Operating in Uncertainty

Capital-intensive mining projects and long-term agreements in the industry, particularly outside of Canada, can be subject to political risk and change that can affect investment. How can investments best be protected?
Protecting investments and assets is key to any industry, and perhaps none more so than mining, where capital-intensive projects, particularly outside of Canada, and long-term agreements can be subject to political risk and change that can affect investment.
But assets can be protected through investment treaties, and properly structuring investment agreements can assist and protect interests internationally. Particularly where treaty protections are not available, incorporating a commercial arbitration clause can create a dispute resolution process appropriate to a mining company’s interests.
Strategies like this can help protect investors and mining companies when they are either acquiring or divesting.
And lawyers working in the mining sector are also seeing an uptick in the M&A market.
“There’s more activity on an asset level than I can recall in prior years,” says Jay Kellerman, a partner at Stikeman Elliott LLP in Toronto. “That is not a surprise but a function of corporate M&A activity in the sector in the past two years.
“The trend we’re seeing in volume is significantly more than this industry has seen in the past, in my view,” says Kellerman, who agrees that mining companies may be focusing more on their core assets. “Non-core to one company may be significantly core to another company. None of these are being sold at fire-sale prices.”
An acquisition may be an asset in a smaller company with smaller capital or cost structure, he says, which “can take that asset and further develop it.”
As well, the mining sector no longer thinks in terms of one-asset companies, Kellerman adds. “There’s too much risk. Better to put the one-asset company under the umbrella of a multi-asset company.”
Stuart Olley, head of the Natural Resources Group at Gowling WLG in Calgary, is also seeing more interest in divesting of non-core assets and in making acquisitions in junior properties.
“There’s good opportunity for those looking to divest,” he says, noting that, at the junior end of the market, “some of the early-stage guys are more optimistic than they have been historically. . . . Three to four years ago, there was nothing.”
That change has occurred over the past five to six years and it has coincided with waning optimism in the commodities sector, Olley says, adding that “people are seeing more optimism in metal prices,” such as gold and copper.
John Stefaniuk, a partner at Thompson Dorfman Sweatman LLP in Winnipeg, sees a demand for other battery metals such as lithium, silicon and cobalt.
“One thing that’s going to be common worldwide is increased investment on the part of China and Chinese entities, especially for the strategic minerals” used in batteries and electronic products, he says.
In Manitoba in particular, he sees “opportunity that requires exploration and development.”
“People forget that mines have finite lives,” Stefaniuk says. Exploration and development sometimes requires incentives, and mining communities are at risk if there aren’t new discoveries that can support the existing mineral-processing infrastructure.
“Especially underground mines [now] employ fewer people,” he says. “They’re increasingly mechanized, [but there are] a lot of jobs . . . in processing facilities, and if there aren’t adequate mineral resources, there’s not enough feed to supply the milling and refining processes, which means a large-scale employment reduction. . . . You have to keep the front [part] fed.”

Protecting long-term mining interests
Any company or entity undertaking an acquisition, especially in a foreign country, will, of course, want to ensure their interests are adequately protected.
“Any change in government can have an impact on investment,” says Rachel Howie, a partner in Dentons Canada LLP in Calgary, whose practice is in the contract drafting stage, where asset protection can best occur.
The mining industry can often have long-term agreements, and “the longer the term, the greater the chance there may be a change in a regime that could potentially have a negative impact” on the project, she says.
The tools companies can use including investment structuring and protections under treaties that may apply. A dispute resolution clause is “something that people don’t necessarily like to think about early on in a project,” says Howie, but for longer-term projects of five to 10 years, “it can often be too late to restructure an agreement” down the road, making it important to create one at the outset.
Investment structuring involves a web of myriad treaties, including bilateral investment treaties, the foreign investment promotion and protection agreements, multilateral investment treaties and free trade agreements.
While the nature of substantive obligations will vary through treaties, Howie says, generally, the substantive treaty protections available are i) compensation for expropriation; ii) fair and equitable treatment; iii) full protection and security; iv) national treatments, which generally speaking means a right to be treated as favourably as national companies of the host state; v) most-favoured nation treatment; and vi) the right to free transfer of investment and funds.
General considerations for drafting an agreement at the acquisition stage include the potential to consolidate multiple disputes if there are multiple related agreements, and whether there may be other entities related to a dispute that might arise, which may require rules or procedures around the joinder of other parties.
A traditional method for protecting against political risk in long-term mining agreements with states in which mining concessions are negotiated with government agencies is stabilization clauses or agreements, says Stefaniuk.
These “set out the conditions under which the commercial conditions may be subject to review or negotiation if some fundamentals are changed during the course of agreement, such as royalties, taxation, other obligations — those could give rise to a process of renegotiation, even arbitration or compensation,” he says.
Over the past couple of years, Stefaniuk has been involved in the Canadian Bar Association’s joint Supporting Inclusive Resource Development in East Africa project with Global Affairs Canada, and he has visited Africa, volunteering his time toward equitably advancing East Africa’s nascent oil and gas industry.
“Tanzania, for instance, over the last several years, has done a revamp of its mining and royalty laws, and it has imposed restrictions on the use of arbitration provisions, including requirements that arbitrations be held in Tanzania, restrictions on judgments in foreign currencies, a whole number of restrictions that would have impacts on the use of stabilization agreements, or stabilization clauses, and international arbitration as a means of enforcing those clauses,” he says.
A big part of long-term natural resource investment is the expectation of political stability and a predictable landscape. With most global mining companies being global and basing their investment decisions on expected rates of return, “when you factor in political risk, that requires either an additional rate of return or makes a project less attractive for development, if political instability or a risk of significant change to the underlying assumptions of the mining regime is a reality.”
Political risk insurance is available, though, through the Multilateral Investment Guarantee Agency, for example, which is part of the World Bank Group.
Lockbox arrangements — whereby a company directs its customers to send their payments directly to a bank, which opens the incoming mail, deposits all received funds in the company’s bank account and scans the payments and any remittance information — “so revenues from the sale of a commodity is accumulated offshore,” also minimizes the risk that foreign states can seize cash as it’s coming off the property. Arbitration clauses, particularly where international arbitration can be conducted outside the jurisdiction where the project is located, can be used effectively, as it has been against Argentina, he says.

And joint ventures are often requested by foreign states. “Often, what you have in foreign jurisdictions, particularly developing countries, is … in their mining code, it will specify that you have to take on their state-owned company as a joint venture partner. So, they will have an interest in the project, either through shares or through a joint venture,” he says.
This type of partnership can benefit the state player when assets are being divested and can mitigate risk for the seller as well. “If they have an interest in the project, and you’re handling the sale of the commodity or you’re an international player who has greater access to markets than they might have, they are motivated to keep you involved in selling the commodity because they’re getting a share of it,” Olley adds.
Another risk for investors, though, is evolving issues around environmental controls, including Indigenous consultation, and new European developments surrounding conflict minerals.
“Those are things that are really moving quickly,” he says. “And it’s hard to guess where they’ll be 20 years from now, when you’re talking about a long-term project.”

When bilateral investment treaties aren’t available
If Canada doesn’t have a bilateral investment treaty in the target jurisdiction, it is often possible to establish a subsidiary in a foreign jurisdiction that does have a BIT, says Olley. “So, for example, . . . you might look at incorporating a subsidiary in the BVI [British Virgin Islands] or some other jurisdiction that does have a BIT.”