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Overview of Mining Investment Risks
© 2008 Fasken Martineau DuMoulin LLP. All rights reserved. This
information is not legal advice and is being provided for information
purposes only. Fasken Martineau DuMoulin LLP does not guarantee the
completeness of the information contained in this presentation and we are
not responsible for any errors or omissions in or your use of, or reliance
on the information.
Mining Investment Risks in Frontier Countries
• Mining investment decisions are made after economic and
profitability prospects are assessed having weighed
potential rewards against possible risks
• In “Frontier Countries” it may be harder to assess risks
and/or rewards
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Mongolia: Changes in royalty and taxation regimes
Congo: Review of mining contracts
Ecuador: Review of mining concessions and impose royalties
Bolivia: Nationalization of mining assets
There are risks related to mining per se
• Exploration risks
• Technical
• Geological
• Mining and Production risks
• Geological
• Operational
• Financial (e.g., development costs)
• Economic (e.g., commodity prices)
• Environmental
And there are business-related risks
• Legal factors
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Ownership
Contractual matters
Regulatory regime
Fiscal regime
• Operational factors
• Political and Social factors
• Political
• Nationalization
• Profit repatriation
• Falling out of favour
• Social
• External factors (NGOs, influence from other states, etc.)
Size of enterprise may be relevant to risk profile
JUNIORS
MID-SIZED
& MAJORS
• Focus on exploration
• Often are pioneers in new areas
• Likely to have limited technical,
managerial, legal and financial
capabilities
• Generally lack political leverage
• Involved in exploration,
production and processing
• Have deeper technical,
managerial, legal and financial
resources
• May have political clout, both in
the host country and abroad
Much can be learned before investing
• Political, social, economic and fiscal stability
• Respect for the rule of law and effective legal
profession/judiciary
• Security of tenure over mining titles and right to alienate
or pledge them
• Government’s capability and effectiveness, at all relevant
levels
• Attitude towards foreign investment
• Labour and procurement issues (locally and from abroad)
• Ability to repatriate profits and capital
• Ability to sell output in local and foreign markets
Is (or was there) an active mining sector?
• Are there any local or foreign mining exploration or
producing mining companies?
• Are the local mining authorities competent?
• Title registries
• Permitting issues
• Are there adequate local capabilities?
• Technical and production personnel
• Administrative, legal and financial expertise
• Mining contractors
• Is there adequate infrastructure and power?
Many other (often free) resources available
• Embassies and commercial attaches
• International financial institutions (World Bank, IFC, IDB, EBRD,
Asian Development Bank, African Development Bank)
• Political risk insurers (EDC, OPIC)
• Trade associations
• Publicly filed documents (EDGAR, SEDAR)
• Open source rankings
• Transparency International
• Fraser Institute
• Google (surprising what you may find there!)
Legislative checklist
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Mining statutes (Clear and transparent mining registry. Can titles be pledged
or assigned? Do mineral rights trump surface rights? Interaction with other
natural resource statutes (e.g., forestry or oil and gas)
Foreign investment laws (Investor protection clauses? Stability agreements?
Is the country a signatory to bilateral investment protection treaties (BITs)?
Currency flows and convertibility issues)
Real estate (Can foreigners acquire land and freely dispose/pledge their
holdings? Development restrictions?)
Corporate law (Can foreigners set-up and control companies? Local
directorships?)
Securities laws (Is there an effective regulator? Stock market involved in
mining sector?)
Taxation law (Stable and fair tax system? Relevant bilateral tax agreements?
Centralized system?)
Import and export statutes and regulations (Approval and duties. Relevant
free trade/customs union?)
Legislative checklist (cont.)
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Competition law (Are mergers allowed? Would market power be an issue?)
Environmental laws (What standards apply (national or international)?
Permitting process? Enforcement and penalties?)
Dispute resolution (Is there an independent judiciary? Effective and
independent local bar? Is the country party to international dispute resolution
mechanisms?)
Regulatory system (Is there an industry regulator? Is there a fair
administrative law process? Are there effective avenues for redress against
adverse regulatory decisions?)
Employment law (Is the law restrictive or liberal? Preferential provisions for
nationals?)
Aboriginal/First Nations laws (Clarity re land tenure? Has there been
litigation in this sector? Are there any tensions with native groups?)
Energy and Transportation laws (Relevant if production is contemplated)
Investment protection mechanisms
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Membership evidences intent by host country to receive foreign investment
Provide dispute resolution and settlement mechanisms
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Convention on the Settlement of Investment Disputes (ICSID) (1965)
• ICSID Convention and Arbitration Rules
• Other arbitration rules may be used (UNCITRAL, ICC, etc.)
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Bilateral Investment Protection Treaties (BITs)
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Purpose is to reduce non-economic risk
Provide protection against arbitrary expropriation or dispossession
Measures taken must not be discriminatory and there must be effective compensation
Over 2000 BITs in place and while similar, they may be important differences
Multilateral Investment Guarantee Agency (MIGA) (1988)
• Risks related to currency transfer, expropriation, war and civil disturbance and breach of
contract by host government may be covered
• Premiums may be higher than those of other political risk insurance agencies (such as
EDC) but MIGA guarantees extend to longer periods
Investment protection mechanisms (cont.)
• Agreements with governments
• Stabilization agreements (primarily cover taxation matters)
• Ad hoc agreements for large projects (particularly if other
infrastructure projects are required in connection with a mining
project)
• Joint-ventures with host governments (central, regional, municipal
or state-owned entity (e.g., Crown corporation)
• Agreements with local and strategic partners
• Local parties bring specialized knowledge and other inputs
• Strategic partners may have political clout
Investment protection mechanisms (Cont.)
• Mine development enhances both risks and protections
• Risk because mines are not mobile
• Rules may change once investment has been made
• Protection is enhanced because the project financing process seeks
to mitigate risk with contractual and other provisions
• Off-take agreements may involve several jurisdictions providing
added political clout (e.g., Japan, Canada and Germany in the
Antamina project)
• Participation by strategic investors (e.g., IFC)
Risk management is a dynamic process
• Even modern governance/legal systems cannot be taken for granted
• Australia (1976)
Fraser Island case:
– Mining operations in full compliance with State of Queensland mining and
environmental laws. All production was for export.
– Local community concerned about damage to fragile environment.
– Federal government withheld export permits (exports fell under federal
jurisdiction).
– Court held this was not expropriation and Federal government ultimately offered
compensation to investors
• Canada (2007)
• Ontario (Diamond royalties)
• Alberta (Oil sands royalties)
• Even “tough” jurisdictions have (some) bearable spots
• i.e. not all you read in the papers is correct
Probity is essential
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Be on guard against becoming involved, directly or indirectly, with corruption
or other illegal matters such as:
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Corporate and Personal Liability
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Tax evasion or illegal currency transactions
Breaches of environmental laws
Breaches of labour laws
Civil and criminal exposure
Litigation possible in home jurisdiction or where company is registered or is a reporting issuer
Insurance policies are likely to exclude willful wrongdoing
Important to set and monitor high ethical and business standards within firm
and subsidiaries, and demand similar standards from joint-venture partners
and contractors
Consequences can be severe and long-lasting
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Reputational loss
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The internet is unforgiving (It will be on Google for a long time)
Negative media exposure may lead to regulatory attention and shareholder lawsuits
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Alcoa Faces Allegation By Bahrain Of Bribery (front page, Wall Street Journal, February 28, 2008)
Thank You!
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Raziel Zisman
Counsel
Global Mining and Energy Groups
Fasken Martineau DuMoulin LLP
66 Wellington Street West
Suite 4200, Toronto Dominion Bank Tower
Toronto, Ontario
Canada, M5K 1N6
http://www.fasken.com
[email protected]
Tel (direct): (416) 868-3548
Fax: (416) 364-7813
Fasken Martineau’s Global Mining Group
• Fasken Martineau has over 150 years of experience in the
mining industry in Canada and internationally
• Winner of the Who’s Who Legal’s mining law firm of the
year award in 2005, 2006 and 2007
• Fasken Martineau has offices across Canada, in Toronto,
Vancouver, Montreal, Quebec and Calgary, and
internationally in London and Johannesburg
• Fasken Martineau has approximately 650 lawyers of
whom 75 are involved in mining law and related
disciplines