The Mining Contract Process

Transcription

1 The Mining Contract Process Martin Kudnig The African Community of Practice for Managing for Development Results 7 May 2014 AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

2 Presentation by: Martin Kudnig, Partner (Solicitor, Victoria, Australia), ERI London Direct line: +44 (0) Mobile: +44 (0) Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Tel: +44 (0) Fax: +44 (0)

3 Overview Negotiation of Mining Contracts Signing of Mining Contracts Management of Mining Assets and Government/Investor Relationship Enforcement of Mining Contracts The Future and Conclusions 3

4 Life of Mine Cycle Available Land Resources Closure/ Reclamation years Operation 1-5-years LIFE OF MINE CYCLE 1-3 years Development / Construction Prospecting/ Exploration 5-10 years Environmental Assessment & Approval 4

5 Negotiation of Mining Contracts Signing of Mining Contracts Management of Mining Assets and Government/Investor Relationship Enforcement of Mining Contracts The Future and Conclusions 5

6 Negotiation: Types of Mining Contracts Various types of mining contracts: [Licences granted by the state permitting an investor to engage in mining activities] Concession/Investment agreements between the state and investor outlining the rights, privileges and duties of both parties Joint venture agreements between the parties conducting mining operations Farm-in agreements between new and existing investors in a project Mine management/operations agreements governing management/ operation of the mine Mine development and procurement contracts governing development of the mine and procurement of mining equipment and supplies Mining services contracts governing how minerals are extracted Mining sales agreements governing the sale of minerals 6

7 Negotiation: Involvement of the Private Sector Tension exists between the principle of sovereign control of minerals and the need to encourage private initiative and investment in exploration, innovation and development of mineral products However, is the private sector better than Governments at managing this? Extent of state participation varies from country to country If domestic private sector underdeveloped, private industry involvement must be imported from foreign sources (usually requiring greater state or local participation) Balancing act 7

8 Negotiation: Foreign Investor s Concerns 3 BASIC QUESTIONS FOR FOREIGN INVESTOR What are the country risks? Does the regime enable the implementation of satisfactory legal or commercial structures to mitigate this risk? Does the country s mining regime meet the investor s basic investment condition? 8

9 Negotiation: Mining Agreements - Licences Government grants licences to persons to allow mining activities Licensing regimes vary but all have common features At least 2 stages (sometimes 3): Exploration Production Retention Licence grants exclusive right to explore for and extract minerals 9

10 Negotiation: Mining Agreements - Licences (continued) Typically, each state s legislation outlines the: Types of licences that can be granted Processes to be followed in relation to grant Process for conversion of an exploration title to a mining title Revocation and surrender Requirements relating to transfer 10

11 Negotiation: Mining Agreements Types of Licences 11

12 Negotiation: Mining Agreements - Licence Conditions Exploration Licences will typically have minimum expenditure conditions as well as time limits on exploration Mineral Licences usually require a certain level of expenditure Reporting obligations Approved development plan required to develop a mine Annual rental based on area Royalties based on amount of minerals extracted Failure to comply can lead to cancellation 12

13 Negotiation: Mining Agreements Concession/Investment Agreements Designed to: clearly define rights, privileges and duties of Government and foreign investors provide the investor with protection against some of the more problematic country risks 13

14 Negotiation: Mining Agreements Concession/ Investment Agreements (continued) guarantee of basic rights to operate including good title, rights to mine, currency protection and repatriation guarantees against expropriation and discrimination Key Provisions right to international arbitration economic/fiscal stabilisation, including rights to compensation from Government for adverse changes 14

15 Negotiation: Fiscal Regime Investors will seek a favourable domestic fiscal regime (including direct and indirect taxes) so the project can produce reliable cash flows to service debt and to meet or exceed profit thresholds Maintaining certainty is key for both parties better the devil you know 15

16 Negotiation: Stabilisation Mining projects characterised by long term agreements and high levels of investment Stabilisation clause in investment agreements fix life of mine costs and address risk of law change Issues with enforcement and state immunity (depends on domestic laws) Typical examples: freezing; and balancing 16

17 Negotiation: Stabilisation (continued) Freezing Clauses provide that laws in place at the time the agreement is executed will apply for life of the agreement Balancing Clauses provide for the renegotiation of the economic terms of an investment agreement in the event of a change in law, to compensate for any loss suffered by the mining company due to such change 17

18 Model Mine Development Agreement Produced by Mining Law Committee of the International Bar Association Constructed with the precept of: [a mining] project aiming to contribute to sustainable development not just of the project itself, but of the local, regional and national community as well. Provisions: Mine Development and Tenure Environmental Assessment Environmental Management Plan Royalty Taxation Mutual Obligations State Obligations Company Obligations 18

19 Negotiation: Financing Issues 19

20 Negotiation: Financing Issues (continued) 20

21 Negotiation: Joint Venture Operation Common to conduct mining activities as part of a joint venture (may include state) Governed by a joint venture agreement which covers: scope, purpose and duration of the JV identifies the assets committed to it describes and quantifies the interests of participants provides for the operation, management and control of the JV 21

22 Negotiation: Joint Venture Operation (continued) Joint venture agreements will also cover: Subscription, holding and expenditure of the funds Apportionment of liability Consequences of default Use and disposal of the output of the JV Assignment of the interests Withdrawal from the JV Two types of joint ventures commonly used: Incorporated JVs Unincorporated JVs 22

23 Negotiation: Holding Mining Interests Types of Joint Ventures Key features of an incorporated joint venture: Operated by a SPV Joint venturers are shareholders in SPV Has own separate legal personality Shareholders agreement entered into and SPV formed to own and control JV Agreed number of directors appointed by each joint venturer 23

24 Negotiation: Holding Mining Interests Types of Joint Ventures Key features of an unincorporated joint venture: Parties agree to cooperate under a commercial undertaking However, hold their interests in the JV separately No company structure Joint venture agreement will govern the parties relationship, operation of the JV and the parties respective obligations to each other 24

25 Negotiation: Holding Mining Interests Comparison of Types of Joint Ventures Incorporated Joint Venture Unincorporated Joint Venture Legal Entity Separate legal personality No separate legal personality. Usually a manager to act as agent for the participants Liability Ownership Income Liability of participant limited to the amount unpaid on its shares Held by way of shares in the joint venture company Profits distributed by dividends. Losses cannot be offset against shareholder s income Several not joint and limited to participating interest in the joint venture Parties own interest in the assets of joint venture in accordance with participating interests Party entitled to share of production from joint venture s activities. Party then free to sell product to third parties Partnership Risk Not a partnership as separate legal entity If set up as a partnership, potential undesirable tax consequences if joint receipt of income or participants held to be jointly and severally liable Transfer of Ownership Governance, Reporting and Decision Making Transfer of shares rarely require notification to, or consent of, the Government. Usual to find pre-emption rights between shareholders Joint venture company and board or directors will need to comply with relevant companies legislation as well as contractual obligations Transfer of interests in mining tenements likely to require notification to, or consent of the Government. Pre-emption rights not uncommon. Governance through contractual arrangements between the parties (e.g. joint venture agreement or joint operating agreement) 25

26 Negotiation: How a JV Agreement fits in Farm-In Agreement Parent Company Guarantees (if applicable) Management Agreement JV Agreement Sales Agency Agreement Crosscharges 26

27 Negotiation: What are Farm-In Agreements Party acquires JV interest in exchange of exploration or other project costs 3 possible farm-in options: - Deferred transfer farmin; - Immediate transfer farm in; or - Stepped or incremental earning farm-in Initial interest may also be acquired directly from participant as part of farm-in Common in exploration or early stage joint ventures Farm-in Agreements Exit options prior to transfer of participating interest 27

28 Negotiation: Development Contracts Development contracts underpin construction of infrastructure for project Two main types of contract: Engineering, Procurement and Construction (EPC); and Engineering, Procurement and Construction Management (EPCM). 28

29 Negotiation: Development Contracts EPC and EPCM Contracts EPC Contract: EPC contractor responsible for the design, construction and commissioning of a facility. Contract contains a performance specification outlining the required standards for the completed facility EPCM Contract: Essentially, a professional services contract whereby an EPCM contractor: Takes responsibility for provision of engineering and design services Procures contracts with suppliers and contractors as agent of the owner Manages, supervises and co-ordinates the construction phase of the project 29

30 Negotiation: Development Contracts - Difference between EPC and EPCM Contracts Responsibility: EPC - single point of responsibility EPCM multiple points of responsibility Time: EPC contractor agrees to deliver a fully operational facility within a specified period EPCM contractor only commits to using best efforts to meet desired schedule Contract price: EPC contactor performs contract on fixed price basis EPCM contactor performs contract in accordance with a schedule of rates or on a cost-reimbursable basis Procurement: EPC contractor responsible for procurement of necessary plant and materials EPCM contractor procures contracts for plant and materials as agent of the facility owner 30

31 Negotiation: Development Contracts - Difference between EPC and EPCM Contracts (continued) Quality/Performance Guarantees: EPC contractor guarantees the completed facility will achieve certain performance standards EPCM contractor provides no performance guarantees. Only provides warranties relating to the standard of its professional services Owner s Involvement: EPC contract provides EPC contractor with latitude in relation to the design and construction of facility EPCM contract provides a facility owner, if desired, with more control over design and construction of facility Defective Work/Services: EPC contractor responsible for remedying any defective work and services EPCM contactor only liable to re-perform any defective engineering or design services which it has provided 31

32 Negotiation: Procurement Mining Services Contracts Mining Services Contract v Owner Mining Mining Services: Onus on contractors who provide services to physically extract minerals Further layer of contractual supervision Owner mining Owner of mine also extracts minerals itself Less contractual supervision Purchases all machinery itself 32

33 Negotiation of Mining Contracts Signing of Mining Contracts Management of Mining Assets and Government/Investor Relationship Enforcement of Mining Contracts The Future and Conclusions 33

34 Signing of Mining Contract Usually takes place with physical signing, not via electronic means All parties must have relevant authority to sign Minister or Government body must have power delegated to it by applicable legislation Otherwise, legality of document can be challenged by an aggrieved party 34

35 Negotiation of Mining Contracts Signing of Mining Contracts Management of Mining Assets and Government/Investor Relationship Enforcement of Mining Contracts The Future and Conclusions 35

36 Management: Equity Most countries are sensitive to foreign ownership of mineral resources, which are often regarded as assets belonging to the country in question, held on trust for future generations Effective management and decision making structure which permits investor to manage the project and its revenues in accordance with modern international mining practices Investors and lenders will be concerned by any arrangement which requires a local partner (private or Government) to be free carried to any degree 36

37 Management: State Involvement in Project Issue of how much a state can intervene in the management of the project Once investor has been approved to conduct mining operations, it will want minimal state: involvement in processes and administration of project influence over decision making of Manager and other joint venturers 37

38 Management: Management Agreement Either a standalone agreement or included within the joint venture agreement Will cover: Establishment and functions of the project s Management Committee Appointment of Manager to manage joint venture and agent of the joint venture parties Functions, powers and duties of the Manager Limits on the powers of the Manager Process for approval of work programmes and budgets relating to the project and prepared by the Manager How the Manager delivers minerals to the other joint venturers for onward sale 38

39 Management: Sale of Minerals Sales of mineral governed by sales agency and/or offtake agreements Historically, off-take price of minerals was calculated and negotiated on a long term fixed price basis Now, common for off-take commodity prices to be linked to international stock markets Advantage of being flexible. However, gives parties less certainty on incoming revenues Dependent on other areas of demand and acts of God, such as China s demand for minerals; or a flood in Australia causing an increase in the price of African minerals Example: Olympic Dam, South Australia 39

40 Management: Sale of Minerals and Repatriation (continued) Sale of product at market prices Key Requirements Repatriation of capital and profits, loan principal and interest Repatriation in hard currency 40

41 Negotiation of Mining Contracts Signing of Mining Contracts Management of Mining Assets and Government/Investor Relationship Enforcement of Mining Contracts The Future and Conclusions 41

42 Enforcement: Dispute Resolution International arbitration is usually accepted Right to refer dispute to international arbitration outside host country is often critical for foreign investors and lenders Some domestic law remedies may also be available for example in relation to tax assessments Issue of governing law of the investment and project agreements can be sensitive 42

43 Enforcement: Arbitration Arbitration clauses are commonly found in investment agreements and other important contracts relating to mining projects An effective arbitration clause will: Define the scope of disputes which are covered Allow the parties a reasonable time period to settle the dispute before commencing proceedings Specify an appropriate arbitral institution before which proceedings should be brought (usually ICSID or ICC) State the number of arbitrators that will hear the dispute (and identify the Chairperson of the tribunal) Specify the seat of the arbitration 43

44 Negotiation of Mining Contracts Signing of Mining Contracts Management of Mining Assets and Government/Investor Relationship Enforcement of Mining Contracts The Future and Conclusions 44

45 The Future Greater State Control? Under recent African mining law reforms, states have sought to assert greater control and generate increased revenue from their resources States mainly achieve this through regulatory reform, examples of which include: State participation Royalties Local content 45

46 The Future Greater State Control? (continued) State participation: Guinea implemented laws which permit the state to 15 per cent. free equity participation in mining companies with the option to acquire additional participation up to 35 per cent. Tanzania now authorises the state to negotiate a free equity participation in mining companies for projects requiring investment of at least US$ 100 million Kenya has introduced regulations requiring local equity participation of at least 35 per cent. in companies holding mining rights 46

47 The Future Greater State Control? (continued) Royalties: Zambia recently doubled royalties on base metals from 3 per cent. to 6 per cent. DRC has proposed an increase in royalty rates from 2 per cent. to 6 per cent. on non-ferrous metals and from 2.5 per cent. to 6 per cent. on precious metals Burkina Faso now indexes its royalty rates on gold production to gold prices 47

48 The Future Greater State Control? (continued) Local content: Angola and Guinea s legislation now requires mining investors to employ and train its citizens and procure goods and services locally Mali requires that its minerals are processed locally DRC has proposed a ban on the export of copper and cobalt concentrates to encourage domestic processing 48

49 Broad Conclusions on African Mining Perception that mining industry has been highly profitable due to increase in value and that benefits/wealth are not flowing adequately to nations that own them Many African states are increasing taxes on mining and increasing required free State equity in local mining projects Variation in approaches to achieve objectives: - ranging from increased mandatory free State equity, to indigenisation and nationalisation - Governments are also seeking to renegotiate terms of existing investment agreements, despite stabilisation clauses in contract and law Mining companies are now required to do more to increase local employment and business opportunities 49

50 The Mining Contract Process Martin Kudnig The African Community of Practice for Managing for Development Results 7 May 2014 AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA