Mining 2017: Roundtable
Who’s Who Legal brings together Pablo Mir of Bofill Mir & Alvarez Jana Abogados, Geoff Simpson of Allen & Overy LLP and Florencia Heredia of Holt Abogados to discuss the impact of falling mineral prices, adapting to client constraints in the current market, alternative sources of financing and the legal challenges posed by an increased focus on environmental issues.
Although there have been some signs of a slowdown of late, mineral prices have continued to fall worldwide in the past year. In your jurisdiction, what has been the practical impact of this?
Pablo Mir: Due to the strong impact of current prices on most players of this industry, many mining companies are making restructuring efforts aimed to at gaining liquidity we well as stabilising and strengthening balance sheets by cap-ex discipline and cost reduction. As a practical impact, headcount has been downsized, agreements are being renegotiated and non-core exploration or exploitation assets are being halted or sold.
We have also seen players willing to purchase long-term exploitation or exploration projects, with the belief that prices will go up again in time. However, in the current period, negotiations have been longer and tougher than ever before, since purchasers want a much deeper due diligence to safeguard their investments, and sellers are reluctant to accept new market prices and conditions.
Geoff Simpson: The situation is much the same in Australia, though with an uptick in gold, iron ore and coal prices, which are all key Australian exports; there has been some returning optimism about commodity prices. That said, cost reduction and cap-ex discipline remain the order of the day. There are indications the equity capital markets are open for certain commodities too - gold and lithium players being the main beneficiaries.
Florencia Heredia: Very much the same applies to Argentina; I share all the same comments and views expressed by my colleagues. However, in the case of my country, the impact of the downswing has been even more dramatic due to the unfriendly environment for investors that, for some years, was standard. Fortunately, this situation changed last December with a new government and different policies that will hopefully attract investments in many areas – mining being one of them. In this regard, and due to the situation of the industry, not much activity has been seen yet, except for lithium exploration and acquisitions, which are very active nowadays in Argentina.
What tactics are law firms using to adapt to clients’ needs and constraints in a tougher market?
Pablo Mir: There are a number of different tactics, for any of which law firms and lawyers must be flexible and fast enough to anticipate and adapt to these new requirements. It absolutely helps to have a broad and solid range of different practice areas, and team oriented cross-selling technics, to prove mining clients that if a tougher market pushed them out of their business comfort zone, their law firm is there to assist them under new market conditions. Many clients, for example, appreciate attorney flexibility in terms of different alternatives of billing arrangements.
Client’s constraints due to a tougher market can also be seen as a shifting balance in the legal services provided. For example, while finance, corporate, M&A and environmental remain stable; under these challenging times, there has been a growing request for labour, litigation and tax services.
Geoff Simpson: A diversified offering across product lines and geography assists. M&A and financings are clearly down but disputes, particulalry construction related, and restructuring work, is up. Sensitivity to cost pressures, including providing services in different, innovative ways is important. A&O’s PeerPoint is one example. More generally law firms are adopting the same strategies as their clients - keeping things tight and investing in a very focused way.
Florencia Heredia: As well as clients, law firms have to adapt to the current times and economic constrains. Creativity and flexibility regarding fees proposals is very much appreciated by clients. Efficiency in providing the services is also key. Law firms need to have a vision towards the market requirements and clients needs which in jurisdiction which many regulations and federal organisation is indeed very challenging.
With banks less willing to finance mining projects, what forms of alternative financing are available to clients?
Pablo Mir: Private equity sponsors and management teams are willing to invest in attractive projects under the expectation that prices will rise eventually. We have been involved in recent transactions which were financed by Australian or Canadian private equity funds. Non-banking finance also depends on the size of the clients and the deal at hand. Some clients often times have their own resources to finance their projects. We have seen other players who have resorted to selling non-essential exploration or exploitation projects to gain liquidity. For junior mining players, accomplishing finance to maintain their projects has been a bigger challenge. Other creative alternatives have been growing steadily in the junior mining market such as, amalgamation arrangements, share swaps, fusions and restructure combinations, with the purpose of preserving explorations projects and increasing their value, without having to resort to current expensive capital. Last but not least, we have also noted an increase in streaming agreements, and new players willing to enter into the streaming business; which has allowed companies to obtain vital capital by instantly monetising portions of their long-term production.
Geoff Simpson: PE and other funds are investing – both equity and debt. Royalty streaming is on the rise. Some sell-downs, joint ventures and mergers are driven by the fundamental need to finance a specific project, which necessarily needs to be of an appropriate quality in light of market conditions.
Florencia Heredia: Same actors for financing have also been evaluating projects in Argentina, especially in recent months. We have seen also streaming, royalty financing and end-users involved in financing specially for lithium projects.
Financing for exploration has been extremely limited and junior companies have dramatically suffered the situation.
With Argentina now back in the international scene, multilaterals financing come also in the picture though as also mentioned the appropriate quality of the project will be the main condition.
What demands are being put on law firms by clients as a result of increased scrutiny on environmental issues?
Pablo Mir: When it comes to environmental issues, many clients demand full availability from the team, and especially more senior or partner involvement. All mining companies are aware of the importance of environmental issues in this industry. In Chile for example, environmental agencies have become very sophisticated in terms of scrutiny and approvals. As a result, mining companies know there is no room for mistakes when it comes to environmental filings and dealings, and usually look for effective legal assistance to walk with them step by step through their environmental issues. In conclusion, we believe there is a fair relationship between increased environmental scrutiny, and client rising requirements for legal advice at earlier stages of their projects, and nonstop participation with management and BOD.
Geoff Simpson: Clearly the environmental issues are now at the forefront of project proponents minds. Law firms are the beneficiaries of this where they have the requisitie expertise. Organisations such as the Export Credit Agencies have always approached environmental issues with rigour and seek to understand the relevant jurisdictions environmental law framework in-depth – for example, for Japanese and Korean ECAs that sometimes require lawyers with requisite language skills. More importantly, however, it requires lawyers who work internationally and cross-border and are able to draw comparisions with other jurisdictions and provide advice on international norms.
Florencia Heredia: Environmental and social licence issues have become a crucial aspect of mining project and this seems to be an increasing trend. Law firms need to have experts on this field and interact more with the relevant agencies that have now a better knowledge of the international topics being discussed in these areas as well.
Environmental issues are also a very relevant aspect for due diligence in financing and therefore, the interaction of these areas in a firm is also of the essence. In countries such as Argentina with a federal organisation, local regulations also play a very important role that demands more expertise at these levels. Explaining these complexities to the board of directors also requires a very good expertise and knowledge of how things work in the differnt provinces.
In addition, and in the northern region of Argentina, indigenous communities issues have become more relevant and are part of the broader environmental aspects; they need to be considered and dealt with by mining companies. This area is starting to demand more tailored legal advice.