105% -16% -6%

Net International Reserves at the Central Bank 43 -352 357 531 1,304 2,001 2,742 5,718 6,641 8,540 10,169-96% -919% -201% 49% 146% 53% 37% 109% 16% 29% 19%

Consumer Price Index (in Lima) 16,866 136,138 0.20 6.20 31.30 54.40 80.80 100.00 111.10 124.00 134.6053% 707% -100% 3000% 405% 74% 49% 24% 11% 12% 9%

Industrial Production 132.30 113.30 91.70 94.00 103.00 97.60 102.90 113.90 117.90 132.40 140.5016% -14% -19% 3% 10% -5% 5% 11% 4% 12% 6%

Official Exchange Rate (vs the U.S. dollar) 0.0000 0.0001 0.0027 0.1977 0.7846 1.2575 2.0042 2.1967 2.2584 2.4854 2.6700100% 550% 1954% 7303% 297% 60% 59% 10% 3% 10% 7%

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Exhibit 2

POLITICAL RISK NUMBERS

Country Risk Values for Peru

0102030405060708090

100

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

CompositePoliticalFinancialEconomic

Country Risk Values for Canada

0102030405060708090

100

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

CompositePoliticalFinancialEconomic

Country Risk Values for Venezuela

0102030405060708090

100

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

CompositePoliticalFinancialEconomic

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Year Copper Zinc2001 60 502002 710 4002003 690 5302004 670 5502005 610 5402006 690 4802007 630 5602008 590 6502009 610 6802010 670 5102011 690 3902012 690 3002013 710 2852014 680 3602015 600 2802016 680 1802017 675 1752018 690 1952019 800 1902020 295 852021 290 852022 230 752023 190 402024 90 50

Exhibit 3

ORE PRICES (US$ per pound)

Exhibit 4

PRODUCTION ESTIMATES

(millions of pounds)

Year Copper Zinc1997 0.75 0.521998 0.70 0.511999 0.66 0.502000 0.70 0.492001 0.75 0.502002 0.80 0.502003 1.00 0.552004 1.20 0.622005 1.35 0.652006 1.20 0.672007 1.15 0.702008 1.10 0.622009 1.05 0.572010 1.00 0.502011 0.80 0.502012 0.80 0.502013 0.80 0.502014 0.80 0.502015 0.80 0.502016 0.80 0.502017 0.80 0.502018 0.80 0.502019 0.80 0.502020 0.80 0.502021 0.80 0.50

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Exhibit 5

COMPARABLE FINANCIAL DATA OVER THE PERIOD (from July 1995 to July 1998)

Canadian Firms

Beta vs Domestic

Market

Beta vs Canadian

MarketBeta vs.

U.S. Market

Beta vsPeruvian Market

(Pesetas)

Beta vs World Market

Barrick Gold Corp. 1.56 N/A 0.89 0.29 1.14Noranda Inc. 0.93 N/A 0.79 0.19 1.05Rio Algom 1.13 N/A 0.56 0.41 0.68Teck Corp 1.19 N/A 0.80 0.34 0.86

U.S. FirmsAsacro Inc. 0.71 1.33 N/A 0.38 0.95United States Lime and Mineral 0.57 0.32 N/A 0.37 0.42Freeport-McMoRan Copper & Gold 0.87 1.11 N/A 0.36 1.08

Peruvian FirmsMinsur SA 1.04 0.23 0.02 N/A 0.28Southern Peru Copper Corporation (Price in U.S. dollars) 0.77 1.19 0.93 N/A 1.23

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Exhibit 6

OVERALL FINANCIAL MARKET DATA

Average Market Returns (per cent) 1988 to 1998 1995 to 1998Average Canadian Market Return 10.9 22.0Average Peruvian Market Return 17.1 9.5Average U.S. Market Return 16.1 26.5Average World Market Return 8.9 14.2

Average Risk-free Rates (per cent) 1988 to 1998 1995 to 1998Avg Canadian Risk-free Return (10 yr.) 8.5 6.7Average Peru Risk-free Return (USD) 16.6 16.4Average Peru Risk-free Return (PS) 89.1 31.9Avg U.S. Risk-free Return (10 yr. Bond) 7.3 6.2

Current Rates (per cent) July-98Canadian Risk-free Return (10 yr.) 5.3Average Peru Risk-free Return (USD) 15.8Average Peru Risk-free Return (PS) 31.3U.S. Risk-free Return 5.5Canadian BBB Return (10 yr.) 8.2American BBB Return (10 yr.) 7.8

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Figure 1

PERU GDP

Figure 2

PERUVIAN EXCHANGE RATE

GDP (in constant terms)

0

1,000

2,000

3,000

4,000

5,000

6,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Official Exchange Rate (vs the U.S. dollar)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

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Figure 3

PERUVIAN EXPORTS VERSUS IMPORTS

Peru: Exports vs. Imports

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

ExportsImports

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Appendix

POLITICAL RISK AND POLITICAL RISK INSURANCE Political Risk Nearly all companies that venture abroad face some form of political risk. Even businesses that operate only in Europe and North America may experience the hazards of non-government organization (NGO) action or regulatory change. Companies need to understand and evaluate the political risks they are exposed to and develop appropriate and effective risk management strategies to deal with the most serious threats. Political risk is generally defined as the uncertainty that stems in whole or in part from the exercise of power by governmental and non-governmental actors. Political instability and politicized government policy are the best known political risks. Political violence, expropriation and creeping expropriation, contract frustration and currency inconvertibility are among typical hazards. These risks can affect a company’s value in many ways. Risks such as expropriation and sabotage can have an impact on a company’s assets. Risks such as kidnapping and politically motivated murder can affect personnel. Risks such as social unrest and export restrictions can affect operations. Risks such as tax hikes and hyperinflation can affect commercial activity, while risks such as currency crises and capital controls can affect transfers. As a result of this diversity, political risk carries very different connotations for different companies. For example, an oil company with a drilling operation in a country will be deeply concerned with security issues and with its own relationship with the host government. However, if the oil company sells the oil outside the country, the country’s macroeconomic policies may have relatively little impact on the oil company’s operations (unless the right to receive export proceeds in offshore accounts is withdrawn). Political risks are generally far easier to handle before they evolve into full-blown crises. Companies that rely on damage control strategies must employ top management personnel. Once made, political decisions are hard to reverse because reputations are publicly on the line. Far better to identify risks in advance and influence the host government and NGO actions before reputational concerns about “losing fact” arise. The factors that drive political risk can be broken down into three main groups: external drivers (e.g., political instability and poor public policy), interaction drivers (e.g., the relationships between the company and external actors) and internal drivers (e.g., the quality of a company’s risk management process).

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Appendix (continued) External Drivers The classic drivers are incidents of political instability such as riots and coups and poor public policy leading to hyperinflation and currency crises. The main driver of these is usually weak institutional frameworks and regulations (including enforcement). Generally the company has no say over these policies: it cannot influence macroeconomic or legal policy decisions. As a result, the company needs to accurately assess and manage these risks. It can do so by using a number of approaches, one of them being the purchase of political risk insurance. Interaction Drivers Companies typically have many relationships that can influence political risk. The most common include relationships with the host country’s government and local governments and regulators. Other important relationships include those with the local communities, local work force and NGOs. Because of the Internet, NGO’s are taking on increased importance because they can effectively co-ordinate their actions with other NGOs. Last but not least is the relationship with shareholders. The Internet has made it much easier for a company’s foreign activities to be monitored by all shareholders. It is therefore critical for the company to present its political risk management strategy to shareholders in a compelling fashion before political risk crises hit. The company can influence both the probability and impacts of these political risks on the firm. Internal Drivers These drivers can change from company to company. They depend on the organization of the company. For instance, companies often have difficulty aligning management’s incentives with the political risk management goals of the company as a whole. Sometimes companies only provide an incentive for the project developers to get a project going. This may leave them with an incentive to underplay the true political risks involved. It is also possible that employees of the company would ignore the company’s own risk management guidelines. However, one very basic approach to risk management that multinationals use is to spread the risk associated with foreign operations by investing in a number of countries. This portfolio approach reduces the company’s exposure to specific markets.

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Appendix (continued) POLITICAL RISK INSURANCE FOR BANKS1 Companies that invest abroad or sell to other countries are not the only parties exposed to political risk; banks that finance the transactions are exposed as well. Political risk insurance (PRI) for lenders can help protect specific categories of loans, typically covering up to 100 per cent of eligible losses. Insured Risks PRI insures against eligible losses incurred where the main cause of the loss is a political risk as defined in the policy. Coverage is available for the following risks: • Transfer restrictions and inconvertibility of funds

Foreign governments occasionally prevent the conversion of local currency into hard currencies or stop hard currencies from leaving the country. PRI offers protection against loan losses that may result from either of these events.

• Political violence

The eruption of political violence has the potential to negatively affect foreign investments. Politically motivated conflicts can damage or destroy assets. Such conflicts may also shut down business operations for an extended period of time. PRI also offers protections against loan losses caused by these events.

• Expropriation

Governments can change, as can government priorities. When this happens, losses may arise as a result of actions of the host government that have the effect of nationalization or confiscation. A PRI policy insures against loan losses brought about by such actions.

Benefits of PRI for Banks • Balance sheet protection: coverage can be provided against losses for both principal and

interest; • Financing: PRI coverage may allow companies to leverage additional financing; • Long-term commitment: some insurers can issue PRI policies that offer up to 15 years of

protection; • Adaptability: policies can be tailored to fit various loan structures; 1This section is based for the most part on information provided by EDC with regards to the PRI it provides to lenders on projects such as Antamina.

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Appendix (continued) • Simplicity: a single policy can be offered to numerous participants in a bank syndicate; • Reserve requirements: in some cases reserves that banks have to put up against their loans to

international projects may be reduced, increasing the return on the loans; • Portfolio management: most banks have internally or externally imposed country risk limits.

Political risk insurance can, at times, reduce or eliminate the contribution of a loan towards such limits.

What is not covered? PRI protects loans from losses caused by certain political events as specifically defined in the policy. Commercial risks are not insured under a PRI policy. Examples of commercial risks would be currency devaluation, financial non-performance and changes in commodity prices. Cost of Coverage Premium rates will vary based on a risk assessment that considers country (see below), industry and transaction characteristics. For PRI on loans, premiums are usually calculated on the amounts insured for principal and interest. Lower fees typically apply to amounts placed on “standby” (that is, amounts not insured, but available for coverage in the future). Standby fees allow policyholders to pay lower premiums when a loan is disbursed gradually over time. Conversely, insured banks also have the ability to reduce the maximum amount insurable of their policy before each insurance period. This allows them to reduce their PRI coverage proportionately as a loan is being repaid, thereby paying lower total premiums. Sample Components of Political Risk Assessment • Transfer restrictions and inconvertibility — Laws and regulations, past and current practices,

expectations, foreign exchange (FX) availability, mitigating factors.

• Expropriation — Government attitudes, opposition attitudes, laws and regulations, past experience, mitigating factors.

• Political violence — Political disputes, geographical location of the project, actions in

response to government control, history, mitigating factors.