Canadian Underwriter

Gold Rush

October 12, 2012   by Regan Reid

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In 1996, Fortune Minerals discovered a gold-cobalt-bismuth-copper deposit in the Northwest Territories. Sixteen years and nearly $100 million later, Fortune’s NICO project is still waiting on its permits—meaning, they have yet to actually construct a mine. Fortune Minerals is one of the approximately 1,600 junior mining companies in Canada. Like most other juniors, it is publicly traded, funded by investors, and has no source of revenues from mineral sales—at least, not yet.

Nevertheless, Fortune Minerals is a junior mining success story. With plans to begin construction of a mine, Fortune is one of the rare companies that has found a deposit and plans to develop it. Most others fail to even find a valuable resource deposit. “Companies will spend tens of millions of dollars on exploration and never find anything,” says Julian Kemp, chief financial officer (CFO) of Fortune Minerals. Despite the odds, there is always that small chance that a junior mining company might develop into the next Barrick Gold or Kinross.

Understandably, insurance brokers are eager to jump into this exciting market.

“It’s a good risk to write. To date, we haven’t seen any claims come out of exploration activities.”

“An exploration company might be paying $10,000 in premiums today, but if they build that mine, they might be paying $1 million tomorrow, thus making the exploration sector attractive to the insurance industry,” says Mark Rankin, president of Integro Insurance Brokers. But, like the mining industry itself, there are no guarantees. “Only a small percentage of exploration companies will take a mine all the way through to production,” Rankin notes.

Digging Up Funding

Long before any drilling begins, junior mining companies need to attract investors to fund their operations, and Canada is one of the best countries in the world to do that. The Toronto Stock Exchange and Venture Exchange list half of all public mining companies in the world. “Toronto is a real hotbed for the mining industry in terms of raising capital,” says Patrick Bourk, vice president at Integro. Canada has a history of producing some of the most profitable mining companies in the world. “A lot of very successful mining companies have come out of Canada,” explains Kemp. “And they have grown from small companies to be very big companies.”

But in order to grow, juniors need an experienced board of directors and, therefore, a directors and officers liability (D&O) policy. “In order to attract experienced board members, it is imperative that junior mining companies have appropriate D&O liability coverage, as these board members are current on coverage issues and want to be protected,” says Frances McCuaig, natural resources service account manager at JLT.

At this stage, these companies will also look to a broker for a small office package, which is generally property and premises liability coverage. But Diane Flynn, senior vice president, natural resources at JLT, says most insurance companies don’t write premises-only liability policies for mining companies. “If there was a third-party liability claim related to their exploration activities, it would be difficult to restrict their liability coverage to premises only,” says Flynn. “So the typical markets that write office packages aren’t really the insurers that deal with the junior mining companies. It puts junior mining companies into a specialty group, which only certain markets can underwrite.”


As a junior mining company moves from the financing stage to the exploration stage, its insurance needs grow. In addition to D&O and coverage for their office exposures, says Rankin, “they’re going to want general liability for their activity on the ground, and property insurance for their field equipment they have on site, and auto insurance. If they are starting to fly executives and investors to the mine site and they are chartering aircraft, they may want to consider non-owned aviation. Depending on the country in which they are exploring, they may also want to consider kidnap and ransom insurance. These types of insurance will pretty much cover them for most of their exploration phase.”

Though most insurance offerings are relatively standard at this stage of a company’s development, many CFOs require specialized D&O coverage. It’s not uncommon for a CFO to sit on several junior mining boards at a time, says Bourk. One way this issue can be addressed, he says, is in a specific product called an independent director liability policy. This policy, which is uniquely tailored to the junior mining industry, covers an individual who sits on multiple boards rather than covering a single company’s board members. It can act as an excess policy for the individual director and is attractive as it is personalized and customized to that particular director, explains Bourk.

At the exploration stage, junior mining companies have relatively clean claims histories, making them attractive to insurers, says Rankin. For example, in his more than 20 years working for junior mining companies, Fortune’s Kemp has filed one claim (the pipes in an office two floors above his burst causing a flood). “It’s a good risk to write,” agrees Flynn. “To date, we haven’t seen any claims come out of exploration activities.”

Though some define junior mining companies as companies solely in the financing or exploration phase, others define juniors as small operating mines. In the rare case that a junior will move on to the operation stage, the company’s insurance needs expand. Rankin says a mining company operating a single mine may need, depending on their risk profile, additional coverage, including, but not limited to, worker’s compensation, business interruption, boiler and machinery, excess liability, specie insurance, environmental impairment liability, aircraft landing strip liability, and, depending on the country where its operations are located, kidnap and ransom, political risk and political violence insurance.

As more and more junior and operational mining companies enter the market, companies are forced to look further and further away for mining opportunities. Alan Lee, Energy Resource Specialty Underwriter, Chubb Insurance Company of Canada, says worldwide coverage is very important to the junior mining industry. “These are explorers, people who, by definition, will move around,” he says.

Remote and Dangerous

Working in international or remote locations can present serious challenges to mining companies. “Mining companies have to go to far-flung locales, which nowadays appear, more often than not, to be more dangerous or riskier locations,” says Rankin. “They could be risky because of the geopolitical situation, because they’re high earthquake zones, because they’re in flood zones or windstorm zones. It’s becoming a more risky proposition to seek out ore bodies in these far-flung locations,” he says.

In Canada, junior mining companies can be located in areas that are hard to access. Rankin had a client, based in Nunavut, who relied on ice road truckers to deliver supplies. If the weather did not cooperate, the supplies would have to be flown in at a much higher price to the company. Rankin found weather insurance for his client that would cover the extra expense of flying supplies into the company. “The market is flexible and creative enough that if you give them an idea, or show them a risk—and it’s a fortuitous risk—you can design a product for them,” he says.

For companies operating in foreign countries, the major risk that is making headlines today is political risk. The increasing danger of expropriation and nationalization has become a major issue for junior (and operating) companies. In July, for example, Bolivian president Evo Morales revoked the mining rights of South American Silver Corp., an exploration company based out of Vancouver. “There are a number of Canadian mining companies in Bolivia,” notes Rankin.

In addition to the business risks, mining executives and staff are often at personal risk when working in foreign countries. “Outside Canada and the United States we’re starting to see more interest with kidnap and ransom coverage,” says Lee. “Officially there were approximately 3,000 recorded and reported kidnappings in Mexico last year. Unofficially there were probably closer to 8,000. So, it’s a real risk,” says Rankin. “You can buy insurance for kidnap and ransom to cover the financial impact, but that doesn’t diminish the fact that some people might get injured or killed.”

Mining companies have to go to far-flung locales, which nowadays appear, more often than not, to be more dangerous or riskier locations,”


Possibly the most serious challenge brokers face in insuring this sector is actually convincing companies to buy appropriate insurance. “Mining company executives are generally risk takers. They’re in the business of risk,” says Rankin, “so, buying insurance is not necessarily a priority for them. It’s not the priority.” Flynn agrees. “They obviously want to be properly insured, but they don’t want to allocate all of their budget to insurance. So generally speaking, they’re more prone to buying insurance as the need arises,” she says.

Fortune’s Kemp says that the cost of insurance means junior mining companies will often absorb risk themselves. He gives the example of pollution insurance: “I would suggest that if a junior mining company has pollution insurance, they are the exception, because pollution insurance is very expensive and most junior mining companies cannot afford it,” he says. When a truck leaked oil into the ground at a junior mining company that Kemp worked for, the company paid to dig up the contaminated soil and ship it to a disposal area out of pocket. “Typically those kinds of things aren’t going to bankrupt the company,” he says, but “investors don’t like giving money to you to pay for cleaning up mistakes.”

When small mining companies do spend the money on insurance, Flynn says juniors “buy what they can afford and determine what risks need to be transferred to an insurance product.” She admits most companies would obviously like higher limits, but they can’t always manage the cost. “You have to engage with the client to determine what their risk tolerance is,” she says. “It is important that we bring value to them by educating them about the risks that they have. Once you’ve done this, and they are comfortable with the portion of the risk that they prefer to retain, then you have done your job. You cannot tell clients how to run their business.”

For some products, higher limits at an affordable price are now within reach. “D&O insurance 15 years ago, for a junior exploration company, was very expensive,” says Integro’s Rankin. “For a $2 million policy, you’d spend $40,000 in premiums. That same company in today’s market, they’re going to spend $8,000. So, companies are more accepting of buying higher limits now because it’s very affordable,” he says.

Added Value

For brokers interested in getting into this market, Kemp says he needs more than a broker, he needs an advisor. “I think the biggest risk for junior mining companies is a lack of risk management,” he says. The CFO or the president is too busy dealing with every other aspect of the business to focus solely on properly insuring risk. “Human resources reports to me, supply chain management reports to me, as well as the accounting and tax function. I’ve probably spent more time in my career dealing with human resources issues, than I have with accounting and financial reporting,” says Kemp. So a broker needs to function as a junior mining company’s “off-site risk management,” says Flynn. For the busy CFO or junior mining executive, insurance is never top of mind. “I’ve had a mining client call me and say, ‘Oh we’ve got a closing tomorrow. We’re buying a hotel for our staff to stay at. Can you get that insured? I need to provide a certificate of insurance by the end of the day.’ That’s what happens all the time,” says Flynn. “They always come at you with something you haven’t seen before and you have to be ready to jump on it.”


Copyright 2012 Rogers Publishing Ltd. This article first appeared in the July/August 2012 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.