Summary of Discussions at the Meeting of the Board of Directors of IFC June 3, 2004
INVESTMENT IN MARLIN GOLD – GUATEMALA
- The Board of Directors if IFC approved an investment in the form of a senior loan of up to US$45 million in Marlin Gold in Guatemala (IFC/R2004–0108, dated May 21 2004)
- One speaker asked to be recorded as abstaining.
- Staff Introduction. Staff said that the proposed project was a Greenfield gold project located in remote western Guatemala , and was the first major mining project in the country in more than twenty years. A few days ago, IFC had received a letter from a local non–governmental organization (NGO) raising concerns about the project and requesting a three–month delay in consideration by IFC's Board. Staff had responded to the NGO the day before, refuting the allegations, and stating that the consultation had been carried out responsibly and properly. In the response, IFC suggested that the NGO meet with the company to discuss their concerns and has offered to participate in such a meeting.
- Prior to the meeting, several Directors had asked to explain the Sponsor's desire for IFC's involvement, and IFC's rationale for the investment. Staff explained that Glamis, the sponsor, was looking to IFC to provide broadly defined risk mitigation and to help it obtain and maintain the broad support of the community over the life of the mine. For it's part, IFC believed that Marlin was an excellent project with a committed sponsor and a clear and positive development impact. Marlin's successful development would re–attract foreign investment to Guatemala , and its commitment to socially responsible mining provided an opportunity for IFC to assist and enhance community development and environmental management. It was IFC's hope that Marlin would set the standard for future mining projects in Guatemala .
- Welcome engagement. A large number of speakers welcomed IFC's engagement in Guatemala 's mining sector, and agreed that the project would have a significant development impact. One of them said that the community–banking program, business linkages, employment opportunities, and focus on community infrastructure were particularly important and she hoped that the project was financially very solid. Another speaker said that recent economic and political developments in Guatemala had been quite positive.
- One speaker was satisfied with IFC's additionality but said that he was obliged to abstain because of domestic legal requirements, as stipulated in the Pelosi legislation. In response to a question from another speaker concerning the nature of the legislation, he explained that it required publication of an environmental impact Assessment (EIA) 120 days prior to Board consideration of a project, both in–country and to the Board. The EIA for the proposed project had been published in Guatemala in a timely manner, but the Board publication had missed the Pelosi deadline. He acknowledged that in–country notification was the more important consideration, and hoped that such situations could be avoided in the future.
- IFC's Role. A number of speakers raised questions about the IFC's role in the project. Several of them noted Glamis' desire for political mitigation, and asked whether the sponsor had approached MIGA for such coverage. Some of them wondered why a well–capitalized sponsor like Glamis would ask IFC to provide financing that on its face would appear to be available from other sources. Some speakers expressed concern that the US$261 million project would create only 160 long–term jobs, and suggested that the IFC consider other opportunities with a greater development impact. One speaker wondered whether IFC's business linkages program could help some of the national companies take advantage of regional opportunities.
- Staff said that the company's primary interest was to develop a long–term partnership with IFC because of the corporation's holistic project approach and ability to reduce broad political risks, including regulatory risks, and to ensure that it had a social license to operate. Unlike MIGA, which covered only political risks. IFC had financial incentives to help clients work through any obstacles that might arise, due to its role as a lending institution. Staff recognized that the direct employment impact of the capital–intensive project was low, but said that the project's community development efforts were intended to broaden this impact, IFC intended to work with the company to enhance small– and medium–enterprise (SME) opportunities, and to strengthen long–term sustainability in Guatemala , which today was viewed as a difficult country by foreign investors.
- One speaker noted IFC's plans to advise the company on transparency and disclosure and asked if IFC had discussed these issues with the World Bank.
- Staff said that the bank had been very active in Guatemala , and was addressing transparency issues through an ongoing judicial sector project and through the Public Sector Management Project, which was currently under preparation. Revenue management issues in Guatemala were being addressed through World Band and World Bank Institute projects and activities to support the tax and customs agencies, in addition to the aforementioned ongoing projects.
- Taxation and Royalties. A number of speakers noted that Montana Exploradora S.A. (ME) would make royalty payments of only one percent of its revenues, and that these revenues would be split between the central and municipal governments. They questioned the adequacy of the revenue management arrangement, particularly since the company would receive a tax exemption under the drawback industry law. In addition, they asked staff to confirm that taxes and royalties would equal 7 percent of the government's annual tax revenue, as stated in the documentation.
- Staff assured the Directors that IFC looked very closely at benefits of the government, as well as to the company. The government itself had decided to lower loyalties from 6 percent to 1 percent to attract much needed investment. Staff explained that royalty payments in the range of one to three percent were considered normal, and said that the government's willingness to return half of the monies to the region was a welcome development. All export–orientated companies entering Guatemala today were granted a tax holiday until 2008, after which a 31 percent corporate tax rate would be assessed. Staff agreed to confirm IFC's estimates for the percentage of total government revenues attributed to taxes.
- Extractive Industries Review (EIR) Timing. A number of speakers expressed concern that each Board discussion of a mining project prior to the CODE meeting on the EIR posed a potential reputational risk to IFC, and urged IFC to be cognizant of the fact that the Board's decision making would be scrutinized even more thoroughly than usual. One of them assumed that no more mining projects would be brought to the Board now that a date had been set for the CODE discussion. However, another speaker said that a moratorium on such projects was not needed and he supported IFC's decision to present the project to the board at this time. At the same time, he said that it would be helpful to know of any inconsistencies between the proposed project and the management's response to the EIR.
- NGO Letter. A large number of speakers appreciated IFC's prompt response to the NGO's concerns and encouraged IFC to facilitate an open discussion of the issues between the sponsor, the NGO, IFC and any other interested parties. One of them noted that the opposition from the National Council of Indigenous Peoples had come as a surprise to IFC. Several of them commented that because of the EIR, it was particularly important for IFC to foster transparent communications in the extractive industries and to engage with NGOs prior to its due diligence. They were concerned that IFC was relying on information from the sponsor to refute the allegations, and suggested IFC conduct its own investigation and be in a position to cite a more visibly independent assessment. Some of them expressed concern that last minute protests from NGO's were becoming increasingly common.
- Staff clarified that, except for well–documented information concerning very recent events, IFC's own appraisal had formed the basis of its response to the NGO. IFC was very confident that royalty payments from the project would benefit local communities. A U.S.–based NGO was helping the company augment these resources with contributions from other donors, and IFC's Corporate Citizenship Facility was providing assistance to one of the foundation's programs. Staff said that until last week IFC had never heard of the National Council of Indigenous Peoples, although local disclosure had occurred in early 2003, and there had been many opportunities for local groups to express their views. IFC would have expected such a group to support the project because of the benefits to the indigenous population.
- Subsidiary Structure. One speaker noted that the project would be implemented by a subsidiary of Glamis Gold that was headquartered in Nevada , and said that it would have been preferably to incorporate the subsidiary in Guatemala . He and another speaker asked it the necessary safeguard policies were in place to ensure transparency.
- Staff clarified that although Glamis was headquartered in Reno ; Nevada , it would be operating in Guatemala through its incorporated Guatemala subsidiary, Montana Exploradora.
- Terms and the Investment. One speaker wondered whether the interest rate reflected the political risks associated with the project and asked why IFC was offering a two–year grace period.
- Staff explained that the company would be charged a market–based interest rate due to the company's strength, and the sponsor's commitment. The two–year grace period took into account the fact that construction of the mine would last about eighteen months.
- Closing Remarks by the Director Whose Constituency Includes Guatemala . On behalf of the Guatemalan authorities, the Director whose constituency Includes Guatemala thanked IFC for the project, and said it would have a significant developmental impact for the country as a whole. The project was part of a very important institutional strengthening process that was expected to lead to a more investor–friendly climate in Guatemala . The Director said that he did not expect the EIR to have any significant effect on the project in the short–term